&EPA
United Slates
ErevirDfinMiilfll Protectiwi
Agency
Taconite Iron Ore NESHAP Economic Impact
Analysis
-------
EPA-452/R-03-015
August 2003
Taconite Iron Ore NESHAP Economic Impact Analysis
By:
Katherine Heller
Brooks M. Depro
Jui-Chen Yang
Laurel Clayton
RTI International*
Health, Social, and Economics Research
Research Triangle Park, North Carolina 27709
Prepared for:
John L. Sorrels
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group (ISEG)
(C339-01)
Research Triangle Park, NC 27711
Contract No. 68-D-99-024
*RTI International is a trade name of Research Triangle Institute.
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CONTENTS
Section Page
Executive Summary ES-1
1 Introduction 1-1
2 Industry Profile 2-1
2.1 The Supply Side 2-3
2.1.1 Taconite Pellet Production Processes, Inputs and Outputs .... 2-3
2.1.1.1 Mining of Crude Ore 2-3
2.1.1.2 Beneficiation 2-5
2.1.1.3 Agglomeration 2-8
2.1.2 Types of Products 2-8
2.1.3 Major By-Products, Co-Products, and Input Substitution
Possibilities 2-10
2.1.4 Costs of Production and Worker Productivity 2-11
2.1.4.1 Costs of Production 2-11
2.1.4.2 Variations in Worker Productivity by
Establishment Size 2-12
2.2 The Demand Side 2-13
2.2.1 Uses and Consumers 2-13
2.2.1.1 Uses 2-13
2.2.1.2 Consumer Characteristics 2-15
2.2.2 Product Characteristics 2-15
2.2.3 Substitution Possibilities in Consumption 2-15
2.3 Industry Organization 2-17
2.3.1 Taconite Manufacturing Facility Characteristics 2-17
2.3.2 Firm Characteristics 2-17
2.3.2.1 Ownership 2-18
2.3.2.2 Size Distribution 2-22
2.3.2.3 Horizontal and Vertical Integration 2-22
2.3.3 Small Businesses in the Taconite Industry 2-23
2.3.4 Market Structure 2-24
2.3.4.1 Measures of Industry Concentration 2-24
2.3.4.2 Geographic Concentration 2-24
2.4 Markets 2-25
2.4.1 Historical Market Data 2-25
2.4.1.1 Domestic Production 2-25
2.4.1.2 Domestic Consumption 2-25
iii
-------
2.4.1.3 Domestic Prices 2-27
2.4.1.4 Foreign Trade 2-27
2.4.2 Trends and Projections 2-30
3 Engineering Cost Estimates 3-1
3.1 Description of Emissions Controls 3-1
3.2 Summary of Costs 3-2
3.2 Plant-Specific Costs 3-2
4 Economic Impact Analysis: Methods and Results 4-1
4.1 Conceptual Approach 4-1
4.1.1 Baseline and With-Regulation Market Equilibrium 4-1
4.1.2 Approach for Modeling Impacts on Affected Markets 4-3
4.1.3 Supply 4-3
4.1.4 Demand 4-4
4.2 Economic Impact Results 4-5
4.2.1 Market-Level Impacts 4-5
4.2.2 Industry-Level Impacts 4-6
4.2.3 Impacts at the Company Level 4-8
4.2.3.1 Review of Empirical Literature on Closure 4-8
4.2.3.2 With-Regulation Company Operating Income 4-9
4.2.3.3 Company Ability to Make Compliance Capital
Investments 4-9
4.2.4 Employment Impacts 4-10
4.2.5 Social Costs 4-11
4.2.6 Sensitivity Analysis 4-11
4.3 Regional Economic Impacts 4-12
4.3.1 IMPLAN Application in Regional Economic Impact
Analysis 4-12
4.3.2 Data for the Affected Regions 4-14
4.3.3 Assessment of Regional Economic Impacts 4-15
4.3.3.1 Effect of Regulation on Local Economy 4-15
4.3.3.2 Impact of Regulation on Local Business Output ... 4-16
4.3.3.3 Change in Employment 4-18
References R-l
IV
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Appendixes
A Model Data Set and Specification A-l
B Sensitivity Analysis Results B-l
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LIST OF FIGURES
Number Page
2-1 Process Flow Diagram for Taconite Iron Ore Processing 2-4
2-2 Flow Sheet: Concentrating 2-6
2-3 Flow Sheet: Pelletizing 2-9
2-4 Locations of Taconite Iron Ore Processing Facilities 2-18
2-5 Taconite Iron Ore Facility Operator and Ownership, 2002 2-21
4-1 Market Equilibrium without and with Regulation 4-2
VI
-------
LIST OF TABLES
Number Page
2-1 Iron Ore Mined and Pelletized in the United States, 2001 (103 metric tons) ... 2-5
2-2 Crushing Stages Operated at Eight Taconite Facilities in Michigan and
Minnesota, 2000 2-7
2-3 Types of Indurating Furnaces Used at Eight Taconite Facilities, 2000 2-10
2-4 Production Costs for NAICS 21221—Iron Ore Mining, 1997 2-11
2-5 Worker Productivity by Plant Size for Facilities in NAICS 21221—Iron
Ore Mining, 1997 2-13
2-6 U.S. Consumption of Iron Ore by End Use, 1997-2001 (103 metric tons) ... 2-13
2-7 Iron Making Capacity and Facility Location of U.S. Integrated Iron and
Steel Companies (103 metric tons per year) 2-16
2-8 Taconite Iron Ore Facility Capacity and Production, 2002 2-19
2-9 Taconite Iron Ore Facility Operator and Ownership, 2002 2-20
2-10 Taconite Iron Ore Facility Owner Company Sales and Employment, 2002 .. 2-23
2-11 Domestic Production and Consumption of Iron Ore, 1990-2001
(103 metric tons) 2-26
2-12 Historical Prices of Usable Iron Ore at Mines', 1990-2000 2-28
2-13 U.S. Imports for Consumption and Value of Imports of Iron Ore Products,
1990-2002 ($103) 2-29
2-14 Value of Imports for Consumption and Exports of Iron Ore by Country,
2001 ($103) 2-30
2-15 Quantity of Imports and Exports of Iron Ore by Type of Product, 2001
(103 metric tons) 2-31
2-16 U.S. Domestic Exports and Value of Exports of Iron Ore Products,
1990-2002 ($103) 2-32
3-1 MACT Standards for Existing Affected Sources 3-1
3-2 Summary of the Industry Cost (106 $2002) 3-3
3-3 Plant-Specific Costs (106 $2000) 3-4
4-1 Market-Level Impacts of the Taconite NESHAP, 2002 4-6
4-2 Industry-Level Impacts of the Taconite NESHAP, 2000 4-7
4-3 Social Costs of the Taconite NESHAP, 2000 4-12
4-4 Background of Impacted Counties in 1998 4-15
vn
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4-5 Direct Impact of Taconite NESHAP on Regions in Minnesota and Michigan
($2002)a 4-17
4-6 Estimated Total Impacts of the Taconite NESHAP on Value of Output
(103 $2002)a 4-18
4-7 Estimated Total Change in Employment (Number of Employees) 4-18
Vlll
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EXECUTIVE SUMMARY
Under Section 112 of the Clean Air Act (the Act), the U.S. Environmental Protection
Agency (EPA) is developing national emission standards for hazardous air pollutants (NESHAP)
for the taconite processing source category. Taconite processing involves separating and
concentrating iron ore as well as creating and indurating (hardening) pellets. Taconite
production in the United States is concentrated in a few counties in Minnesota and Michigan.
To better control emissions of hazardous air pollutants (HAPs) during these processes,
EPA expects that additional emission control equipment will be installed for indurating furnaces
and other part of the operation, such as onsite crushing and handling and pellet handling. Table
ES-1 provides detail on the estimated total costs. Incorporating comments from industry, the
Agency has estimated the total capital costs of complying with the rule to be approximately $57
million, and the total annualized cost (including the costs of new capital equipment and new
operation, maintenance, monitoring, record keeping, and reporting [MRR] activities) to be $8.61
million. The controls will increase the cost of producing taconite pellets and the iron and steel
made from those pellets. For this reason, the Agency examined the economic impacts on the
industry using an integrated mathematical model that simulates the market response of taconite
and iron and steel producers to the estimated costs of compliance. The model predicts that the
price of taconite will increase by approximately $0.10 per metric ton (0.18 percent of the current
price), while domestic taconite production is projected to decline by 70,000 metric tons (0.14
percent of the total production). Additional results are presented in Table ES-2.
Further, the Agency conducted a regional impact analysis using IMPLAN (an input-
output model) recognizing the fact that taconite production facilities are highly geographically
concentrated in Minnesota and Michigan. However, these incremental regional impacts are
projected to be very small. The IMPLAN results reported in Table ES-3 indicate that the $0.4
million of direct costs that are imposed on the region cause the regional economy another $0.2
million loss via indirect and induced effects. Overall, EPA estimates that the rule may lead to
approximately seven layoffs.
ES-1
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Table ES-1. Estimated Total Costs of the Taconite NESHAP (106 $2002)
Cost Component
Emission Control Cost
Monitoring, Record
keeping and
Recording Cost
Total Cost
Total Capital
Cost ($106)
52.8
4.58
57.4
Annualized
Capital Cost
(106 $/yr)
4.53
0.39
4.93
O&M Cost
(106 $/yr)
3.16
0.12
3.28
MRR Labor
Cost
(106 $/yr)
0.4
0.4
Total
Annualized
Cost (106 $/yr)
7.7
0.91
8.61
Table ES-2. Social Costs: (106$2002)
Value ($106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron and Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs
-$2.86
-$5.73
-$3.59
-$4.51
$1.09
$1.27
-$8.60
This economic impact analysis (EIA) is organized as follows. Section 1 provides an
introduction to the analysis. Section 2 describes the taconite industry and affected production
processes. Section 3 reports the estimated national control costs. Section 4 presents the
analytical methods used and the estimated economic impacts of the rule. Appendix A resents the
data used in the economic model and the equations within the model. Appendix B provides a
sensitivity analysis by varying elasticities of demand and supply.
ES-2
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Table ES-3. Estimated Total Impacts of the Taconite NESHAP on Value of Output (103
$2002)a
Minnesota Michigan
Direct effect -847 492
Indirect effect -222 143
Induced effect -168 69
Total Impact -1,236 704
a All amounts were inflated using the consumer price index available from the Bureau of Labor Statistics
().
Source: Minnesota IMPLAN Group (MIG). 2001. IMPLAN county data for Minnesota and Michigan.
IMPLAN impact report of output.
ES-3
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SECTION 1
INTRODUCTION
Under Section 112 of the Clean Air Act (the Act), the U.S. Environmental Protection
Agency (EPA) is developing national emission standards for hazardous air pollutants (NESHAP)
for the taconite processing source category. Taconite mining and processing fall under the North
American Industry Classification System (NAICS) 21221 Iron Ore Mining. According to the
1997 Economic Census of Manufacturing, in 1997, 32 establishments owned by 26 companies
produced products that are categorized in NAICS 21221 (U.S. Department of Commerce,
Bureau of the Census, 2000). In 1997, these firms employed 7,920 workers and shipped
products valued at $1.9 billion (U.S. Department of Commerce, Bureau of the Census, 2000).
Since 1997, however, the number of companies, plants, and employees in the industry
and the value of product shipments from the industry have declined. Demand for domestic iron
ore is entirely dependent on the steel industry. Because of massive imports of foreign
semifinished steel and iron ore, as well as the adverse effect of the 1997 Asian financial crisis,
approximately 20 domestic steel companies have filed for bankruptcy since 1997 (Skillings
Mining Review, 2000; Kirk, 2000a; Kirk, 2000b). Concurrently, the domestic iron ore industry
has experienced major structural changes through company mergers and acquisitions. As
reported in the 2003 U.S. Geological Survey Mineral Commodity Summaries, in 2002, 11 iron
ore companies owned 11 mining operations, eight concentration plants, and eight pelletizing
plants. During the same period, these firms employed approximately 5,000 workers and shipped
products valued at $1.2 billion (Kirk, 2003).
Taconite, the principal iron ore mined in the United States, has a low (20 percent to 30
percent) iron (Fe) content and is found in hard, fine-grained, banded iron formations. The main
taconite iron ore deposits are located near Lake Superior in Minnesota (Mesabi Iron Range) and
Michigan (Marquette Iron Range). The taconite mining operations in Michigan and Minnesota
accounted for virtually all domestic iron ore production (Kirk, 2003). The following taconite ore
production processes will be covered by the rule (EPA, 2001):
• liberation of the iron ore by wet or dry crushing and grinding in gyratory crushers,
cone crushers, rod mills, and ball mills;
1-1
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• concentrating of the iron ore by magnetic separation or flotation;
• pelletization by wet tumbling with a balling drum or balling disc; and
• indurating using a vertical shaft furnace, straight grate, or grate/kiln, and material
handling (transfer, pellet cooling) of the indurated pellets.
Better control of HAP emissions from these processes will lead to increases in their
operating costs. This in turn will increase the cost of producing taconite pellets and the iron and
steel made from those pellets, affecting prices and quantities in both the market for taconite and
the markets for steel and iron products that taconite is used to produce. Therefore, this economic
impact analysis (EIA) analyzes the economic impacts of the compliance costs on the industry,
based on a conventional economic framework. Because the economies of the states and
localities where taconite is mined are so dependent on taconite, we also analyze the local and
regional impacts of the rule. The report is organized as follows:
• Section 2 provides background information on the taconite industry and describes the
affected production processes in great detail.
• Section 3 reports the estimated national control costs based on different emissions
control equipments for indurating furnaces, onsite crushing and handling facilities,
and pellet handling operations.
• Section 4 presents an integrated mathematical economic model that simulates the
market response of taconite and iron and steel producers to the estimated costs of
compliance. Section 4 also presents the estimated impacts on the markets for taconite
and steel, companies in the taconite industry, and the regions where taconite
production is concentrated.
• Appendix A provides details about data and methodology, and Appendix B presents
the results of a sensitivity analysis of estimated demand and supply elasticities.
1-2
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SECTION 2
INDUSTRY PROFILE
This industry profile provides information to support the economic impact analysis (EIA)
of a National Emission Standard for Hazardous Air Pollutants (NESHAP) regarding taconite iron
ore processing. Taconite mining and processing fall under the North American Industry
Classification System (NAICS) 21221 Iron Ore Mining. Using the NAICS definition, this
industry comprises establishments primarily engaged in (1) developing mine sites, mining,
and/or beneficiating (i.e., preparing) iron ores and manganiferous ores valued chiefly for their
iron content and/or (2) producing sinter iron ore (except iron ore produced in iron and steel
mills) and other iron ore agglomerates (U.S. Department of Commerce, Bureau of the Census,
2001).
Taconite, the principal iron ore mined in the United States, has a low (20 percent to 30
percent) iron (Fe) content and is found in hard, fine-grained, banded iron formations. The main
taconite iron ore deposits are located near Lake Superior in Minnesota and Michigan. According
to the Economic Census of Manufacturing, in 1997, 32 establishments owned by 26 iron ore
companies produced products that are categorized in NAICS 21221 (U.S. Department of
Commerce, Bureau of the Census, 2001). In 1997, these firms employed 7,920 workers and
shipped products valued at $1.9 billion (U.S. Department of Commerce, Bureau of the Census,
2001). Since 1997, however, the number of companies, plants, and employees in the industry
has declined. Demand for domestic iron ore is entirely dependent on the steel industry. Due to
massive imports of foreign semifinished steel and iron ore, as well as the adverse effect of the
1997 Asian financial crisis, 35 domestic steel companies have filed for bankruptcy since 1997
(United Steelworkers of America, 2002). Concurrently, the domestic iron ore industry has
experienced major structural changes through company mergers and acquisitions.
As reported in the 2003 U.S. Geological Survey Mineral Commodity Summaries, in
2002, 11 iron ore companies owned 11 mining operations, 8 concentration plants, and 8
pelletizing plants. During the same period, these firms employed approximately 5,000 workers
and shipped products valued at $1.2 billion (Kirk, 2003). Of the 11 mining operations, 6 were
taconite facilities on the Mesabi Iron Range in Northern Minnesota and 2 were on the Marquette
2-1
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Iron Range in the Upper Peninsula of Michigan. Virtually all domestic iron ore production was
from the 8 taconite mining operations in Minnesota and Michigan that were operated by 5
companies (Kirk, 2003).
The following taconite ore production processes will be covered by the rule (EPA, 2001):
• liberation of the iron ore by wet or dry crushing and grinding in gyratory crushers,
cone crushers, rod mills, and ball mills;
• concentrating of the iron ore by magnetic separation or flotation;
• pelletization by wet tumbling with a balling drum or balling disc; and
• indurating using a vertical shaft furnace, straight grate, or grate/kiln, and material
handling (transfer, pellet cooling) of the indurated pellets.
The economic effects of the rule are conditional on the technology for producing taconite
iron ore and their costs of production, the value of the taconite products to end users, and the
organization of the industries engaged in iron ore production and use. Due to the present
condition of the iron ore industry, some tables of information from government sources that
present data for prior years (e.g., 1997) may not reflect the current situation of the industry. To
the extent possible, we update ownership and operating characteristics to the year 2002. Overall,
this profile provides background information on these topics organized within a conventional
economic framework:
• Section 2.1 includes a detailed description of the production process for the taconite
mining industry, with a brief discussion of the inputs to the production process and
costs of production.
• Section 2.2 describes the characteristics, uses, and consumers of iron ore pellets as
well as substitution possibilities.
• Section 2.3 discusses the organization of the industry and provides facility- and
company-level data. Usually, small businesses are reported separately for use in
evaluating the impact on small businesses to meet the requirements of the Regulatory
Flexibility Act (RFA) as amended in 1996 by the Small Business Regulatory
Enforcement and Fairness Act (SBREFA). Because the iron ore industry has no
small businesses, we do not address any issues associated with them.
• Section 2.4 contains market-level data on prices and quantities and discusses trends
and projections for the industry.
2-2
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2.1 The Supply Side
Domestic iron ore supply (production minus exports) satisfied 60 percent of domestic
demand in 2001 (Kirk, 200Ib). Taconite ores mined in Minnesota and Michigan accounted for
virtually all the domestic useable ore production. Minnesota produced 73 percent of the national
output of useable ore while Michigan accounted for about 27 percent (Kirk, 200Ib). The
production process typically involves four stages, and taconite iron ore is the primary input. The
production process, product characteristics, and associated costs of production are described in
detail in the following subsections.
2.1.1 Taconite Pellet Production Processes, Inputs and Outputs
Low-grade taconite ore in Minnesota and Michigan is the primary source of iron for the
iron and steel industry in the United States. Taconite iron ore processes are illustrated in
Figure 2-1. Figure 2-1 also demonstrates the emission points from taconite ore production.
Three types of hazardous air pollutants (HAPs) are released from the processes: acidic gases
(hydrochloric and hydrofluoric acid), metallic particulate matter, and products of incomplete
combustion (PICs) (EPA, 2001).
2.1.1.1 Mining of Crude Ore
Iron ore is a mineral substance that, when heated in the presence of a reductant, yields
metallic iron (Fe). It almost always consists of iron oxides, the primary forms of which are
magnetite (Fe3O4—iron content 72.4 percent), hematite (Fe2O3—iron content 69.9 percent), and
goethite (Fe2O3H2O—iron content 62.9 percent) (McKetta, 1988). Table 2-1 shows that
domestic taconite iron ore is generally mined and processed on the Mesabi Iron Range of
northern Minnesota and the Marquette Iron Range of the Upper Peninsula of Michigan.
Domestic ore is mined from open pits because most commercial ore bodies lie close to the
surface and their lateral dimensions are large. Mining activities involve overburden removal,
drilling, blasting, and removal of waste rock and crude taconite from the open-pit (EPA, 2001).
2-3
-------
a
CTQ
n
1
o
EP-1
t
1
Mining
Operations
EP-2
t
Ore Transfer
and Storage
EP-3
t
EP-4
Coarse Ore
Crushing
4
Fine Ore
Crushing
EP-5
t
5
Ore
Classification
Screens
CTQ
3
3 -
o
n
o
N^*
r+
CD
Agglomeration Building
EP-8
13
Balling Drums—
Pellet Formation
Binding Additives
EP-9
EP-10
EP-11
14
Indurating
Furnace
15
Pellet Cooling
and Storage
16
Process
Boiler
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Table 2-1. Iron Ore Mined and Pelletized in the United States, 2001 (103 metric tons)
District and State
Lake Superior
Minnesota
Michigan
Other States
Total
Number of Mines a
6
2
3
11
Crude Ore
117,000
36,800
78
154,000
Usable Ore
33,800
12,300
83
46,200
a Status in 2003.
Data are rounded and may not add to total.
Source: Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
.
Kirk, W.S. 2003. "Iron Ore." U.S. Geological Survey Mineral Commodity Summaries.
.
Mining in open pits is mostly done with large powerful shovels and trucks. Shovels at
taconite mines are used to dig surface overburden as well as iron ore and waste rock. Rotary
drills with 12- to 17 Vi-inch bits are used to create holes about 16 inches in diameter to a depth of
45 to 55 feet into the taconite ore for explosives to be placed for blasting activities. The
commonly used blasting agent is a mixture of ammonium nitrate fertilizer and fuel oil (called
ANFO), which is pumped into the holes. The quantity of taconite broken by individual blasts
usually ranges from about 0.4 to 1.5 million tons. Trucks then transport the crude iron ore to the
primary or coarse crushers. In some mining operations, trains are used to haul ore to the
crushers (EPA, 2001; EPA, 1994; McKetta, 1988).
2.1.1.2 Beneficiation
The mined taconite is beneficiated to increase its iron content, reduce the content of
impurities, and improve its physical structure, according to the needs of consumers.
Beneficiation processes typically involve milling (crushing and grinding); screening; washing;
and processes that separate ore minerals from gangue (sand, rock, and other impurities
surrounding the iron) by differences in physical or chemical properties. Figure 2-2 illustrates the
general beneficiation processes. Table 2-2 presents the crushing stages operating at the taconite
facilities located in Minnesota and Michigan (EPA, 2001).
2-5
-------
a
CTQ
5
CD
to
ON
Is)
a
o"
I
O
o
o
CD
I
a
era
FLOW SHEET-CONCENTRATING
AUTOGENOUS
GRINDING MILL
ROUGHER
MAGNETIC
SEPARATOfi
RNISHER
MAGNETfC
SEPARATOR
TO PELLET PLANT
SCBEEN
FEED PUMP
-------
Table 2-2. Crushing Stages Operated at Eight Taconite Facilities in Michigan and
Minnesota, 2000
State
Michigan
Minnesota
Company
Empire Iron Mining Partnership
Tilden Mining Co., LC
EVTAC Mining, LLC
Hibbing Taconite Co.
Ispat-Inland Steel Mining Co.
National Steel Pellet Co.
Northshore Mining Co.
U.S. Steel LLC (Minntac)
Mine
Palmer3
Ishpeming3
Evelethb
Hibbingsb
Virginia13
Keewatinc
Babbittb
Mountain Ironb
Pelletizing
Plant
Palmer
Ishpeming
Forbesb
Hibbing
Virginia
Keewatin
Silver Bayd
Mountain Iron
Stages of
Crushing
Single
Single
Four
Single
Three
Single
Three
Three
Number of
Indurating
Furnaces
2
1
2
2
2
2
2
3
a Located in Marquette County
b Located in Saint Louis County
c Located in Itasca County
d Located in Lake County
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air
Pollutants (NESHAPs)for Taconite Iron Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U.S. Environmental Protection Agency.
After crushing, the ore is sent to rod mills for fine grinding, then sent to either ball or pebble
mills (McKetta, 1988). The taconite ore slurry discharged from the rod/ball mills is passed
through multiple stages of magnetic separation (EPA, 2001). Magnetic separation involves three
stages: cobbing, cleaning/roughing, and finishing. Each stage works on finer particles as a
result of removing oversized particles in earlier separations. Ore material not picked up by
magnetic separators is rejected as nonmagnetic gangue or tailings, which are re-ground to extract
as much iron as possible. Cleaners and finishers then work on ore particles in the range of 48
mesh and less than 100 mesh, respectively (EPA, 2001; EPA, 1994).
The iron-bearing slurry flows into a hydraulic concentrator where excess water is
removed through gravity separation. Sediment collected at the bottom of the concentrator is
passed on to the chemical flotation unit (see EPA Technical Resource Document, 1994, for
details of these processes,). In the flotation process, three types of additives are used to upgrade
the iron ore concentrates by removing residual gangue (silica) from the iron-bearing slurry:
2-7
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frothers, collectors/amines, and anifoams. Then the iron-rich concentrates become the raw
materials for producing taconite pellets in the agglomerating process (EPA, 1994).
2.1.1.3 Agglomeration
After beneficiation activities, agglomeration is used to combine the iron-rich concentrates
into pellets, sinter, briquettes, or nodules. This section focuses only on the pelletizing
(indurating) processes because pellets account for more than 95 percent of domestic iron ore
production. Figure 2-3 illustrates the typical pelletizing procedures. In the pelletizing processes,
the iron-rich concentrates are mixed with water and a binder, normally bentonite (clay), hydrated
lime, or organic material (peridor). Then the concentrate is rolled into marble-sized balls (3/8 to
5/8 inch [9-15 mm] in diameter) inside large rotating cylinders. These green (moist and unfired)
balls are then dried and heated to 2,354 to 2,552°F. The induration or heating of the green balls
can be done in a vertical shaft furnace on a travel grate or straight grate or by a combination of a
travel grate and a rotary kiln, or grate-kiln (see EPA Taconite MACT draft report for technical
details; EPA, 2001). The finished product is taconite pellets. As Table 2-3 shows, the travel
grate and grate-kiln are the most commonly used types of indurating furnaces in the pelletizing
processes in the United States (EPA, 2001; EPA, 1994).
2.7.2 Types of Products
Ninety-nine percent of domestic iron ore production was pelletized before shipment
(Kirk, 200Ib). Standard (acid) pellets and fluxed pellets (pellets with a basicity ratio of 0.6 or
greater [American Iron Ore Association, 2000]) are the two major types of pellet products. In
addition to iron, standard pellets can include silica, alumina, magnesia, manganese, phosphorus,
and sulfur. Fluxed pellets contain a certain amount of limestone (calcium carbonate, CaCO3)
and/or dolomite, in addition to all the constituents of standard pellets. Sometimes fluxed pellets
are characterized by basicity ratio, which is a mass ratio of the sum of calcium oxide and
magnesium oxide divided by the sum of silicon oxide and aluminum oxide:
Basicity ratio = [(CaO + MgO)/(SiO2 + A12O3)]
2-8
-------
a
CTQ
5
I
CD
a MILL
CD
Q-
-
3'
CTQ
K)
CONCENTRATE
LAUNDER
CONCENTRAlf
THICKENER
BALLING
DRUM
MIXER
aURRY
TANK
FLOW SHEET - PEUETIZIHG
DISC
FILTER
M:
FILTER CAKE
BENTDNiTE STORAGE BIN
DAY BIN
STOCKPILE
PELLET
LOAD OUT
BINS
ROLL
SCREEN
FEEDER
TRAVELING GRATE
EMERGENCY
STOCKPILE
-------
Table 2-3. Types of Indurating Furnaces Used at Eight Taconite Facilities, 2000
State
Michigan
Minnesota
Company
Empire Iron Mining
Partnership
Tilden Mining Co., LC
EVTAC Mining, LLC
Hibbing Taconite Co.
Ispat-Inland Steel Mining Co.
National Steel Pellet Co.
Northshore Mining Co.
U.S. Steel LLC (Minntac)
Mine
Palmer"
Ishpeming"
Evelethb
Hibbingb
Virginia13
Keewatinc
Babbittb
Mountain Ironb
Pelletizing Plant
Palmer
Ishpeming
Forbesb
Hibbing
Virginia
Keewatin
Silver Bayd
Mountain Iron
Type of
Indurating
Furnaces
Grate-kiln
Grate-kiln
Grate-kiln
Travel grate
Travel grate
Grate-kiln
Travel grate
Grate-kiln
Number of
Indurating
Furnaces
4
2
2
3
1
1
4
5
a Located in Marguette County
b Located in Saint Louis County
c Located in Itasca County
d Located in Lake County
Source: U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed Integrated
Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
Fluxed pellets of at least 1.0 basicity ratio are called fully fluxed pellets. Fluxed pellets
accounted for 66 percent of total pellet production in 2001, which was 45.8 million tons (Kirk,
2001b).
2.1.3 Major By-Products, Co-Products, and Input Substitution Possibilities
Manganese, phosphorus (apatite), cobalt, copper, vanadium, and small quantities of silver
and gold are the by-products or co-products of domestic iron ores. Manganese has a close
association with iron so that the oxides of both metals are usually smelted together. Cobalt was
an important by-product of iron ore mined in Pennsylvania until 1972. Both vanadium and
cobalt are not economically recoverable (McKetta, 1988).
Iron ore is the only source of primary iron. Magnetite (taconite), hematite (jaspilite),
goethite (limonite), siderite, ilmenite, and pyrite are the major types of iron ores mined around
the world. In the United States, magnetite, hematite and goethite are the most common ore
2-10
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types. Minnesota and Michigan mostly produce magnetite and hematite with a small amount of
goethite. Other minor iron ore deposits located in Missouri and Utah are the possible substitutes
for taconite. Besides domestic iron ores, imported iron ore products (e.g., iron-rich concentrates,
fine ores and pellets) are used as substitutes for taconite ore.
2.1.4 Costs of Production and Worker Productivity
This section examines the costs of production as reported in the 1997 Economic Census
of Mining for the iron ore industry, historical costs for the industry, and worker productivity for
various plant sizes. These data, from 1997, represent the most recent Economic Census data
available for the industry. These figures are reported for NAICS 21221, Iron Ore Mining.
2.1.4.1 Costs of Production
The three primary types of production costs for the iron ore industry are capital
expenditures, labor expenses, and cost of inputs used. Each of these cost categories is discussed
below for the iron ore industry. Overall, labor and machinery accounted for the majority of
production costs in 1997 (U.S. Department of Commerce, Bureau of the Census, 1999).
• As shown in Table 2-4, capital costs in 1997 for the iron ore industry totaled
approximately $91 million, or 5 percent of total production costs. Buildings and
other structures accounted for $81 million (about 90 percent of capital costs), while
$9 million (10 percent of these costs) can be attributed to mineral exploration and
development. The expenditures for mineral land and rights, which depend on
whether the land contains sufficient quantity and grade of taconite ore to be economic
for further development (see the Minnesota Mining Tax Guide for more detail;
Minnesota Department of Revenue, 2002) amounted to $0.1 million.
• The iron ore industry spent approximately $542 million in 1997 on labor for a total of
32 percent of total production costs. Twenty-seven percent of labor costs were spent
on fringe benefits, and the remaining expenditures (about $394 million) went toward
the annual payroll.
• Cost of inputs used for the iron ore industry totaled $1 billion (62 percent of total
production costs) in 1997. Supplies used, minerals received, and purchased
machinery installation costs accounted for the most significant portion of this cost
(approximately 58 percent). Other material costs included $117 million for fuel
expenditures and about $259 million for purchased electricity.
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Table 2-4. Production Costs for NAICS 21221—Iron Ore Mining, 1997
1997 Percentage of Total Cost of
($103) Production
Total Cost of Production
Total Capital Expenditures
Buildings and other structures
Mineral exploration and development
Mineral land and rights
Total Labor Expenditures
Annual payroll
Fringe benefits
Total Cost of Supplies
Supplies used, minerals received, and purchased
machinery installed
Resales
Fuels
Purchased electricity
Contract work
$1,677,400
$90,963
$81,437
$9,420
$106
$541,771
$393,921
$147,850
$1,044,666
$603,797
NA
$117,001
$258,971
NA
100.0%
5.4%
4.9%
0.6%
0.0%
32.3%
23.5%
8.8%
62.3%
36.0%
NA
7.0%
15.4%
NA
NA = Not available.
Source: U.S. Department of Commerce, Bureau of the Census. 1999. 7997 Economic Census of Mining,
Industry Series—Mining. Washington, DC: Government Printing Office.
2.1.4.2 Variations in Worker Productivity by Establishment Size
Table 2-5 provides information from the most recent Economic Census (1997) on
variations in the productivity of workers (measured by value added per production worker) for
facilities of varying size. Data are not provided for establishments with more than 20
employees, but value added per production worker is lower for the industry as a whole than it is
for the smaller establishments. Thus, there appears to be no efficiency advantage to larger
establishments.
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Table 2-5. Worker Productivity by Plant Size for Facilities in NAICS 21221—Iron Ore
Mining, 1997
Employees
Value Added by
Establishments Manufacturer ($103)
Number of
Production Value Added/
Worker Hours Production Worker
(103) Hour
0 to 4 employees
5 to 9 employees
10 to 19 employees
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
1,000 to 2,499 employees
Total
9
3
8
1
1
2
2
3
3
32
1,382
1,930
8,313
NA
NA
NA
NA
NA
NA
983,940
17
22
124
NA
NA
NA
NA
NA
NA
15,326
$81.29
$87.73
$67.04
NA
NA
NA
NA
NA
NA
$64.20
NA = Not available.
Source: U.S. Department of Commerce, Bureau of the Census. 1999. 7997 Economic Census of Mining,
Industry Series—Mining. Washington, DC: Government Printing Office.
2.2 The Demand Side
In addition to the supply side, estimating the economic impacts of the regulation on the
taconite iron ore manufacturing industry requires characterizing various aspects of the demand
for taconite pellets. This section describes the product characteristics desired by end users and
possible substitutes for taconite pellets.
2.2.1 Uses and Consumers
2.2.1.1 Uses
Taconite pellets are primarily consumed by iron and steel producers. As Table 2-6
illustrates, almost all (98.8 percent) of the iron ore produced in the United States was used for
manufacturing iron and steel in 2001. Data are incomplete for 2002, but data show that
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Table 2-6. U.S. Consumption of Iron Ore by End Use, 1997-2001 (103 metric tons)
End Use/Year
Integrated Iron and Steel Plants
Blast furnaces
Steel furnaces
Sintering plants
Miscellaneous
Direct-reduced iron for steelmaking
Nonsteel End Uses
Total
2002
58,800
52,900
300
5,620
2
NA
NA
NA
2001
61,900
57,300
35
4,560
0
1,800
756
64,400
2000
70,700
64,400
49
6,190
0
2,340
1,150
74,100
1999
67,800
62,100
57
5,840
2
2,420
1,290
71,500
1998
70,000
63,500
101
6,330
48
2,400
1,280
73,600
1997
71,800
64,900
86
6,660
146
752
1,280
73,800
Note: Because of rounding, numbers may not add up to the total.
Source: Kirk, W.S. 1997b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1997.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998.
.
Kirk, W.S. 1999b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1999.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
.
Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
.
Kirk, W.S. 2003b. "Iron Ore in January 2003." U.S. Geological Survey Mineral Industry Survey.
integrated iron and steel plants consumed 90 percent of domestic iron ore production in 2002.
Table 2-6 also shows that the use of iron ore in integrated iron and steel mills has been steadily
decreasing since 1997 due to the increasing market share of electric arc furnaces (more than 50
percent of domestic production in 2002) and their use of direct reduced iron (DRI) (Kirk,
200Ib). Integrated steelmakers used small amounts of DRI in blast furnaces as a process
coolant. On the other hand, EAF minimills and specialty mills consumed greater quantities of
DRI to improve their steel quality (Fenton, 2000). Because EAFs represent a growing share of
the steel industry, use of iron ore to produce DRI increased significantly during the 1990s. In
addition to the taconite pellets consumed in the iron and steel industry, the remaining 2 percent
of taconite ore production is used in manufacturing other commodities such as cement, heavy-
medium materials, ballast, iron oxide pigments, high-density concrete, ferrites, specialty
chemicals, and additives to animal feed (McKetta, 1988).
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2.2.1.2 Consumer Characteristics
In 2001, 78 percent of domestic taconite ore (36 metric tons) was produced for captive
use (Kirk, 200Ib), which was not traded on the market. In other words, taconite ore is mined,
processed into pellets, and used in company-owned blast furnaces to make iron and steel; the
plants performing different steps in the process are owned by a single company or by related
companies. For example, Ispat-Inland International N.V., USX Corporation, and NKK Steel
have ownership interests in mines to ensure secure sources of iron ore for their integrated steel
mills. Other steel mills acquire iron ore pellets based on long-term contractual agreements with
pellet producers. For instance, Geneva Steel Company purchases iron ore pellets from USX
Corporation under a long-term pellet supply contract.
In 2001, 13 companies owned 19 operating integrated iron and steel facilities (Fenton,
2001). All facilities have iron making, steel making, and casting operations. Table 2-7 lists the
companies and their iron making operations. Five facilities are located in Ohio; four are in
Indiana; two each are in Illinois, Alabama, and Michigan; and one each is in Kentucky,
Maryland, Utah, Pennsylvania, and West Virginia. USX Corporation has the most production
capacity for iron making, while Acme Metals Incorporated has the least capacity of all
companies owning integrated facilities.
2.2.2 Product Characteristics
Pellets are usually the most desirable form of iron ore because they contribute the most to
the productivity of the blast furnace. Pellets usually measure from 3/8 to 5/8 inch (9.55 to 16.0
millimeters) in diameter and contain 60 to 66 percent iron. Besides iron, standard pellets can
include silica, alumina, magnesia, manganese, phosphorus, sulfur, and moisture. Fluxed pellets
contain a certain amount of limestone (calcium carbonate, CaCO3), dolomite and/or lime (CaO),
in addition to all the constituents of standard pellets.
2.2.3 Substitution Possibilities in Consumption
Domestic iron ore production has been steady since 1990 although the steel demand has
risen from 96 million metric tons in 1990 to 133 million metric tons in 1999 (a 39 percent
increase). The need for domestic iron ore production in iron and steel making may decrease
because of the growth of minimills and imports of iron ore substitutes. Imported iron ore
substitutes for both integrated mills and minimills include steel mill products, scrap, pig iron,
and direct reduced iron (DRI). Steel mill products are semifinished steel, such as blooms, billets,
slabs, sheets, bars and plates (Fenton, 2001). In 2002, 10 million tons of semifinished foreign
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Table 2-7. Iron Making Capacity and Facility Location of U.S. Integrated Iron and Steel
Companies (103 metric tons per year)
Company Name
Acme Metals Incorporated
AK Steel Holdings Corporation
Bethlehem Steel Corporation
Geneva Steel Company
Ispat-Inland International N.V.
LTV Corporation
National Steel Corporation
Renco Group Incorporated
Rouge Industries Incorporated
Republic International LLC
USX Corporation
Weirton Steel Corporation
WHX Corporation
Total
Iron-Making Capacity
907
3,901
7,312
2,384
NA
6,886
5,384
1,325
2,662
2,029
10,641
2,449
1,953
48,831
Facility Locations
Riverdale, IL
Ashland, KY; Middletown, OH
Burns Harbor, IN; Sparrows PL, MD
Orem, UT
East Chicago, IN
Cleveland, OH; East Chicago, IN
Granite City, IL; Ecorse, MI
Warren, OH
Dearborn, MI
Lorain, OH
Braddock, PA; Fairfield, AL; Gary, IN
Weirton, WV
Mingo Junction, OH
NA = Not available.
Source: U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed Integrated
Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
Association of Iron and Steel Engineers (AISE). 1998. 1998 Directory Iron and Steel Plants.
Pittsburgh, PA: AISE.
U.S. Environmental Protection Agency (EPA). 1998. Update of Integrated Iron and Steel Industry
Responses to Information Collection Request (ICR) Survey. Database prepared for EPA's Office of Air
Quality Planning and Standards. Research Triangle Park, NC: U.S. Environmental Protection Agency.
steel were imported. This would potentially decrease the need for iron ore pellets from
Minnesota and Michigan. However, the recent U.S. government's quotas and tariffs on imported
steel slabs and finished steel would reduce imports and strengthen domestic iron ore production
(Skillings Mining Review, 2003). Pig iron is the product of blast furnaces and is used by
integrated mills and to some extent by minimills. DRI is a product obtained by reducing iron ore
to iron metal at temperatures below the melting point of iron. DRI is used as a scrap substitute
in EAF steel making at minimills and specialty mills (Kirk, 2000b). About 2.2 million tons of
DRI were used domestically in 2001 as a substitute for iron and steel scrap (Fenton, 2002).
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2.3 Industry Organization
This section identifies the characteristics of the taconite industry in the United States.
The issues affecting this industry's organization are addressed at both the company and facility
levels.
2.3.1 Taconite Manufacturing Facility Characteristics
Table 2-8 lists the eight taconite mining and pelletizing plants in the United States as of
2001. Six of these operations were on the Mesabi Iron Range in northeastern Minnesota:
EVTAC Mining LLC, Hibbing Taconite Company, Inland Steel Mining Company, National
Steel Pellet Company, Northshore Mining Company, and the U.S. Steel LLC (Minntac). The
other two operations, located on the Marquette Iron Range in the Upper Peninsula of Michigan,
were the Empire and Tilden Mines (Skillings Mining Review, 2003). Figure 2-4 illustrates the
locations of taconite facilities.
Besides the plant locations, Table 2-8 also provides information on plant annual capacity,
year 2002 production, and employment. The total domestic pellet production in 2002 was
51 million metric tons and the workforce totaled 5,516 employees. The facilities operated by
Cleveland-Cliffs produced a total of about 24 million metric tons, which was 46 percent of the
total domestic pellet production. Except for EVTAC Mining LLC and Inland Steel Mining
Company, all the plants employed more than 500 people. Employment at these facilities ranged
from 355 employees at Ispat-Inland Steel Mining Company to 1,570 employees at US Steel's
Minntac operations. Data on plant locations and employment were obtained from the EPA
(2001), Skillings Mining Review (2003), and Kirk (2001b).
2.3.2 Firm Characteristics
Facilities comprise a site of land with a plant and equipment that combine inputs
(taconite iron ore) to produce output (taconite pellets). Companies owning these facilities are
legal business entities that have the capacity to conduct transactions and make business decisions
that affect that facility. The terms establishment, facility, and plant are synonymous in this study
and refer to the physical location where products are manufactured. Likewise, the terms
company and firm are synonymous and refer to the legal business entity that owns one or more
facilities. This section presents information on the parent companies that own the taconite
mining and pelletizing plants identified in the previous section.
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Figure 2-4. Locations of Taconite Iron Ore Processing Facilities
2.3.2.1 Ownership
As discussed in Section 2.3.1, 5 companies operated 8 mining and pelletizing facilities in
2002. Table 2-9 lists companies that own and/or operate these facilities. With four facilities,
Cleveland-Cliffs operates more plants that produce taconite pellets than any other domestic
manufacturer.
As Table 2-9 and Figure 2-5 show, most iron ore mines are wholly owned subsidiaries of
one or more steel-producing companies. Some of the pellets are also produced for commercial
purposes. In 2001, 78 percent of domestic ore was produced for captive use and not sold on the
market (Kirk, 200Ib), because the ownership structure of taconite differs from other industries.
In many cases, a mine is owned by multiple parent companies. The ore may be produced for
these parent companies, and thus does not reach the open market. For example, Ispat-Inland
Steel Mining Company obtains iron ore pellets directly from the Empire Mine in Michigan and
Minorca Mine in Minnesota, in which it has ownership interests. Stelco Incorporated has
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Table 2-8. Taconite Iron Ore Facility Capacity and Production, 2002
State
Minnesota
Michigan
Total United
Company
EVTAC Mining, LLC
Hibbing Taconite Co.
Ispat-Inland Steel Mining Co.
National Steel Pellet Co.
Northshore Mining Co.
U.S. Steel LLC (Minntac)e
Empire Iron Mining Partnership
Tilden Mining Co., LC
States'
Operator
Independent
Cleveland-Cliffs
Ispat Inland, Inc.
National Steel
Corp.
Cleveland Cliffs
U.S. Steel
Cleveland Cliffs
Cleveland Cliffs
Mine
Eveleth3
Hibbing3
Virginia3
Keewatinb
Babbitt3
Mountain
Iron3
Palmerd
Ishpemingd
Pelletizing
Plant
Forbes3
Hibbing
Virginia
Keewatin
Silver Bayc
Mountain
Iron
Palmer
Ishpeming
Annual
Capacity
(million
metric
tons)
4.47
8.53
2.64
5.54
4.88
16.05
6.26
7.92
56.30
2002
Production
(million
metric tons)
4.25
7.82
2.86
5.56
4.17
14.88
3.70
7.99
51.22
Employment
428
740
355
504
500
1,570
635
784
5,516
3 Located in Saint Louis County
b Located in Itasca County
c Located in Lake County
d Located in Marguette County
e U.S. Steel Corp. is an independent company from USX Corp. as/of the end of 2001.
f Because of rounding, numbers may not add up to the total
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air Pollutants (NESHAPs)for
Taconite Iron Ore Processing Plants—Background Information for Proposed Standards. Washington, DC: U.S. Environmental
Protection Agency.
Skillings Mining Review. "US/Canadian Iron Ore Production 2002." July 20, 2002. pp. 17-30.
Shillings Mining Review. "US/Canadian Iron Ore Production 2001." July 28, 2001. pp. 19-32.
Skillings Mining Review. "US/Canadian Iron Ore Production 2000." July 29, 2000. pp. 21-36.
Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
.
-------
Table 2-9. Taconite Iron Ore Facility Operator and Ownership, 2002
State Company
Minnesota EVTAC Mining, LLC
Hibbing Taconite Co.
Ispat-Inland Steel Mining Co.
National Steel Pellet Co.
Northshore Mining Co.
U.S. Steel LLC (Minntac)d
Michigan Empire Iron Mining Partnership
Tilden Mining Co., LC
Operator
Independent
Cleveland-Cliffs
Ispat Inland, Inc.
National Steel Corp.
Cleveland Cliffs
U.S. Steel LLC
Cleveland Cliffs
Cleveland Cliffs
Ownership
Eveleth Taconite Co.a
Virginia Horn Taconite Co.b
Ontario Eveleth Taconite Co.c
Cleveland-Cliffs
Bethlehem Steel Corp.
Stelco Inc.
Ispat International N.V.
National Steel Corp.
NKK Steel
Cleveland-Cliffs
U.S. Steel LLC
Cleveland-Cliffs
Ispat International N.V.
Cleveland-Cliffs
Stelco Inc.
Share
(%)
45
40
15
23
62
15
100
32
68
100
100
79
21
85
15
a Owned by Rouge Steel Company
b Owned by AK Steel Holding Corporation
c Owned by Stelco Incorporated
d U.S. Steel Corp. is an independent company from USX Corp as of the end of 2001.
NA = Not available.
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air
Pollutants (NESHAPs)for Taconite Iron Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U.S. Environmental Protection Agency.
"Hibbing Taconite Resumes Operations." Shillings Minings Review August 4, 2001. pp. 7.
"US/Canadian Iron Ore Production 2002." Shillings Mining Review July 20, 2002. pp. 17-30.
"US/Canadian Iron Ore Production 2001." Shillings Mining Review July 28, 2001. pp. 19-32.
"US/Canadian Iron Ore Production 2000." Shillings Mining Review July 29, 2000. pp. 21-36.
Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
.
U.S. Securities and Exchange Commission. Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) System.
Hoover's Online. Electronic database, . Obtained on August 28, 2001.
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Ontario
Eveleth Taconite/Stelco \
(15%)
Eveleth
Taconite/Rouge Steel
(45%)
Virginia-Horn
Taconite/AK Steel
(40%)
Cleveland
Cliffs
U.S. Steel
(100%)
Stelco
(15%)
National Steel
(32%)
NKK
(68%)
Bethlehem
Steel (62%)
Stelco
(15%)
Figure 2-5. Taconite Iron Ore Facility Operator and Ownership, 2002
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ownership interests in EVTAC Mining Company, Ribbing Taconite Company, and Tilden Mine
to ensure secure sources of iron ore for its integrated steel companies. Other steel mills acquire
iron ore pellets based on long-term contractual agreements with pellet producers. For instance,
Geneva Steel Company purchases iron ore pellets from USX Corporation under a long-term
pellet supply contract.
2.5.2.2 Size Distribution
Company sales and employment ranges are reported in Table 2-10. Most companies are
large, publicly owned integrated steel companies, such as AK Steel Corporation, Bethlehem
Steel Corporation, Ispat International N.V., LTV Corporation, and USX Corporation. Two
companies have sales volumes less than $1 billion, six between $1 and $5 billion, and two with
more than $5 billion. Five companies have fewer than 10,000 employees and the other
five companies employ 10,000 or more people. Sales and employment data were collected from
Hoover's Online (2001) and complemented with information from InfoUSA (2001).
2.3.2.3 Horizontal and Vertical Integration
Whether a firm in this industry is vertically or horizontally integrated, or not integrated,
depends on the nature of the primary business activity that the parent company does and on the
businesses the various facilities owned by the parent company engage in. Vertically integrated
firms may produce the inputs used in their production process or use the product as an input into
other production processes. These firms may own several plants and/or operate many
subsidiaries, each of which handles a different stage of production or directly or indirectly
produces an input or product. In the taconite industry, captive iron ore producers are parts of
vertically integrated iron and steel operations. Most of the companies in Table 2-9 are vertically
integrated. For example, Ispat-Inland Steel Mining Company, National Steel Corporation, and
USX Corporation use taconite pellets produced by taconite operations they own in their
integrated steel operations to produce iron and steel. However, USX Corporation spun off its
integrated steel operation (now called United States Steel Corporation) at the end of 2001 (U.S.
Steel, 2002).
Companies that are not integrated either horizontally or vertically produce only one type
of product or set of closely related products. The smaller companies involved in manufacturing
taconite ore products are, for the most part, not integrated; they produce a sole product without
having forward or backward corporate linkages. These companies purchase inputs from outside
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Table 2-10. Taconite Iron Ore Facility Owner Company Sales and Employment, 2002
Owner Company
Bethlehem Steel Corp.
Cleveland-Cliffs
Eveleth Taconite Co.a
Ispat International N.V.
National Steel Corp.
Stelco Inc.
US Steel Corp.b
Virginia Horn Taconite Co.c
Legal Form of Organization
Public
Public
Public
Public
Public subsidiary
Public
Public
Public
Sales ($106)
3,572
599
1,127
4,889
2,609
2,009
7,054
4,289
Employment
11,500
3,858
2,705
15,400
8,342
9,749
20,351
11,300
a Owned by Rouge Steel Company
b Previously owned by USX Corporation
b Owned by AK Steel Holding Corporation
NA = Not available.
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air
Pollutants (NESHAPs)for Taconite Iron Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U.S. Environmental Protection Agency.
Shillings Mining Review. "US/Canadian Iron Ore Production 2002." July 20, 2002. pp. 17-30.
Shillings Mining Review. "US/Canadian Iron Ore Production 2001." July 28, 2001. pp. 19-32.
Stelco Inc. website, . Obtained on August 28, 2001.
Hoover's Online. Electronic database, . Obtained on August 28, 2001.
InfoUSA Incorporated. 2001. ReferenceUSA electronic database.
suppliers, not of their corporate tree. Then they manufacture the product and sell it either
directly to consumers or through wholesalers.
2.3.3 Small Businesses in the Taconite Industry
To determine the possible impacts of the NESHAP on small businesses, businesses
producing taconite are categorized as small or large using the Small Business Administration's
(SBA's) general size standards definitions. For NAICS 21221, these guidelines indicate a small
business employs 500 or fewer workers (U.S. Small Business Administration, 2000). Based on
the SB A definition and the company employment shown in Table 2-10, this industry has no
small businesses.
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2.3.4 Market Structure
Market structure is of interest because it affects the behavior of producers and consumers
in the industry. If an industry is perfectly competitive, then individual producers are not able to
influence the price of the outputs they sell or the inputs they purchase. This condition is most
likely to hold if the industry has a large number of firms, the products sold are undifferentiated,
and entry and exit of firms are unrestricted. Product differentiation can occur both from
differences in product attributes and quality and from brand name recognition of products. Entry
and exit of firms are unrestricted for most industries except, for example, in cases when
government regulates who is able to produce, when one firm holds a patent on a product, when
one firm owns the entire stock of a critical input, or when a single firm is able to supply the
entire market.
When compared across industries, firms in industries with fewer firms, more product
differentiation, and restricted entry are more likely to be able to influence the price they receive
for a product by reducing output below perfectly competitive levels. This ability to influence
price is referred to as exerting market power. At the extreme, a single monopolistic firm may
supply the entire market and hence set the price of the output.
2.3.4.1 Measures of Industry Concentration
To assess the competitiveness of a market, economists often estimate concentration ratios
and the Herfindahl-Hirschmann Indexes (HHI) for the subject market or industry. Firms in
less-concentrated industries are more likely to be price takers, while firms in more-concentrated
industries are more likely to be able to influence market prices. Tables 2-8 and 2-9 provide data
on the market share that each company holds in terms of pellet production and company
ownership share. With fewer than a dozen owner companies, many of them vertically
integrated, and with significant barriers to entry, the taconite industry is likely to be fairly
concentrated. However, there are no publicly available market concentration statistics available
for the taconite industry.
2.3.4.2 Geographic Concentration
As Table 2-8 and Figure 2-4 illustrate, the taconite mining and processing facilities are
located in either Minnesota or Michigan. In Minnesota, all of the iron ore production occurs in
the Mesabi Range, located in Cook (2000 population: 5,168), Itasca (43,992), Lake (11,058),
and Saint Louis (200,528) counties. In Michigan, the production is from the Empire and Tilden
Mines in Marquette County (2000 population: 64,634). The geographic location of the 8
2-24
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taconite facilities indicates that the potential impact of the rale will be concentrated in the five
counties mentioned above. Based on the information from Cleveland-Cliffs, the Empire and
Tilden Mines have a local economic impact of $390 million per year. The Hibbing Taconite and
Northshore Mining Companies have an economic impact of more than $400 million per year on
the local economy (Cleveland-Cliffs, 2001).
2.4 Markets
This section examines the historical market statistics and future trends and projections for
the taconite pellet industry. Historical data for this industry are provided for domestic
production and consumption, domestic prices, and foreign trade in iron ore pellets. The future
trends section focuses on projected demand and employment for the taconite pellet industry.
2.4.1 Historical Market Data
This section provides data on historical quantities of iron ore produced and consumed in
the United States, the quantities imported and exported, and prices.
2.4.1.1 Domestic Production
Table 2-11 presents the data on the quantities of iron ore production from 1990 to 2001,
including crude ore, usable ore, and pellet productions. The domestic production of crude ore
ranged from a low of 154 million metric tons in 2001 to a high of 213 million in 1998. On
average, 30 percent of the crude ore mined could be processed into usable ore. The domestic
useable ore production in 2001, at 46.2 million metric tons, reached its lowest level since 1990.
The domestic production of pellets in 2001, at 45.8 million metric tons, also reached its record
low.
2.4.1.2 Domestic Consumption
Table 2-11 also shows the domestic consumption of iron ore products, including iron ore
and agglomerates (pellets and sinter). The domestic consumption of iron ore ranged from a low
of 66.4 million metric tons in 1991 to a high of 83.1 million metric tons in 1995. In 2001,
domestic consumption was 67.3 million metric tons, reached its second lowest level since 1990.
During the same year, the integrated iron and steel producers consumed about 62 million metric
tons of iron ore products. Of the ore consumed, 83 percent was of domestic origin, 7 percent
was imported from Canada, and 10 percent came from other countries (Kirk, 2001b).
2-25
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Table 2-11. Domestic Production and Consumption of Iron Ore, 1990-2001 (103 metric
tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Crude Ore
181,431
183,774
184,600
180,896
191,989
209,988
207,988
208,743
213,357
192,481
208,055
154,000
Usable Ore
56,405
56,758
55,589
55,657
58,378
62,485
62,069
62,968
62,927
57,747
63,100
46,200
Pellet Production
54,817
54,777
54,196
54,497
57,579
61,397
61,096
62,075
62,128
57,512
62,400
45,800
Consumption3
76,900
66,400
75,100
76,800
80,200
83,100
79,600
79,500
78,200
75,100
76,500
67,300
a Includes iron ore and agglomerates (pellets and sinter)
NA = Not available.
Source: American Iron Ore Association. 2000. Iron Ore: 1999 Statistical Report. Cleveland: American Iron
Ore Association.
Skillings Mining Review. "US/Canadian Iron Ore Production 2000." July 29, 2000. pp. 21-36.
Kirk, W.S. 1994. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1994.
.
Kirk, W.S. 1995. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1995.
.
Kirk, W.S. 1996b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1996.
.
Kirk, W.S. 1997b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1997.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998.
.
Kirk, W.S. 1999b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1999.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
2-26
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2.4.1.3 Domestic Prices
One of the major structural changes in the domestic iron ore industry occurred in 1982
with the development of a U.S. spot market for pellets, which led to the beginning of price
competition. As a result of the spot market for pellets, domestic iron ore producers lowered
prices to make domestic ore competitive with imported material and also reduced production
costs by improving labor productivity, reducing wages, negotiating lower-cost power contracts
and royalty agreements, pressing suppliers to reduce prices for materials, lobbying legislators for
tax breaks, and paying off debt (Kirk, 1998b).
The domestic prices of iron ore products (e.g., direct-shipping ore, concentrates,
agglomerates, and byproduct ore) from 1990 through 2001 are presented in both current and
2002 dollars in Table 2-12. Note that the iron ore prices presented in Table 2-12 were the values
of the useable ore at mines, which did not include mine-to-market transportation costs. Also
most spot sales are individually negotiated one-time contacts made directly between buyer and
seller (Kirk, 2001b). Thus, the prices presented in Table 2-12 would only be a representation of
a small proportion of the entire domestic iron ore production. As shown in Table 2-12, adjusted
prices in 2002 dollars for iron ore products range from a low of $23.66 per metric ton in 2001 to
a high of $31.72 per metric ton in 1992. Between 1993 and 1997, the adjusted price never went
above $30 per metric ton. In addition to vertically integrated production and the spot market,
long-term contracts (mentioned above) affect prices. The prices at which iron ore products
change hands under long-term contracts are frequently tied to movement in the spot market price
or the world price. The low spot market prices in both 1999 and 2000 coincided with increased
imports of pig iron, DRI, and semifinished steel, reducing the demand for domestic iron ore.
Steel producers increased their use of imports because it allowed them to increase steel
production in response to cyclical increases in steel demand without having to increase their
blast furnace production, reopen idled blast furnaces, and hire new personnel.
2.4.1.4 Foreign Trade
Table 2-13 provides data on the quantities and dollar values of imported iron ore
products from 1990 through 2002. The average volume of imported iron ore products during
that period was slightly more than 15 million metric tons per year. The average dollar value of
iron ore imports between 1990 and 2002 was slightly more than $450 million per year in
constant 2002 dollars. In 2002, the value of imported iron ore products per metric ton was
$25.10. As of 2001, about 43 percent of the imports were from Canada, followed by 40 percent
2-27
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Table 2-12. Historical Prices of Usable Iron Ore at Mines ', 1990-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Shipments
(103 metric tons)
57,000
56,800
55,600
56,300
57,600
61,100
62,200
62,800
63,200
58,500
61,000
50,600
Value of Shipments
($103)
1,570,000
1,530,000
1,550,000
1,380,000
1,410,000
1,700,000
1,750,000
1,860,000
1,970,000
1,550,000
1,560,000
1,210,000
Average Value
Current $
27.54
26.94
27.88
24.51
24.48
27.82
28.14
29.62
31.17
26.50
25.57
23.91
per Metric Ton b
2002$
31.56
30.68
31.72
28.12
28.09
28.80
27.69
29.28
31.07
26.55
25.66
23.66
a Usable iron ore includes direct-shipping ore, concentrates, agglomerates, and byproduct ore.
b Average value per metric ton = value of shipments/shipments
Source: Kirk, W.S. 1994. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1994.
.
Kirk, W.S. 1995. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1995.
.
Kirk, W.S. 1996b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1996.
.
Kirk, W.S. 1997b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1997.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998.
.
Kirk, W.S. 1999b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1999.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
Bureau of Labor Statistics. "Producer Price Index Revision—Current Series: PCU1011#, Iron Ores:
1990-2003." .
2-28
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Table 2-13. U.S. Imports for Consumption and Value of Imports of Iron Ore Products,
1990-2002 ($103)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Imports
(103 metric tons)
18,082
13,331
12,501
13,981
17,552
17,509
18,382
18,599
17,009
14,244
15,677
10,645
12,453
Value
Current $
559,534
436,607
395,618
415,063
509,887
485,846
555,953
551,035
527,059
398,527
420,046
292,744
312,555
of Imports
2002$
641,218
497,320
450,087
476,236
585,034
502,931
547,239
544,674
525,386
399,375
421,388
289,669
312,555
Value of Imports
Current $
30.94
32.75
31.65
29.69
29.05
27.75
30.24
29.63
30.99
27.98
26.79
27.50
25.10
per Metric Tona
2002$
35.46
37.31
36.01
34.06
33.33
28.72
29.77
29.29
30.89
28.04
26.88
27.21
25.10
Source: U.S. International Trade Commission. "SIC-1011: FAS Value by FAS Value for All Countries."
. As obtained June 4, 2003a.
U.S. International Trade Commission. "SIC-1011: Customs Value by Customs Value for All Countries:
. As obtained June 4, 2003b.
Bureau of Labor Statistics. "Producer Price Index Revision—Current Series: PCU1011#, Iron Ores:
1990-2003." .
from Brazil (see Table 2-14). Pellets and fine ores were the two major types of imported
products, as shown in Table 2-15.
Overall, the volume of exported iron ore products is much lower than the volume of
imported iron ore products, and the price per metric ton is higher. As Table 2-16 presents, the
average volume of exported iron ore products between 1990 and 2002 was slightly more than 5
million metric tons per year. The average dollar value of iron ore exports during that period was
slightly more than $200 million dollars per year in constant 2002 dollar terms. Table 2-14
indicates that in 2001, most exported iron ore products went to Canada (99 percent). The major
exported product was pellets (see Table 2-15).
2-29
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Table 2-14. Value of Imports for Consumption and Exports of Iron Ore by Country, 2001
($103)
Imports from:
Australia
Brazil
Canada
Chile
Peru
Sweden
Venezuela
Others
Total
Exports to:
Canada
Others
Total
Value ($)
4,840
104,000
133,000
17,400
1,030
2,570
6,500
23,300
292,640
227,000
1,840
228,840
Share (%)
1.7
35.5
45.4
5.9
0.4
0.9
2.2
8.0
100.0
99.2
0.8
100.0
Source: Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
2.4.2 Trends and Projections
In 2002, iron ore was produced in about 50 countries. The seven largest of these
producing countries—China, Brazil, Australia, Russia, India, Ukraine, and the United States—
accounted for more than 80 percent of the world total (1.1 billion metric tons), and no other
country had as much as a 5 percent share (Kirk, 2003). U.S. iron ore production in 2002 totaled
50 metric tons or 4.5 percent of the world total. Domestic steel making accounted for about
98 percent of domestic iron ore consumption (Kirk, 2001a). From 1992 to 1997, the domestic
production of usable iron ore trended upward from 56 million metric tons to about 63 million
metric tons, an average growth rate of 2.6 percent (Kirk, 1999b). In 2000, domestic iron ore
production reached its highest level (63 metric tons) since 1981, and domestic iron ore
consumption has declined since 1995 by an average of 2.5 percent per year (Kirk, 2000b; Kirk,
1999b).
2-30
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Table 2-15. Quantity of Imports and Exports of Iron Ore by Type of Product, 2001 (103
metric tons)
Type of Product Imports Exports
Concentrates 598 74
Coarse ores 28 1
Fine ores 4,050 22
Pellets 5,500 5,490
Briquettes 0 <0.5
Other agglomerates 462 21
Roasted pyrites 7 1
Total 10,700 5,610
Source: Kirk, W.S. 2001b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2001.
The majority of U.S. iron ore trade involves Canada. Since 1990, about 50 percent of
U.S. imports were from Canada, and 99 percent of U.S. exports were shipped there. The iron ore
mines and most of the integrated steel industry are close to the Great Lakes, which offers low-
cost transportation and helps U.S. ore producers have a competitive advantage. However, each
iron ore producer is aware that it must reduce costs substantially to compete with foreign
producers (Kirk, 2000b).
The domestic pellet industry is experiencing a serious decline in demand for its products
and is projecting a tonnage decrease of at least 10 to 15 percent from the 2000 levels (Skillings
Mining Review, 2001). Due to the massive imports of cheap steel into the U.S. market, coupled
with world-wide overcapacity in steel production (Hufbauer and Goodrich, 2002), the U.S. steel
industry has undergone a downsizing, which has accelerated since 1998 when the Asian
economic crisis weakened global demand for steel. For instance, in early 2001, the LTV Steel
Mining Company (LTVSMC) closed its taconite mining operation in Hoyt Lakes, which was
later sold to Cleveland-Cliffs. (Cleveland-Cliffs, Inc., 2001). Then the LTV Corporation
decided to sell its Cleveland Works East and Indiana Harbor Works integrated steel assets under
an Asset Protection Plan (APP) issued by the U.S. Bankruptcy Court (LTV Corporation, 2002).
Domestic steelmakers are now experiencing structural changes in their markets that have the
potential to affect the domestic iron ore industry. For example, some of the integrated steel
makers use imported iron ore as feedstock to produce direct reduced iron. Further, the
2-31
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Table 2-16. U.S. Domestic Exports and Value of Exports of Iron Ore Products, 1990-2002
($103)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Exports
(103 metric tons)
3,181
4,045
5,055
5,060
4,972
5,267
6,256
6,336
5,994
6,120
6,146
5,605
6,753
Value
Current $
123,236
156,197
186,814
166,805
162,468
184,459
231,701
234,894
244,473
242,962
245,953
229,241
248,810
of Exports
2002$
141,226
177,917
212,535
191,289
186,412
190,946
228,069
232,183
243,697
243,479
246,739
226,833
248,810
Value of Exports
Current $
38.75
38.62
36.95
32.97
32.67
35.02
37.04
37.07
40.79
39.70
40.02
40.90
36.85
per Metric Tona
2002$
44.40
43.99
42.04
37.83
37.49
36.25
36.46
36.64
40.66
39.79
40.14
40.47
36.85
Source: U.S. International Trade Commission. "SIC-1011: FAS Value by FAS Value for All Countries."
. As obtained June 4, 2003a.
U.S. International Trade Commission. "SIC-1011: Customs Value by Customs Value for All Countries:
. As obtained June 4, 2003b.
Bureau of Labor Statistics. "Producer Price Index Revision—Current Series: PCU1011#, Iron Ores:
1990-2003." .
minimills' share of the steel market has increased steadily, rising from 15 percent in 1970 to
about 50 percent in 2000. Minimills use iron and steel scrap and direct reduced iron as
feedstock, rather than iron ore pellets made from taconite. This trend is expected to continue and
will affect the domestic iron ore industry negatively (McGraw-Hill, 2000).
Given the severe economic environment, domestic steel producers asked the International
Trade Commission (ITC) to impose substantial tariffs of up to 40 percent on all imported steel
products, and the ITC has found that there was injury from imports in most steel markets. In
June 2001, the Bush Administration requested a Section 201 investigation to determine if the
steel industry has been injured from imports. After the investigation, the U.S. International
Trade Commission found the imports were a substantial cause of serious injury or threat of
2-32
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injury and recommended a four-year program of tariffs and tariff-rate quotas to the President. In
response, President Bush decided to impose tariffs on several key steel products for a period of
three years (Bush, 2002). Meanwhile, leading U.S. steelmakers are trying to develop
consolidation plans to protect their iron and steel interests in North America as well as to prevent
further bankruptcies. For example, the U.S. Steel Corporation has begun talks to acquire
National Steel of Japan, NKK, and has also considered merging with other steel companies,
including Bethlehem Steel and Wheeling-Pittsburgh Steel (BBC News, 2001). As to iron ore
supply, Cleveland-Cliffs, Inc. has taken several actions to consolidate its position as the largest
supplier of iron ore to the North American steel industry. In a recent press release, Cleveland-
Cliffs stated that it plans to increase its ownership of the Tilden Mine from 40 percent to 85
percent by acquiring 45 percent share from Algoma Steel, Inc., to reduce pellet production and
employment at the Empire Mine operation, and to invest (along with Kobe Steel, Steel
Dynamics, Inc., the Iron Range Resources and Rehabilitation Agency, and the State of
Minnesota) in the Mesabi Nuggets Project. Phase U of this project involves construction of a
pilot plant that applies Kobe Steel's ITmkS iron-making technology for converting iron ore into
nearly pure iron nuggets that are substitutes for pig iron (Cleveland-Cliffs, Inc., 2002).
2-33
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SECTION 3
ENGINEERING COST ESTIMATES
This chapter presents the estimated regulatory compliance costs resulting from the
control of HAP emissions under the standards. EPA estimated the emission control, MRR costs
necessary to bring each facility into compliance with the standards. Section 3.1 provides a
description of the emissions controls for taconite facilities; Section 3.2 provides a summary of
the overall costs anticipated to be incurred by the industry; and Section 3.3 provides more
detailed information about the costs.
3.1 Description of Emissions Controls
EPA identified several operations at taconite facilities that produce HAP emissions,
including ore crushing and handling operations (OCH), indurating furnaces, finished pellet
handling (PH), and ore dryers. Three types of HAPs are released from the processes: acidic
gases (hydrochloric and hydrofluoric acid), metallic particulate matters, and PICs (EPA, 2001).
Using data on baseline emissions and emissions control performance of existing taconite
facilities, EPA defined Maximum Achievable Control Technology (MACT) emissions standards
for each type of unit, as shown in Table 3-1.
Table 3-1. MACT Standards for Existing Affected Sources
Affected Source MACT limit (gr/dscf)
Ore crushing, and handling 1.1
Finished pellet handling 0.1
Indurating furnaces 368.6
Total 369.8
Source: U.S. Environmental Protection Agency (EPA). 2003. National Emissions Standard/or Hazardous Air
Pollutants (NESHAPs)for Taconite Iron Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U.S. Environmental Protection Agency.
EPA estimated emission control costs based on replacement of existing non-compliant
emission control equipment with new wet scrubber control equipment capable of meeting the
3-1
-------
MACT standards. As a result of discussions with the industry during the public comment
process, EPA revised the costs of installing new wet scrubbers. To ensure that costs were
accurate, EPA asked each plant to provide an estimate and incorporated this information into its
estimates; the data underlying these estimates can be found in the docket. EPA's final estimate
is slightly higher than its estimate at proposal and slightly lower than industry's estimates,
largely because it is based on a smaller number of affected emission units requiring replacement
of control equipment. Public comments on the proposal indicated that emissions controls at one
furnace no longer need to be replaced, resulting in a reduction in the estimated costs for that
source. MRR costs have been updated to reflect changes in performance testing, monitoring,
and compliance schedule requirements to address public comments. Finally, EPA has updated
its base year for the cost estimates from 1999 to 2002.
3.2 Summary of Costs
The incremental costs of complying with the rule include the costs of purchasing and
installing capital equipment to control emissions from various units and to monitor the emissions
from various units. EPA then annualizes the capital costs over the life of the equipment (25
years) using a 7 percent interest rate. The annualized capital costs are combined with the
operating and maintenance costs to estimate the total annualized costs of the rule. These costs
include not only the costs of controlling emissions, but also the costs of conducting MRR
activities. Each of the affected facilities already has some emissions control equipment in place
and thus has some baseline level of operating and maintenance costs. Therefore, EPA estimates
the incremental costs of the rule as the difference between costs currently incurred and the costs
that would be incurred to comply with the rule. Table 3-2 provides a summary of the emission
control costs and the MRR costs for the taconite industry. EPA estimates that, for existing
sources, the total capital cost of the rule will be $57.4 million and total annualized costs,
including MRR costs, will be $8.6 million per year. Approximately 74 percent of the total
annualized costs are associated with the emission control upgrades for the indurating furnaces.
EPA developed the cost estimates based on information gathered from industry representatives
and vendors of industry-specific control equipment, and using procedures in the EPA's Air
Pollution Control Cost Manual. All costs are presented in 2002 dollars.
3.3 Plant-Specific Costs
Table 3-3 shows the emission control costs and the MRR costs for each of the eight
taconite plants. Total annualized costs, including both emissions control costs and MRR costs,
range from approximately $122,000 to more than $2.8 million. EPA estimates that six
indurating furnaces at four taconite plants (Minntac, EVTAC, Hibbing, and National) will incur
3-2
-------
Table 3-2. Summary of the Industry Cost (106 $2002)
Cost Component
Emission Control Cost
Monitoring, Record keeping
and Recording Cost
Total Cost
Total
Capital Cost
($106)
52.8
4.58
57.4
Annualized
Capital Cost
(106 $/yr)
4.53
0.39
4.93
O&M
Cost
(106 $/yr)
3.16
0.12
3.57
MRR Labor
Cost
(106 $/yr)
0.4
0.4
Total
Annualized
Cost (106 $/yr)
7.7
0.91
8.61
Source: Alpha-Gamma Technologies, Inc. 2003. "Revised Taconite Ore Processing NESHAP Cost Impacts"
Memorandum Chris Sarsony, Alpha-Gamma to Conrad Chin, U.S. Environmental Protection Agency. July, 2003.
emission control costs. Existing emissions control equipment at indurating furnaces at the
remaining four plants is estimated to achieve MACT standards, so these plants do not incur
incremental emissions control costs. Similarly, EPA estimates that three plants (National,
Northshore, and Hibbing) will incur emissions control costs for their pellet handling operations,
while the remaining plants do not incur incremental emission control costs. Over 90 percent of
the costs are incurred by four taconite plants: Minntac, EVTAC, Northshore, and Tilden. One
taconite plant is not projected to incur any incremental emission control costs, although it does
incur MRR costs. EPA estimates that this plant is achieving MACT emissions control levels at
baseline.
3-3
-------
Table 3-3. Plant-Specific Costs (106 $2000)
Emission Control
Facility
MINNTAC
National
EVTAC
Northshore
Inland
Process
Indurating
OCH
PH
Total
Indurating
OCH
PH
Total
Indurating
OCH
PH
Total
Indurating
OCH
PH
Total
Indurating
OCH
PH
Total
A
Total
Capital
Costs
B
Annual-
ized
Capital
Costs
$20,000,000b$l,716,210
$0b
$0b
$20,000,000
$18,000,000"
$0"
$0"
$18,000,000
$500,000f
$l,410,000f
$200,000f
$2,110,000
$0h
$5,550,000"
$1,050,000"
$6,600,000
$0"
$0"
$150,000"
$150,000
$0
$0
$1,716,210
$1,544,589
$0
$0
$1,544,589
$42,905
$120,993
$17,162
$181,060
$0
$476,248
$90,101
$566,349
$0
$0
$12,872
$12,872
C
O&M
Costs
$1,126
$1,126
$1,205
$1,205
$20
$100
$9
,704
$0
$0
,704
,833
$0
$0
,833
,000
,978
,455
$130,434
$351
$77
$428
$9
$9
$0
,450
,472
,922
$0
$0
,703
,703
Costs
D
Total
Annual
Emission
Control
Costs (B+C)
$2,842,914
$0
$0
$2,842,914
$2,750,422
$0
$0
$2,750,422
$62,905
$221,971
$26,617
$311,494
$0
$827,699
$167,573
$995,272
$0
$0
$22,575
$22,575
E
Total
Capital
Costs ($)
$0'
$0'
$0'
$0
$50,000e
$375,000e
$150,000e
$575,000
$40,000^
$430,000^
$45,000^
$515,000
$400,000*
$110,955'
$100,000'
$610,955
$100,000*
$300,000*
$125,000*
$525,000
Monitoring, Record keeping, and Recording
F
Annual-
ized
Capital
Costs
($/YR)
$0
$0
$0
$0
$4,291
$32,179
$12,872
$49,341
$3,432
$36,899
$3,861
$44,192
$34,324
$9,521
$8,581
$52,426
$8,581
$25,743
$10,726
$45,051
H I
G MRR Total
Equipment Labor Annual MRR
O&M Costs Costs
Costs ($/YR) ($/YR) [a] (F+G+H)
$0
$1,600
$0
$1,600 $50,550 $52,151
$0
$0
$0
$0 $50,550 $99,891
$0
$5,334
$0
$5,334 $50,550 $100,077
$51,205
$16,002
$533
$67,740 $50,550 $170,717
$0
$3,200
$533
$3,734 $50,550 $99,335
; Costs c
J
Total
Annual
Costs (D+I)
$2,895,065
$2,850,314
$411,571
$1,165,988
$121,909
(continued)
-------
Table 3-3. Plant-Specific Costs (106 $2000) (continued)
Emission Control
Facility
Tilden
Hibbing
Empire
Total
Grand Total
Process
Indurating
OCH
PH
Ore Dryers
Total
Indurating
OCH
PH
Total
Indurating
OCH
PH
Total
Indurating
OCH
PH
Ore Dryers
A
Total
Capital
Costs
$5,356,15$
$cf
$cf
$tf
$5,356,750
$0"
$0"
$610,000"
$610,000
$0"
$0"
$0"
$0
B
Annual-
ized
Capital
Costs
$459,665
$0
$0
$0
$459,665
$0
$0
$52,344
$52,344
$0
$0
$0
$0
$43,856,750$3,763,370
$6,960,000
$2,010,000
$0
$597,241
$172,479
$0
$52,826,750$4,533,091
C
O&M
Costs
$214,270
$0
$0
$0
$214,270
$0
$0
$48,156
$48,156
$0
$0
$0
$0
$2,566,807
$452,429
$144,786
$0
$3,164,022
Costs
D
Total
Annual
Emission
Control
Costs (B+C)
$673,935
$0
$0
$0
$673,935
$0
$0
$100,500
$100,500
$0
$0
$0
$0
$6,330,178
$1,049,670
$317,266
$0
$7,697,113
E
Total
Capital
Costs ($)
$450,000™
$552,000™
$224,000'°
$150,000™
$1,376,000
$0°
$0°
$0°
$0
$100,000"
$475,000"
$400,000"
$975,000
$1,140,000
$2,242,955
$1,044,000
$150,000
$4,576,955
Monitoring, Record keeping, and Recording
F
Annual-
ized
Capital
Costs
($/YR)
$38,615
$47,367
$19,222
$12,872
$118,075
$0
$0
$0
$0
$8,581
$40,760
$34,324
$83,665
$97,824
$192,469
$89,586
$12,872
$392,751
G
H
MRR
Equipment Labor
O&M Costs
Costs($/YR)($/YR)[a]
$19
$6
$26
$12
$12
$83
$33
$1
$117
,202
,934
$0
$0
,136 $50,550
$0
$0
$0
$0 $50,550
,801
$0
$0
,801 $50,550
,208
,070
,067
$0
,345 $404,403
I
Total
Annual
Costs c
J
MRR Total
Costs Annual
(F+G+H) Costs (D+I)
$194,762
$50,550
$147,017
$914,499
$868,697
$151,051
$147,017
$8,611,612
(continued)
-------
Table 3-3. Plant-Specific Costs (106 $2000) (continued)
Source: Alpha-Gamma Technologies, Inc. 2003. "Revised Taconite Ore Processing NESHAP Cost Impacts" Memorandum Chris Sarsony,
Alpha-Gamma to Conrad Chin, U.S. Environmental Protection Agency. July, 2003.
Notes:
a The MRR labor cost is from the supporting statement. The total labor burden was divided by 8 to obtain the per facility cost. A worksheet
showing the initial performance testing burden calculation is contained in the worksheet titled "Initial Perf. Testing Costs."
b L. Salmela, MINNTAC, April 8, 2003.
c L. Salmela, MINNTAC, April 8, 2003. $60,000 in capital MRR costs were estimated for OCH bag leak detection systems, but these costs
are included in the indurating capital costs.
d L. Gietzen, National Steel, April 3, 2003.
e L. Gietzen, National Steel, March 26, 2003.
f B. Anderson, EVTAC, April 4, 2003 and June 5, 2003.
8 B. Anderson, EVTAC, April 4, 2003.
h D. Skolasinski, Cleveland-Cliffs, April 7, 2003.
' D. Skolasinski, Cleveland-Cliffs, April 7, 2003. The capital MRR costs for SV32 to SV 53 are included in the capital emission control
costs.
1 D. Skolasinski, Cleveland-Cliffs, April 5, 2002.
k D. Skolasinski, Cleveland-Cliffs, April 5, 2002.
1 E. Maki, Tilden, March 25, 2002 and L. Parker, Tilden, June 9, 2003.
m E. Maki, Tilden, March 25, 2002.
n A. Hayden, Hibbing: March 26, 2002; May 15, 2002; April 3, 2003; June 11, 2003.
0 A. Hayden, Hibbing, April 3, 2003.
p D. Ahola, Empire, April 4, 2003.
-------
SECTION 4
ECONOMIC IMPACT ANALYSIS: METHODS AND RESULTS
The underlying objective of the EIA is to evaluate the effect of the regulation on the
welfare of affected stakeholders and society in general. The engineering cost analysis presented
in Section 3 represents an estimate of the resources required to comply with the rule under
baseline economic conditions. This section augments the cost analysis with an evaluation of
how producers and consumers may react and respond to regulatory costs. For instance,
producers may elect to reduce production in response to increased costs, thereby reducing
market supply. Moreover, the control costs may be passed along to consumers through price
increases. The primary purpose of this section is to develop and apply an analytical structure for
measuring and tracking these effects as they are distributed across the stakeholders tied together
through economic linkages. The conceptual approach to this analysis is described in detail in
Section 4.1, followed by the economic impact results based on the operational model in Section
4.2. In addition to a market-based model, Section 4.3 presents the regional economic impact
analysis of the rule recognizing the fact that all affected taconite facilities are concentrated in
Minnesota and Michigan.
4.1 Conceptual Approach
To evaluate the impact on the iron ore and steel mill products markets, the Agency
developed two national competitive partial equilibrium models (taconite and steel mill products)
to estimate the economic impacts on society resulting from the regulation. We assume that,
within each industry, the commodities of interest are homogeneous (e.g., perfectly substitutable)
and that the number of buyers and sellers is large enough that no individual buyer or seller has
market power (i.e., influence on market prices). As a result of these conditions, producers and
consumers take the market price as a given when making their production and consumption
choices.
4.1.1 Baseline and With-Regulation Market Equilibrium
A graphical representation of the competitive model of price formation, as shown in
Figure 4-1 (a), posits that market prices and quantities are determined by the intersection of the
market supply and demand curves. Under the baseline scenario, a market price and quantity
4-1
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qa
Affected Facilities
P'
P
S'
Affected Facilities
+ p
M
Q
Unaffected Facilities
a) Baseline Equilibrium
Market
P'
P
M,
Unaffected Facilities
Q' Q
Market
b) With-Regulation Equilibrium
Figure 4-1. Market Equilibrium without and with Regulation
(p,Q) are determined by the downward-sloping market demand curve (D) and the
up ward-sloping market supply curve (S) that reflects the sum of the (affected) domestic and
(unaffected) domestic and import supply curves.
With the regulation, the costs of production increase for affected domestic suppliers. The
imposition of these regulatory control costs is represented as an upward shift in the supply curve
4-2
-------
for domestic supply. As a result of the upward shift in this supply curve, the market supply
curve for affected products will also shift upward as shown in Figure 4-l(b) to reflect the
increased costs of production for domestic supply.
In baseline without the standards, the industry produces total output, Q, at price, p, with
affected producers supplying the amount qa and unaffected domestic production and imports
accounting for Q minus qa, or qu. With the regulation, the market price increases from p to p',
and market output (as determined from the market demand curve, D) declines from Q to Q'.
This reduction in market output is the net result of reductions in affected domestic supply and
increases from unaffected supply. In this case, unaffected supply includes both unaffected
domestic producers and foreign producers. While the vast majority of the iron ore produced in
this country is affected, a few iron ore producers are not part of the taconite industry. In the steel
industry, the growing sector of the industry that uses EAF technology is expected to be less
affected or unaffected by the rule, compared to integrated iron and steel producers.
4.1.2 Approach for Modeling Impacts on Affected Markets
The Agency modeled the impacts of increased control costs using two standard partial
equilibrium models—one for iron ore sold on the market (i.e., merchant iron ore) and one for the
steel mill product market. The compliance costs are introduced into each model as follows:
• Iron ore—control cost-induced shifts affect the merchant mine supply curves for iron
ore sold in the market.
• Steel mill products—control costs affecting captive mines increase the costs of the
steel plants owning the mines, resulting in an upward shift in the supply curve for
steel mill products.
Conceptually, we have linked these two standard partial equilibrium models by specifying the
interactions between supply and demand for products and then solving for changes in prices and
quantities across both markets simultaneously. For example, changes in the market price for
iron ore would result in higher production costs for steel plants. Thus, these compliance costs
would also indirectly affect the steel market. The Agency explicitly modeled these interactions
to better characterize the distribution of impacts on downstream iron and steel producers in the
steel mill product markets. The following section discusses how the Agency characterized
market supply and demand for each market..
4.1.3 Supply
After critical review, the Agency characterized supply at the mine/facility level. The
model incorporates some fixed factors of production on producers (e.g., plant and equipment)
4-3
-------
that are augmented with variable factors inputs (e.g., materials, labor) to produce iron ore and
steel mill products. These fixed factors are the source of diminishing marginal returns, hence,
increasing marginal costs. Therefore, each producer's decision can be characterized by an
up ward-sloping supply curve.
An important measure of the magnitude of supply response is the price elasticity,
computed as the percentage change in quantity supplied divided by the percentage change in
price. Domestic supply elasticity was computed as the slope of a log-log regression of quantity
produced on per-unit production cost. The computed domestic supply elasticity is 1.08. From
the literature, we identified empirical estimates of foreign supply (ABARE, 1995). We used a
value of 0.66,1 which is consistent with research indicating that import supply may be more
responsive than domestic supply. For the second model of the steel mill product market, EPA
used midpoint values for flat-rolled products reported by the U.S. International Trade
Commission (USITC, 2002). The domestic supply elasticity value used in this analysis is 3.5
and foreign supply elasticity is 15.
4.1.4 Demand
Consumption choices are a function of the price of the commodity, income, prices of
related goods, tastes, and expectations about the future. In this analysis, EPA considered how
these choices change in response to higher prices resulting from regulation, holding other
variables constant. The economic model includes both domestic and foreign demand and
assumes that the law of demand holds (i.e., the quantity demanded falls when price rises).
For the domestic demand elasticity in the iron ore market, the Agency estimated the
elasticity using a method based on studies by J.R. Hicks (1961, 1966) and R.G.D. Allen (1938)
on the elasticity of derived demand for intermediate goods. This method produced an estimated
value of-0.14., which means a 1 percent increase in price would lead to a 0.14 percent decline in
quantity demanded. In contrast, literature estimates for export demand indicate foreign
consumers are more responsive to changes in the market price. Ho and Jorgenson (1998) report
an export demand elasticity for metal mining of-0.92.
For the domestic demand elasticity in the steel mill product market, the Agency used an
econometric estimate (-0.59) computed for the Integrated Iron and Steel NESHAP economic
1 The United States primarily imports iron ore from Canada and Brazil. Overall, the North American import
supply elasticity of iron ore is 0.04 while the Brazilian import supply elasticity is 0.66. EPA selected the
highest of the two elasticity estimates reported by ABARE.
4-4
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impact analysis (EPA, 2000). Ho and Jorgenson (1998) report export demand elasticities for
fabricated metal ranging from -1.1 to -1.9. We used an average value of-1.25.
4.2 Economic Impact Results
To develop quantitative estimates of these impacts, we developed a computer model
using the conceptual approach described above.2 Using this model, EPA characterized supply
and demand of two affected commodities for the baseline year, 2000; introduced a policy
"shock" into the model by using control cost-induced shifts in the affected domestic supply
functions of these markets; and used the market model to determine a new with-regulation
equilibrium in each market. Although most of the data collected are 2000, we have incorporated
up to date financial information from several publicly available sources to better characterize the
whole industry. In the following sections, we present the market, industry, and societal impacts
projected by the model.
4.2.1 Market-Level Impacts
The increased cost of production due to the regulation is expected to slightly increase the
price of iron ore and steel mill products and reduce production/consumption from baseline
levels. As shown in Table 4-1, the price of iron ore increases 0.10 percent. Domestic production
of merchant iron ore declines by 70,000 metric tons (Mt), or 0.14 percent. Imports increase by
24,000 Mt, or 0.19 percent, resulting in a net decline of 46,000 Mt (0.073 percent). This means
that producers will not be able to recoup much of their compliance costs through a price
increase. The market as a whole (internationally) is minimally affected with only slight
movements in price and output.
The price of steel mill products increases minimally by 0.004 percent. Domestic
production declines by 22,000 metric tons (Mt), or 0.025 percent. This is the net result of
declines of 30,000 Mt (0.07 percent) from integrated steel mills that use iron ore and increases in
production from unaffected EAFs of 7,000 Mt (about 0.02 percent). Imports increase by 20,000
Mt, or 0.07 percent, resulting in a net decline in the market quantity
2Appendix A includes a description of the model's baseline data set and specification.
4-5
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Table 4-1. Market-Level Impacts of the Taconite NESHAP, 2002
Main Scenario
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen Process
Electric
Imports
Baseline
$55.31
63.671
51.239
12.453
$532.00
119.636
89.984
44.350
45.633
29.652
With Regulations
$55.40
63.325
51.149
12.477
$532.02
119.633
89.961
44.321
45.641
29.672
Change Absolute
$0.10
-0.046
-0.070
0.024
$0.02
-0.003
-0.022
-0.030
0.007
0.020
Relative
0.177%
-0.073%
-0.137%
0.190%
0.004%
-0.002%
-0.025%
-0.067%
0.016%
0.067%
of steel mill products of only 3,000 Mt (0.002 percent). Domestic integrated steel producers are
projected to absorb nearly all compliance costs as prices rise only minimally. Competition from
EAFs and foreign producers is likely the reason; their increased production is projected to
replace almost all domestic production lost. However, lost domestic production of integrated
steel mills is a very small portion of their total output: 0.07 percent. Thus, the market as a
whole (internationally) shows almost no change resulting from this regulatory cost.
4.2.2 Industry-Level Impacts
Revenue, costs, and profitability of the domestic industry also change as prices and
production levels adjust to increased costs associated with compliance. For domestic producers,
operating profits are projected to decrease by $7.0 million (see Table 4-2). These losses are the
net result of three effects:
• Decreased revenue ($6.2 million)—revenue decreases from output declines are
slightly mitigated by small increases in the prices of iron ore and steel mill products.
4-6
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Table 4-2. Industry-Level Impacts of the Taconite NESHAP, 2000
Change
Merchant Taconite
Revenue ($106) $3.66
Costs ($106) $7.25
Production -$1.33
Compliance $8.58
Operating Profits -$3.59
Steel Mill Products
Revenue ($106) -$9.82
Costs ($106) -$6.40
Production -$6.40
Compliance $0.00
Operating Profits -$3.42
Total Domestic
Revenue ($106) -$6.15
Costs ($106) $0.85
Production -$7.73
Compliance $8.58
Operating Profits -$7.00
Reductions in production costs as output declines ($7.7 million)—variable production
costs fall as firms reduce their output.
Increased emissions control costs ($8.6 million)—for plants/mines included in the
market model, we have assumed total annual compliance costs vary with the level of
output. Therefore, the compliance costs being incurred with regulation are slightly
smaller than the engineering compliance costs input into the model because output
declines due to regulatory costs.
4-7
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4.2.3 Impacts at the Company Level
This section examines the impact of reduced production and increased costs on
companies that own taconite facilities. One of the most sensitive issues to consider in the EIA is
the possibility that the regulation may induce a producer to shut down operations rather than
comply with the regulation. After critical review, the Agency determined the availability and
quality of plant-level data and the size of the compliance costs did not support formal modeling
of a plant closure decision within the market model.3 However, the Agency did examine the
closure issue using empirical literature and also examined other company impact issues using
financial statements.
4.2.3.1 Review of Empirical Literature on Closure
To our knowledge, no empirical work examines the conditions that contribute to capacity
reductions and closures of taconite mines. In contrast, the steel industry has been the focus of
several empirical papers regarding this question. Given that the rule will likely increase the
costs associated with iron ore, we first identified literature that reported the impacts of rising
inputs costs on a firm's decision to close. Beeson and Giarratani (1998) found the changes in
iron ore costs did not have a statistically significant impact on either capacity or plant closures.
In addition, we reviewed findings regarding impacts of pollution abatement costs on the
probability of steel plant closure. Deily (1988) claims that little or no new investment occurs in
plants that will eventually be closed. She finds that firms' real investment per ton of capacity
declined with increases in pollution control costs during 1971-1981. Beeson and Giarratani
report that pollution control costs have a small but statistically significant impact on the
probability of steel plant closures. They estimate a 10 percent change in pollution abatement
costs increases the probability of closure by 1.79 percent. However, Deily and Gray (1991) find
that total compliance costs have a negative and marginally significant effect on the probability of
closure. They qualify their conclusion suggesting that the use of total rather than incremental
costs, data quality, or technological coincidence may explain this unexpected result. Based on
the data collected and the size of the annual compliance costs, the Agency concludes this
regulation alone is unlikely to lead to mine closures or integrated steel plant closures. As
mentioned in Section 4.2.1, integrated steel producers are projected to reduce output by 0.02
percent. Consequently, these reductions in output are expected to be too small to result in any
plant closure. The rule may, however, add to existing financial stresses in the industry.
3 A detailed description of the economic model is included in Appendix A.
4-8
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4.2.3.2 With-Regulation Company Operating Income
To evaluate if the regulation will add to current financial stresses in the industry, the
Agency obtained 2000 financial data for seven affected domestic companies from publicly
available financial statements. Although three of these firms (National Steel, U.S. Steel Group,
and Ispat Inland, Inc.) are owned by another parent company, we used 10-K data for these
companies to focus on impacts on the most directly-affected companies or parts of companies.
A review of these data shows that the affected firms are all large, with substantial resources at
their disposal. However, only four of these companies reported positive operating income4 for
2000. The remaining firms are currently experiencing serious financial difficulties, and are
vulnerable to mergers and acquisitions as has been the trend in recent years in this industry. In
fact, two of them (Bethlehem Steel and National Steel) have filed voluntary petitions for relief
under Chapter 11 of the U.S. Bankruptcy Code since December 2000. Although these filings do
not necessarily imply closure, another firm (LTV) that had filed for Chapter 11 protection was
recently authorized to shut down and sell all integrated steel assets.
EPA used two methods to gauge the impacts of the regulation for these eight firms. First,
we compared annualized compliance costs to baseline operating income. Without accounting for
market adjustments, this computation approximates the change in the companies' operating
income due to the rule. The results are as follows:
• Four firms with positive operating income—Three of these firms are projected to
experience declines in operating income ranging from 0.2 to 2 percent. The fourth is
projected to experience a more substantial reduction in operating income,
approximately 19%.
• Three firms with negative operating incomes—Operating losses are projected to
increase by less than one percent.
4.2.3.3 Company Ability to Make Compliance Capital Investments
Although the economic model assumes firms can make capital investments associated
with the rule, the ability to make these investments depends on a company's short-run financial
strength. The Agency acknowledges that changes in financial conditions since 2000 may present
significant obstacles to making capital investments (for example, two filed voluntary petitions
for relief under Chapter 11 of the U.S. Bankruptcy Code). Therefore, EPA examined each firm's
4This measure equals sales less cost of goods sold, depreciation, and sales and administrative expenses. In the
short run, a plant would be presumed to continue to operate as long as variable profits are positive. The
Agency considered the owning company's operating margin as a reasonable approximation of plant-level
variable profit rate.
4-9
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financial statement more closely, computing the Altman Z-scores to gauge their financial
condition.5 We found that all the domestic firms had Z-scores that suggest the companies may
face potential bankruptcy (i.e., had Z-scores lower than 1.8). This also implies that companies in
the industry may have difficulty financing capital expenditures.
EPA also considered financial strength using the current ratio. The current ratio is the
ratio of current assets to current liabilities and provides a measure of liquidity. Based on
industry data for 1997, the median current ratio for the iron and steel industry was 1.9 (D&B,
1998). Data for 2000 show only two of the eight firms had current ratios exceeding this value.
However, we found that five firms still made environmental compliance capital investments
comparable in size to the costs of the rule in 2002. In spite of their financial difficulties, iron and
steel companies are apparently able to make environmental investments. Therefore, giving
consideration to this evidence, we conclude that it is possible that one or more steel firms may
close or sell some or all of their operations when the costs of this rule are added to their current
financial stresses.
4.2.4 Employment Impacts
Reduction in domestic production leads to changes in industry employment. These
changes were estimated by multiplying the change in domestic production by census data on
industry employment:
AE1 = [AQ/Q]E0 (4.1)
Domestic employment at taconite facilities is projected to decline by only four employees (full-
time equivalents [FTEs]) as a result of the rule based on lost domestic production of taconite.6
Taconite mining is known to be a highly capital intensive industry, as opposed to labor intensive.
Due to the nature of the industry, lost domestic production is not expected to lead to substantial
layoffs.
5The Altman Z-Score model is used as a predictive model for corporate bankruptcy. For this analysis, EPA has
not used this model as a predictive model but has used it to consider the short-run financial strength of the
affected firms.
6The direct reduction in employment at taconite facilities resulting from the rule may generate additional job
losses through induced or indirect impacts on the economy of the taconite region, as laid-off workers spend
less. These regional impacts are examined in Section 4.3.
4-10
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4.2.5 Social Costs
The value of a regulatory action is traditionally measured by the change in economic
welfare that it generates. The regulation's welfare impacts, or the social costs required to
achieve environmental improvements, will extend to consumers and producers alike. Consumers
experience welfare impacts due to changes in market prices and consumption levels associated
with the rule. Producers experience welfare impacts resulting from changes in profits
corresponding with the changes in production levels and market prices. However, it is important
to emphasize that this measure does not include benefits that occur outside the market, that is,
the value of reduced levels of air pollution with the regulation.
The economic analysis accounts for behavioral responses by producers and consumers to
the regulation (i.e., shifting costs to other economic agents). This approach provides insights on
how the regulatory burden is distributed across stakeholders. As shown in Table 4-3, the
economic model estimates the total social cost of the rule at $8.60 million. As a result of higher
prices and lower consumption levels, consumers (domestic and foreign) are projected to lose
$2.86 million, or 33 percent of the total social costs or the rule. Producer surplus declines by
$5.73 million, or 67 percent of the total social costs. This value consists of affected integrated
plants and merchant iron ore mines experience losses of $8.09 million, and unaffected domestic
supply and foreign producers who gain $2.36 million in producer surplus as a result of the
regulation, because they experience price increases and unchanged costs.
4.2.6 Sensitivity Analysis
EPA is confident that the elasticity estimates used in the model reflect the best estimates
available from the literature. However, EPA also conducted sensitivity analysis to explore the
effect of different elasticity values. EPA increased or decreased the elasticities of demand and
supply by 25 percent and re-evaluated the economic impacts. The results of this sensitivity
analysis are presented in Appendix B. Compared to the main scenario reported here, Simulation
1 (increase demand elasticities by 25 percent) and Simulation 4 (decrease supply elasticity by 25
percent) result in larger price adjustments and a greater share of the burden being borne by
consumers of taconite and steel. Conversely, Simulation 2 (decrease demand elasticities by 25
percent) and Simulation 3 (increase supply elasticities by 25 percent) result in smaller price
adjustments and a greater share of the burden being borne by the producers of taconite and steel.
Overall, changes are very small, variations of a few percentage points in price and quantity, and
variations of less than 3 percent in the shares of the social costs borne by producers and
consumers. See Appendix B for the details.
4-11
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Table 4-3. Social Costs of the Taconite NESHAP, 2000
Value ($106)
Consumer Surplus Loss (-)/Gain (+) -$2.86
Producer Surplus Loss (-)/Gain (+) -$5.73
Merchant Taconite Producers -$3.59
Integrated Iron and Steel Plants -$4.51
Nonintegrated Steel Plants $1.09
Foreign Producers $1.27
Total Social Costs -$8.60
4.3 Regional Economic Impacts
As mentioned in Section 2, the taconite industry affected by this rule is concentrated in
one county in Michigan and four counties in Minnesota. As a result, the Agency decided to
conduct an analysis of the rule's impact on this region. Although the rule is national in scope,
affecting a product that is used throughout the nation and internationally, we expect that the
economic impacts of the rule on producers of taconite ore may be concentrated geographically in
this relatively small region. This section focuses on determining the compliance burden for
these regions in Minnesota and Michigan, and to what extent the regulation imposes significant
impacts on the regional economies beyond those imposed by the current condition of the taconite
industry. Section 4.3.1 provides a general discussion of IMPLAN, the economic model chosen
for this regional economic impact analysis. Section 4.3.2 provides general background
information on the most affected counties in Minnesota and Michigan. Section 4.3.3 describes
the estimated economic impacts of the rule on the identified counties.
4.3.1 IMPLAN Application in Regional Economic Impact Analysis
Regional economic impact analysis is commonly used to investigate how a change in
economic activity in one part of the economy will affect economic activity in another part. This
type of analysis has been used to evaluate the effects of changes in policies and regulations that
affect local businesses either directly or indirectly, such as stricter local air pollution standards,
changes in local taxes, or increased government spending on infrastructure. Regional economic
impact analysis has also been used to measure the impacts of many different activities, such as
government projects; plant closings or downsizing; military base conversions; and recreation
4-12
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activities (the presence of fishing, boating, and hunting in a particular area) that draw in visitors
from outside the region. A regional economic impact analysis generally attempts to address the
following basic questions concerning an activity of interest:
• How much spending does this activity bring to the region?
• How much income does this activity generate for local households and
businesses?
• How many jobs does this activity support?
• How much tax revenue is generated by this activity?
• What portion of sales by local businesses is due to this activity?
Regional economic impact analyses are also frequently used to compare the impact expected
from alternative policies under consideration in many State and local government agencies.
IMPLAN is a relatively standard type of input-output (I-O) model used for regional
impact analysis. I-O models are mathematical models that quantify the supply and demand
relationships between sectors in a region's economy. For example, tax revenues from an
industry in the region may account for ten percent of a region's or county's total income.
IMPLAN models a change in that industry to also impact the tax revenue based on the
relationship, or factor, associated with that industry. A one percent drop in industry revenues
would thus be associated with a 0.1 percent drop in tax revenues (10%»1%). I-O models are
tools that can be used to estimate changes in production, income, employment, and local
government expenditures and revenues resulting from a change in economic activity. Unlike the
partial equilibrium market model used earlier in this section, I-O models do not estimate
behavioral responses such as changes in relative prices of inputs or outputs. Whereas the partial
equilibrium model used in Section 4.2 carefully estimates market responses in the most affected
sectors, use of I-O models permits estimation of both the direct impacts in the affected sector and
the indirect impacts that occur as the change in spending by the directly affected industry works
its way through the economy. Based on production functions estimating the inputs that each
industry must purchase from every other industry to produce its output, these models predict
flows of money between sectors. I-O models also determine the proportion of sales that end up
as income and taxes. Multipliers are estimated from I-O models based on the estimated re-
circulation of spending within the region. The higher the propensity for households and firms
within the region to purchase goods and services from local services, the higher the multipliers
for the region will be.
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IMPLAN is a nonsurvey-based regional I-O model including 528 sectors that can be
constructed for any county-defined region in the U.S. IMPLAN's database is built from the
National Income and Product Accounts (NIPA) published annually from the Bureau of
Economic Analysis (BEA) and the 1977 BEA input-output model for the U.S. Data are designed
to be internally consistent (i.e., county data sum to state totals and state data sum to national
totals). IMPLAN can generate regional accounts for single counties, groups of counties, single
states, groups of states, or the entire U.S. Data from numerous other sources are also used in
building these regional accounts in IMPLAN. Most data entering IMPLAN's database do not
represent actual county or state magnitudes. Instead, they are based on national values. For
example, county employment in a given sector equals the NIPA-based state total for that sector
multiplied by the ratio of county employment in that sector to state employment in that sector.
The ratio is calculated directly from County Business Patterns (CBP), but the sector total for the
state is not. Consequently, IMPLAN values for counties and states do not necessarily equal
actual values reported in CBP or other data sources.
To analyze regional economic impacts using IMPLAN, an analyst must estimate the
direct impacts of an economic activity or policy and provide them as input. A data file
containing information on the region of interest provides information such as ratios of jobs to
sales for each sector, the proportion of spending by individuals and firms located within the
region that is spent within the region, and the amount that each sector purchases from each of the
other sectors within the region per unit of output. The IMPLAN program uses these
relationships to estimate the total regional impacts resulting from a given direct impact. Impact
estimates are categorized as direct (exogenous impact resulting from policy or program), indirect
(impacts resulting from changes in local input purchases by directly impacted sectors), and
induced (impacts resulting from changes in household incomes due to changes in labor demand).
4.3.2 Data for the Affected Regions
As mentioned in Section 2, the taconite mining and processing facilities are concentrated
in either Minnesota or Michigan. In Minnesota, all of the iron ore production occurs in Cook,
Itasca, Lake, and Saint Louis counties. In Michigan, the production is primarily from the Empire
and Tilden Mines in Marquette County. Thus, these counties have been identified as the major
affected areas, where the majority of the economic impacts of the rule would be felt. Table 4-4
presents background information about the impacted regions. The counties range from very
small (Cook County, MN) to relatively large (St. Louis County, MN). Cook County has low
population, low employment, and a relatively small number of industries. St. Louis County, by
contrast, has nearly 200,000 residents, more than 100,000 jobs, and a relatively
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Table 4-4. Background of Affected Counties in 1998
County, State
Marquette, MI
Cook, MN
Itasca, MN
Lake, MN
St. Louis, MN
Area (mile2)
1,821
1,451
2,665
2,099
6,226
Population
61,757
4,886
44,715
10,773
197,214
Employment
31,918
4,010
20,711
5,494
118,941
# of Industries
139
78
135
101
222
#of
Households
23,843
1,888
17,348
4,239
77,511
Household
Income
($2002)*
60,529
70,201
56,162
59,861
70,602
a All amounts were inflated to 1998 using the consumer price index available from the Bureau of Labor Statistics
().
Source: MIG. 2001. IMPLAN county data.
diversified economy. The counties have relatively high median household incomes, which
exceed the median household income of the state ($41,600) and the United States ($37,000).
4.3.3 Assessment of Regional Economic Impacts
The rule may affect the local economy in several ways, such as changes in sales and
profits of local businesses, local employment, and local and state sales tax revenue. Generally,
this rule is expected to have a mixed effect on the local economy because of decreased
production of taconite and increased purchases of local labor and materials for implementing
controls and conducting MRR activities. The following subsections describe the estimated
economic impacts of the rule on the Minnesota four-county region and Michigan one-county
region.
4.3.3.1 Effect of Regulation on Local Economy
The total direct impact on each region is estimated as the change in local expenditures
resulting from the rule. The direct impact of the rule is estimated based on the results reported in
Section 4.2, and includes expenditures to comply with the regulation (positive) and adjustments
in output (which may be negative or positive). Generally, the direct impact includes the net
effect of the reduction in local spending because output declines and the increase in local
spending to implement the controls. In each region, some mines are projected to reduce their
production of taconite, while other mines (those incurring costs of compliance that are relatively
small) are projected to increase their production. For the Minnesota region, any reduction in
4-15
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taconite production will also result in a loss in government revenues because a portion of state
revenues comes from taxes on the total production from taconite iron ore (Minnesota
Department of Revenue, 2002). The impact of decreased output and tax revenue is estimated to
be a net reduction in local spending of $0.8 million. For Michigan, the reduction in spending
because output falls at one plant is outweighed by the increase in local spending to implement
the controls and increasing production at another plant, resulting in a net increase of
approximately $0.5 million for the Michigan region.
Table 4-5 lists the direct impacts on both the industry and local and state government.
Although the direct impact of a change in iron pellet production is primarily felt in these sectors,
many additional sectors of the economy will be affected to some extent through secondary
(indirect and induced) impacts, as a result of the decreased or increased spending of the directly
affected sectors. To estimate secondary impacts, it is necessary to incorporate the direct
economic impacts estimates from Table 4-5 as inputs into EVIPLAN to obtain estimated changes
in other sectors, such as electric services, explosives, and motor freight transport and warehouses
industries.
4.3.3.2 Impact of Regulation on Local Business Output
The projected reduction in iron ore production is expected to result in a corresponding
change in the value of local business output, including direct, indirect, and induced impacts.
Table 4-6 summarizes the total impact of the rule on the value of output, based on multipliers
generated by EVIPLAN for the four-county Minnesota region and the one-county Michigan
region. For both regions analyzed, the total impact is estimated to be about 40 to 45 percent
larger than the direct effect. Because EPA's analysis focuses on these five counties, the only
indirect effects reported are the reductions in purchases of inputs from other businesses within
the two regions. Communities located outside of the regions may experience additional impacts,
but these effects are expected to be much smaller than those within the regions and are not
included in the analysis. Similarly, the induced effect measures only the reduction in goods and
services purchased from the regions' businesses as a result of a reduction in household income.
However, households are likely to make at least some purchases outside the local area. Again,
this means that there will be some additional induced impacts in other communities, but this
analysis concentrates on the regions most directly affected by the reduction in taconite pellet
production and does not attempt to quantify the outside-the-region impacts, as they are expected
to be minimal.
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Table 4-5. Direct Impact of Taconite NESHAP on Regions in Minnesota and Michigan
($2002)a
Economic Impacts ($103)
Minnesota
Compliance Costs and Output Loss
EVTAC 191
Hibbing 760
Inland 234
MINNTAC -1,236
National Steel Pellets - 271
Northshore - 373
Taconite Production Tax Reduction
Education sector - 42
Noneducation sector -111
Total Direct Impacts in Minnesota - 847
Michigan
Compliance Costs and Output Gain or Loss
Empire 295
Tilden 197
Total Direct Impacts in Michigan 492
a All amounts were inflated using the consumer price index available from the Bureau of Labor Statistics
().
Source: Taconite Costs with Updated Industry Estimates 6-18-03.xls.
Minnesota Department of Revenue. 2002. Minnesota Mining Tax Guide 2002.
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Table 4-6. Estimated Total Impacts of the Taconite NESHAP on Value of Output (103
$2002)a
Minnesota Michigan
Direct effect -847 492
Indirect effect -222 143
Induced effect -168 69
Total Impact -1,236 704
a All amounts were inflated using the consumer price index available from the Bureau of Labor Statistics
().
Source: Minnesota IMPLAN Group (MIG). 2002. IMPLAN impact report of output.
4.3.3.3 Change in Employment
Another regional economic impact is the change in employment within the sectors that
are affected by the rule. These changes are calculated by IMPLAN based on ratios of sales to
employment for the affected industries in the two regions. As a result of the decrease in taconite
production anticipated, mining facilities will need fewer employees. On the other hand, the rule
requires more manpower in MRR activities. The reduction in employment is estimated to be 11
workers for the Minnesota region and none for Michigan. Table 4-7 summarizes the results of
the employment analysis.
Table 4-7. Estimated Total Change in Employment (Number of Employees)
Minnesota Michigan
Direct effect -6 2
Indirect effect -2 1
Induced effect -3 1
Total Impact -11 4
Source: Minnesota IMPLAN Group (MIG). 2002. IMPLAN impact report of employment.
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Hoover's Online. Electronic database, . Obtained on August 28,
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Hufbauer, G.C., and B. Goodrich. January 2002. "Time for a Grand Bargain in Steel?" Institute
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Extraction and Beneficiation of Ores and Minerals. Volume 3—Iron. Washington, DC:
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Industry Responses to Information Collection Request (ICR) Survey. Database prepared
for EPA's Office of Air Quality Planning and Standards. Research Triangle Park, NC:
U.S. Environmental Protection Agency.
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Integrated Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for
Hazardous Air Pollutants (NESHAPs)for Taconite Iron Ore Processing
Plants—Background Information for Proposed Standards. Washington, DC: U.S.
Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). Costs Memo—Taconite Control and MRR Costs
to 1999 8 26 02.xls.
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for All Countries." . As obtained June 4, 2003.
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Customs Value for All Countries." . As obtained June 4,
2003.
R-5
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U.S. International Trade Commission (USITC). 2001c. Memorandum to the Commission from
Craig Thomsen, John Giamalua, John Benedetto, Joshual Levy, International
Economists. Investigation No. TA-201-73: STEEL—Remedy Memorandum. November
21,2001.
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(EDGAR) System.
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As Independent Company With a Century of Experience."
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APPENDIX A
MODEL DATA SET AND SPECIFICATION
The primary purpose of the EIA for the Taconite NESHAP is to describe and quantify
the economic impacts associated with the rule. The Agency used a basic framework that is
consistent with economic theory and the analyses performed for other rules to develop estimates
of these impacts. This approach employs standard microeconomic concepts to model behavioral
responses expected to occur with regulation. For more information, see the OAQPS Economic
Resource Manual located at .
This appendix describes the spreadsheet model in more detail and discusses how the Agency
• collected the baseline data set for the domestic iron ore and steel mill products
market,
• characterized market supply and demand for each market,
• introduced a policy "shock" into the model by using control cost-induced shifts in the
domestic supply functions, and
• used a solution algorithm to determine a new with-regulation equilibrium for each
market.
A.I Baseline Data Set
EPA collected the following data to characterize the baseline year, 2002:
Baseline Quantity—The Shillings Mining Review (2003) provided production data for
iron ore mines. The American Iron and Steel Institute reported market data for steel
mill products (see Table A-l).
Baseline Prices—The Agency obtained software providing average total costs of
production for all iron producers in the world (Mine Cost, 2000). The Agency used
the reported average total cost of the highest cost (marginal) mine as an
approximation for the market price of iron ore. The 2001 average steel mill product
price was obtained from the Bureau of the Census (U.S. Department of Commerce,
2002) by dividing total f.o.b value of shipments by quantity. Both prices were
adjusted to 2002 using the appropriate producer price index.
A-l
-------
Table A-l. Baseline Data Set, 2000
Market
Iron Ore
Steel Mill Products
Domestic Production
(106 metric tons)
51
90
Imports
(106metric tons)
12
30
Exports
(106metric tons)
7
5
Price
($/metric ton)
$55
$532
Source: U.S. International Trade Commission. "SIC-1011: FAS Value by FAS Value for All Countries."
. As obtained July 5, 2001a.
U.S. International Trade Commission. "SIC-1011: Customs Value by Customs Value for All Countries."
. As obtained July 5, 200Ib.
U.S. Department of Commerce, Bureau of the Census. 2002. Steel Mill Products: MA331B(01)-1.
Washington, DC: Government Printing Office.
American Iron and Steel Institute. 2001. "Year 2002 Selected Industry Data." . As obtained June 25, 2003.
Iron ore supply and demand elasticities—EPA estimated an industry supply elasticity
for taconite using 42 observations of average cost and mine production data western
hemisphere mines (Mine Cost, 2000). The following equation was employed: ln(Q)
= bo-pj ln(p) + e. Given this specification, px can be interpreted as the market supply
elasticity. The value of coefficient (1.08) is statistically significant at the 95 percent
confidence level. The elasticity of demand in our analysis is derived as a function of
the demand for steel mill products; its computed value is -0.14. Ho and Jorgenson
(1998) report an export demand elasticity for metal mining of-0.92 (Table A-2).
Steel mill product supply and demand elasticities—The U.S. International Trade
Commission (USITC, 200Ic) reports supply elasticities for domestic and foreign flat-
rolled steel products. For this analysis, we used the midpoint values (domestic supply
elasticity = 3.5 and foreign supply elasticity = 15). For the domestic demand
elasticity, the Agency used an econometric estimate (-0.59) computed for the
Integrated Iron and Steel NESHAP economic impact analysis (EPA, 2000). Ho and
Jorgenson (1998) report export demand elasticities for fabricated metal ranging from
-1.1 to -1.9. We used an average value of-1.25 (Table A-2).
A-2
-------
Table A-3. Supply and Demand Elasticities Used for the Market Models
Market
Iron Ore
Domestic
Foreign
Steel Mill Products
Domestic
Foreign
Supply
1.08a
1.08a
3.5C
15C
Demand
derived demand
-0.92b
-0.59d
-1.25b
EPA econometric estimate using Mine Cost (2000).
Ho, M., and D. Jorgenson. 1998. "Modeling Trade Policies and U.S. Growth: Some Methodological Issues."
Presented at USITC Conference on Evaluating APEC Trade Liberalization: Tariff and Nontariff Barriers.
September 11-12, 1997. .
U.S. International Trade Commission (USITC). November 21, 2001c. Memorandum to the Commission from
Craig Thomsen, John Giamalua, John Benedetto, Joshua Levy, International Economist. Investigation No. TA-
201-73: STEEL—Remedy Memorandum.
U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed Integrated Iron and
Steel NESHAP. EPA-452/R-00-008.
A.2 Discussion of Modeling Approach
The agency modeled the impacts of increased control costs using two standard partial
equilibrium models — one for iron ore and one for the steel mill product market. Conceptually,
we have linked these two standard partial equilibrium models by specifying the interactions
between supply and demand for products and then solving for changes in prices and quantities
across both markets simultaneously. For example, changes in the market price for iron ore
would result in higher production costs for steel plants. Thus, these compliance costs would also
indirectly affect the steel market. The Agency explicitly modeled these interactions to better
characterize the distributional impacts on downstream iron and steel producers in the steel mill
product markets. The following section discusses how the agency characterized market supply
and demand for each market.
A.3 Market Supply
Market supply is composed of domestic production (d) and imports (m):
Qs = qsd + qs
A-3
-------
A.3.1 Domestic and Import Supply
A.3.1.1 Domestic Taconite Producers
The change in quantity supplied by domestic taconite producers can be approximated as
follows:
A sd sd sd Apt-c
Aq d = q,, d • e d • —-— (A.2)
Ptf)
where q Sd is the baseline quantity, esd is the domestic supply elasticity, the term Apt-c is the
change in the producer's net price, and p0 is the baseline price. The change in net price is
composed of the change in market price resulting from the regulation (Apt) and the shift in the
domestic supply function (c) resulting from the direct costs of compliance. The domestic
producer's supply shift is calculated by dividing the annual compliance cost estimate for each
facility by baseline output.
A. 3.1.2 Domestic Steel Mill Product Producers Using the Basic Oxygen Process
Domestic steel producers using this process use taconite as an input to production. Their supply
decision can be approximated as follows:
A sd sd sd st
Aq d = q0 " • e d • —'- i (A.2)
PsO
where Q s
-------
the increase price of taconite inputs. The domestic producer's supply shift is calculated using
the equilibrium price projected by the taconite market model.
A. 3.1.2 Unaffected Steel Mill Product Producers: Domestic and Foreign
The change in quantity supplied by domestic steel producer using electric processes and
foreign producers can be approximated as follows:
q' - %- ' e' • (A3)
Po
where qSu is the baseline level of output, esu is the supply elasticity, and p0 is the baseline price.
These producers do not face increased pollution control costs resulting from the regulation and
do not use taconite as an production input so their net price change equals the gross increase in
the market price. As a result, producers increase output in response to higher prices.
A.3.2 Producer Welfare Measurement
For affected domestic supply, the change in producer surplus (PS) can be approximated
with the following equation:
Taconite: APSd = qdl-(Ap-c) - 0.5-Aqd-(Ap-c) (A.4a)
Affected Steel: APSd = qdl-(Ap-c) - 0.5-Aqd-(Ap-aApore) (A4b)
where qdl is the with-regulation quantity demanded. New control costs or higher input prices
and output declines have a negative effect on affected domestic producer surplus. However,
these losses are mitigated to some degree as a result of higher market prices.
In contrast to affected producers, unaffected domestic and foreign producers do not face
additional pollution controls and their change in producer surplus can be approximated as
follows:
0.5-Aqm-Ap (A.5)
A-5
-------
With regulation, both price and output increase for these producers leading to unambiguous
producer surplus gains.
A.4 Market Demand
Market demand is composed of domestic consumption (d) and exports (x)
QD" = qD"+ q°* (A.6)
A.4.1 Domestic and Export Demand
The change in quantity demanded by domestic and foreign consumers can be
approximated as follows:
A °i °i °i p
Aq = % ' TI • -£ (A 7)
Po
where qQD is baseline consumption, r|D is the demand elasticity of the respective consumer (i)
and Ap is the change in the market price.
A.4.2 Consumer Welfare Measurement
The change in domestic and foreign consumer surplus in the steel mill product market is
approximated as follows:
ACS; = - qn-Ap + 0.5-Aqj-Ap (A. 8)
As shown, higher market prices and reduced consumption lead to welfare losses for both
domestic and foreign consumers. Note this calculation is only performed for the steel mill
product consumers. Since taconite consumers are steel producers, their welfare loss is reflected
in PS calculation in A.4b.
A.5 With Regulation Market Equilibrium Solution
The new with-regulation equilibrium arises where change in total market supply equals
the change in market demand (i.e., A Qs = A QD). We used the model equations outlined above
and a solver application available in commercial spreadsheets to compute new equilibrium in
prices and quantities.
A-6
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APPENDIX B
SENSITIVITY ANALYSIS RESULTS
As noted in Section 4, EPA's analysis is based on the best estimates available of the
responsiveness of supply and demand for taconite and steel to changes in their prices. This
appendix examines the impact of varying the parameters of interest: the elasticities of demand
and supply in both the taconite and steel markets. EPA performed four sensitivity analysis
simulations. In each simulation, one set of parameters (elasticities of supply or elasticities of
demand) is increased or decreased by 25 percent, relative to the estimates used in the main
scenario. Table B-l presents the design of the sensitivity analysis and the parameter estimates
used in each simulation. Results of the simulations are shown in Tables B-2 through B-13. By
comparing the results in Section 4 with the results in Tables B-2 through B-13, it can be
demonstrated that substantial variations in the parameter estimates do not result in large changes
in the estimated impacts.
B-l
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Table B-l. Sensitivity Analysis
Supply
Demand
Iron Ore
Domestic
Supply
Demand
Foreign
Supply
Demand
Steel Mill Products
Domestic
Supply
Demand
Foreign
Supply
Demand
Parameter
Estimates in Main
Scenario,
Presented in
Section 4
1.08
-0.14
0.66
-0.92
3.50
-0.59
15.00
-1.25
1
25% increase
1.35
-0.14
0.83
-0.92
4.38
-0.59
18.75
-1.25
Sensitivity
2
Analysis Simulations
3
4
25% decrease
0.81
-0.14
0.50
-0.92
2.63
-0.59
11.25
-1.25
25% increase
1.08
-0.17
0.66
-1.14
3.50
-0.73
15.00
-1.55
25% decrease
1.08
-0.11
0.66
-0.69
3.50
-0.44
15.00
-0.94
B-2
-------
Table B-2. Market-Level Impacts: 2002
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen Process
Electric
Imports
Baseline
$55.31
63.671
51.219
12.453
$532.00
119.636
89.984
44.350
45.633
29.652
With Regulations
$55.40
63.613
51.131
12.482
$532.02
119.633
89.956
44.313
45.642
29.677
Change Absolute
$0.10
-0.058
-0.088
0.030
$0.02
-0.003
-0.028
-0.037
0.009
0.025
Relative
0.176%
-0.092%
-0.172%
0.237%
0.004%
-0.003%
-0.031%
-0.083%
0.020%
0.084%
Table B-3. Market-Level Impacts: 2002
Baseline With Regulations Change Absolute Relative
Taconite
Price ($/metric ton) $55.13 $55.40
Quantity (106 metric tons) 63.671 63.633
Domestic 51.219 51.163
Imports 12.453 12.470
Steel Mill Products
Price ($/metric ton) $532.00 $532.02
Quantity (106 metric tons) 119.636 119.633
Domestic 89.984 89.967
Basic Oxygen Process 44.350 44.329
Electric 45.633 45.638
Imports 29.652 29.666
$0.09
-0.038
-0.055
0.017
$0.02
-0.003
-0.017
-0.022
0.005
0.014
0.170%
-0.060%
-0.108%
0.137%
0.004%
-0.003%
-0.019%
-0.049%
0.011%
0.046%
B-3
-------
Table B-4. Market-Level Impacts: 2002
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen Process
Electric
Imports
Table B-5. Market-Level Impacts
Main Scenario
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen Process
Electric
Imports
Baseline
$55.31
63.671
51.219
12.453
$532.00
119.636
89.984
44.350
45.633
29.652
: 2000
Baseline
$55.31
63.671
51.219
12.453
$532.00
119.636
89.984
44.350
45.633
29.652
With Regulations
$55.40
63.621
51.145
12.476
$532.02
119.632
89.691
44.321
45.640
29.671
With Regulations
$55.40
63.625
51.149
12.477
$532.02
119.633
89.961
44.321
45.641
29.672
Change Absolute
$0.09
-0.050
-0.073
0.023
$0.02
-0.004
-0.022
-0.029
0.007
0.018
Change Absolute
$0.10
-0.046
-0.070
0.024
$0.02
-0.003
-0.022
-0.030
0.007
0.020
Relative
0.171%
-0.079%
-0.143%
0.184%
0.004%
-0.003%
-0.025%
-0.065%
0.015%
0.062%
Relative
0.177%
-0.073%
-0.137%
0.190%
0.004%
-0.002%
-0.025%
-0.067%
0.016%
0.067%
B-4
-------
Table B-6. Domestic Industry-Level Impacts: 2002
Change
Taconite
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Total Domestic
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
$2.97
$6.57
-$2.00
$8.57
-$3.60
-$12.81
-$9.40
-$9.40
$0.00
-$3.41
-$9.84
-$2.83
-$11.40
$8.57
-$7.02
B-5
-------
Table B-7. Industry-Level Impacts: 2002
Change
Taconite
Revenue ($106) $3.86
Costs ($106) $7.65
Production -$0.94
Compliance $8.59
Operating Profits -$3.79
Steel Mill Products
Revenue ($106) -$6.93
Costs ($106) -$3.55
Production -$3.55
Compliance $0.00
Operating Profits -$3.39
Total Domestic
Revenue ($106) -$3.07
Costs ($106) $4.10
Production -$4.48
Compliance $8.59
Operating Profits -$7.17
B-6
-------
Table B-8. Domestic Industry-Level Impacts: 2002
Change
Taconite
Revenue ($106) $3.23
Costs ($106) $6.98
Production -$1.60
Compliance $8.58
Operating Profits -$3.76
Steel Mill Products
Revenue ($106) -$9.89
Costs ($106) -$6.50
Production -$6.50
Compliance $0.00
Operating Profits -$3.39
Total Domestic
Revenue ($106) -$6.66
Costs ($106) $0.48
Production -$8.09
Compliance $8.58
Operating Profits -$7.15
B-7
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Table B-9. Industry-Level Impacts: 2000—Simulation 4
Change
Taconite
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Total Domestic
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
$3.66
$7.25
-$1.33
$8.58
-$3.59
-$9.82
-$6.40
-$6.40
$0.00
-$3.42
-$6.15
-$0.85
-$7.73
$8.58
-$7.00
Table B-10. Social Costs: 2002
Value ($106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Domestic
Taconite Producers
Steel Mill Product Producers
Basic Oxygen Process
Electric
Foreign Producers
Total Social Costs
-$2.84
-$5.75
-$7.02
-$3.60
-$3.41
-$4.50
$1.08
$1.26
-$8.59
B-8
-------
Table B-ll. Social Costs: 2002
Value ($106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Domestic
Taconite Producers
Steel Mill Product Producers
Basic Oxygen Process
Electric
Foreign Producers
Total Social Costs
-$2.61
-$5.99
-$7.17
-$3.79
-$3.39
-$4.38
$1.00
$1.18
-$8.60
Table B-12. Social Costs: 2002
Value ($106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Domestic
Taconite Producers
Steel Mill Product Producers
Basic Oxygen Process
Electric
Foreign Producers
Total Social Costs
-$2.64
-$5.95
-$7.15
-$3.76
-$3.39
-$4.40
$1.01
$1.20
-$8.60
B-9
-------
Table B-13. Social Costs: 2002
Value ($106)
Consumer Surplus Loss (-)/Gain (+) -$2.86
Producer Surplus Loss (-)/Gain (+) -$5.73
Domestic -$7.00
Taconite Producers -$3.59
Steel Mill Product Producers -$3.42
Basic Oxygen Process -$4.51
Electric $1.09
Foreign Producers $1.27
Total Social Costs -$8.60
B-10
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO. 2.
EPA-452/R-03-015
4. TITLE AND SUBTITLE
Taconite Iron Ore NESHAP Economic Impact Analysis
7. AUTHOR(S)
Katharine B. Heller, Brooks M. Depro, Jui-Chen Yang, and Laurel
Clayton. RTI International
9. PERFORMING ORGANIZATION NAME AND ADDRESS
Research Triangle Institute (RTI)
Center for Economics Research, Hobbs Bldg.
Research Triangle Park, NC 27709
12. SPONSORING AGENCY NAME AND ADDRESS
Tom Curran, Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 2771 1
3. RECIPIENT'S ACCESSION NO.
5. REPORT DATE
August 2003
6. PERFORMING ORGANIZATION CODE
8. PERFORMING ORGANIZATION REPORT NO.
RTI Project Number 7647.004.387
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
68-D-99-024
13. TYPE OF REPORT AND PERIOD COVERED
Final
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This report evaluates the economic impacts of the final NESHAP for taconite iron ore producers. The
industry impacts and social costs of the rule are estimated by incorporating the expected costs of compliance
to a partial equilibrium model of the U.S. industry and projecting the market impacts for the various end-use
markets. The report also provides an analysis of the impacts on companies owning taconite facilities, and on
the geographic region in Minnesota and Michigan where taconite production is concentrated.
17. KEY WORDS AND DOCUMENT ANALYSIS
a. DESCRIPTORS
economic impacts
regional economic impacts
social costs
18. DISTRIBUTION STATEMENT
Release Unlimited
b. IDENTIFIERS/OPEN ENDED TERMS
Air Pollution control
Economic Impact Analysis
Iron and Steel
19. SECURITY CLASS (Report)
Unclassified
20. SECURITY CLASS (Page)
Unclassified
c. COSATI Field/Group
21. NO. OFPAGES
93
22. PRICE
EPA Form 2220-1 (Rev. 4-77) PREVIOUS EDITION IS OBSOLETE
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United States Office of Air Quality Planning and Standards Publication No. EPA-452/R-03-015
Environmental Protection Air Quality Strategies and Standards Division August 2003
Agency Research Triangle Park, NC
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