§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-1 

### C HAPTER 

### C ONTENTS 

### B2B-1 Summary Insights from this Profile . . . . . . B2B-5 B2B-2 Domestic Production . . . . . . . . . . . . . . . . . B2B-5 B2B-2.1 Output . . . . . . . . . . . . . . . . . . . . . . . B2B-6 B2B-2.2 Prices . . . . . . . . . . . . . . . . . . . . . . . . B2B-9 B2B-2.3 Number of Facilities and Firms . . . B2B-10 B2B-2.4 Employment and Productivity . . . . B2B-12 B2B-2.5 Capital Expenditures . . . . . . . . . . . B2B-14 B2B-2.6 Capacity Utilization . . . . . . . . . . . . B2B-16 B2B-3 Structure and Competitiveness . . . . . . . . . B2B-19 B2B-3.1 Geographic Distribution . . . . . . . . B2B-19 B2B-3.2 Facility Size . . . . . . . . . . . . . . . . . B2B-20 B2B-3.3 Firm Size . . . . . . . . . . . . . . . . . . . B2B-21 B2B-3.4 Concentration Ratios . . . . . . . . . . B2B-22 B2B-3.5 Foreign Trade . . . . . . . . . . . . . . . . B2B-24 B2B-4 Financial Condition and Performance . . . B2B-29 B2B-5 Facilities Operating Cooling Water Intake Structures . . . . . . . . . . . . . . . . . . . . . . . . . B2B-31 B2B-5.1 Waterbody and Cooling System Type . . . . . . . . . . . . . . . . . . . . . . . B2B-32 B2B-5.2 Facility Size . . . . . . . . . . . . . . . . . . B2B-33 B2B-5.3 Firm Size . . . . . . . . . . . . . . . . . . . . B2B-34 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2B-36 

# Chapter B2B: Chemicals and Allied Products (SIC 28)

EPA’s Detailed Industry Questionnaire , hereafter referred to as the DQ, identified thirteen 4-digit SIC codes in the Chemical and Allied Products Industry (SIC 28) with at least one existing facility that operates a CWIS, holds a NPDES permit, withdraws equal to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes (facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). For each of the fifteen SIC codes, Table B2B-1 below provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted ro represent national results), and the number and percent of potential Phase III facilities.

Table B2B-1: Potential Phase III facilities in the Chemicals and Allied Pro ducts Industry (SIC 28)
SIC SIC Description Important Products Manufactured Number of facilities a
Total Potential Phase III facilities b % Inorganic Chemicals (SIC 281) c 2812 Alkalies and Chlorine Alkalies, caustic soda, chlorine, and soda ash 28 20 70% 2813 Industrial Gases Industrial gases (including organic) for sale in compressed, liquid, and solid forms 110 4 4% 2816 Inorganic Pigments Black pigments, except carbon black, white pigments, and color pigments 26 9 35%
2819 Industrial Inorganic Chemicals, Not Elsewhere Classified Miscellaneous other industrial inorganic chemicals 271 30 11% Total Inorganic Chemicals 435 64 15% Plastics Material and Resins (SIC 282)

2821 Plastics Material and Synthetic Resins, and Nonvulcanizable Elastomers Cellulose plastics materials; phenolic and other tar acid resins; urea and melamine resins; vinyl resins; styrene resins; alkyd resins; acrylic resins; polyethylene resins; polypropylene resins; rosin modified resins; coumarone-indene and petroleum polymer resins; miscellaneous resins 305 19 6%§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products


### Table B2B-1: Potential Phase III facilities in the Chemicals and Allied Pro ducts Industry (SIC 28)
SIC SIC Description Important Products Manufactured Number of facilities a
Total Potential Phase III facilities b %

B2B-2 Organic Chemicals (SIC 286) d

2865 Cyclic Organic Crudes and Intermediates, and Organic Dyes and Pigments Aromatic chemicals, such as benzene, toluene, mixed xylenes naphthalene, synthetic organic dyes, and synthetic organic pigments 59 9 15%

2869 Industrial Organic Chemicals, Not Elsewhere Classified Aliphatic and other acyclic organic chemicals; solvents; polyhydric alcohols; synthetic perfume and flavoring materials; rubber processing chemicals; plasticizers; synthetic tanning agents; chemical warfare gases; and esters, amines, etc. 364 52 14%

Total Organic Chemicals 423 61 14% Other Chemical Segments
2823 Cellulosic Manmade Fibers Cellulose acetate and regenerated cellulose such as rayon by the viscose or cuprammonium process 7 1 14%

2824 Manmade Organic Fibers, Except Cellulosic Regenerated proteins, and polymers or copolymers of such components as vinyl chloride, vinylidene chloride, linear esters, vinyl alcohols, acrylonitrile, ethylenes, amides, and related polymeric materials 36 13 36%

2833 Medicinal Chemicals and Botanical Products Agar-agar and similar products of natural origin, endocrine products, manufacturing or isolating basic vitamins, and isolating active medicinal principals such as alkaloids from botanical drugs and herbs 33 2 6%

2834 Pharmaceutical Preparations Intended for final consumption, such as ampoules, tablets, capsule s, vials, ointments, medicinal powders, solutions, and suspensions 91 4 5%

2873 Nitrogenous Fertilizers Ammonia fertilizer compounds and anhydrous ammonia, nitric acid, ammonium nitrate, ammonium sulfate and nitrogen solutions, urea, and natural organic fertilizers (except compost) and mixtures 60 9 14%

2899 Chemicals and Chemical Preparations, Not Elsewhere Classified Fatty acids; essential oils; gelatin (except vegetable); sizes; bluing; laundry sours; writing and stamp pad ink; industrial compounds; metal, oil, and water treating compounds; waterproofing compounds; and chemical supplies for foundries 162 4 3%

Total Other 389 34 9% Total Chemicals and Allied Products (SIC 28) Total SIC Code 28 1,552 178 11%

aNumber of weighted detailed questionnaire survey respondents. b Individual numbers may not a dd up due to independent rounding.
c SIC code 281 is officially titled “Industrial Inorganic Chemical s.” However, to avoid confusi on with SIC code 2819, “Industria l Inorganic Chemicals, Not Elsewhere Classified,” this profile refers to SIC code 281 as the “Inorganic Chemicals segment.” d SIC code 286 is officially titled “Industrial Organic Chemicals. ” However, to avoid confusion with SIC code 2869, “Industrial Organic Chemicals, Not Elsewhere Classified,” this profile refers to SIC code 286 as the “Organic Chemicals segment.”§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-3 Source: U.S. EPA, 2000; Executive O ffice of the President, 1987. 

### The table shows that an estimated 178 out of 1,552 fac ilities (or 11 percent) in the Chemicals and Allied Products Industry (SIC 28) are potentially subject to the proposed Phase III regulation. EPA also estimated the percentage of total production that occurs at facilities potentially subject to the proposed regulation. Total value of shipments for the chemicals and allied products industry from th e 1998 Annual Survey of Manufacturers is $268 billion. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because value of shipments data were not collected usi ng the DQ, these data were not available for the sample of Phase III manufacturing facilities potentially subject to the proposed regulation. Tota l revenue, as reported on the DQ, was used a close approximation for value of shipme nts for these facilities. EPA estimated the total revenue of facilities in the chemicals industry potentially subject to the proposed regulation is $61.2 billion. Therefore, EPA estimates that 23 percent of total production in the chemicals industry occurs at facilities potentially subject to the proposed regulation. The responses to the Detailed Questionnaire indicate that three chemical segments account for 80 percent of the chemicals industry potential Phase III facilities: (1) Inorganic Chemicals (including SIC codes 2812, 2813, 2816, and 2819); (2) Plastics Material and Resins (SIC code2821); and (3) Organic Chemicals (including SIC codes 2865 and 2869). Of the 177 potential Phase III facilities in the Chemical industry, 64 facilities, or 36 percent, belong to the Inorganic Chemicals segment, 61, or 35 percent, belong to the Organic Chemicals segment, and 19, or 11 percent, belong to the Plastics and Resins segment. This profile therefore provides detailed information for these three industry groups. Table B2B-2 on the following page provides the cross-walk between SIC codes and NAICS codes for the profiled chemical SIC codes. The table shows that alkalies and chlorine (SIC 2812), industrial gases (SIC 2813), Plastics Material and Synthetic Resins, and Nonvulcanizable El astomers (SIC 2821) have one-to-one relationships to NAICS codes. The other SIC codes in the three prof iled chemical segments correspond to two or more NAICS codes.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-4 

### Table B2B-2: Relationship betw een SIC and NAICS Codes for the Chemicals and Allied Pr oducts Industry (1997)
SIC Code SIC Description NAICS Code NAICS Description Establishment s Value of Shipments

($000) Employment Inorganic Chemicals (SIC 281) 2812 Alkalies and Chlorine 325181 Alkalies and chlorine manufacturing 39 2,465,183 4,859 2813 Industrial Gases 325120 Industrial ga s manufacturing (pt) 630 3,952,006 8,787
2816 Inorganic Pigments 325131 Inorganic dye and pigment manufacturing (pt) 74 3,734,497 8,608 325182 Carbon black manufacturing (pt) 0 0 0

2819 Industrial Inorganic Chemicals, Not Elsewhere Classified 325131 Inorganic dye and pigment manufacturing (pt) 00 0

325188 All other basic inorganic chemical manufacturing (pt) 638 D 50,000 to 99,999

325998 All other miscellaneous chemical product and preparation manufacturing (pt) 22 380,156 1,484 331311 Alumina refining 7 1,257,211 3,153 Plastics Material and Resins (SIC 282)

2821 Plastics Material and Synthetic Resins, and Nonvulcanizable Elastomers 325211 Plastics material and resin manufacturing 529 44,478,404 60,764
Organic Chemicals (SIC 286)

2865 Cyclic Organic Crudes and Intermediates, and Organic Dyes and Pigments 325110 Petrochemical manufact uring (pt) 22 3,665,285 3,007
325132 Synthetic organic dye and pigment manufacturing 122 2,692,860 8,681

325192 Cyclic crude and intermediate manufacturing 51 6,571,093 8,183

2869 Industrial Organic Chemicals, Not Elsewhere Classified 325110 Petrochemical manufact uring (pt) 32 16,869,465 7,936 325120 Industrial gas manufacturing (pt) 13 1,279,462 3,705
325188 All other basic inorganic chemical manufacturing (pt) 2 D 250 to 499 325193 Ethyl alcohol manufacturing 39 1,287,273 1,890
325199 All other basic organic chemical manufacturing (pt) 654 52,294,254 86,793 D = Withheld to avoid disclosure. Source: U.S. DOC, 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-5 

## B2B-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of Chemicals firms that would be potentially subject to the proposed Phase III regulation, to ab sorb compliance costs without material adverse economic/financial effects. Two important factors in th e ability of the industry’s ability to withstand compliance costs are: (1) the extent to which the industry may be e xpected to shift compliance co sts to its customers through price increases and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, the chemicals industry has variable level of concentration, with some industry segments exhibiting relatively low concentration while others show somewhat higher concentration. Regardless of the domestic concentrati on level and its implications for market power, the U.S. chemicals industry faces increasing competitive pressure fro m abroad, which substantially limits any apparent ability of firms in this industry to pass through to cu stomers a significant portion of their compliance-related costs. In addition, the relatively low share of total industry output that is produced in potential Phase III facilities, an estimated 23 percent, also argues against complying firm s’ ability to shift compliance costs to customers. For these reasons, in its analysis of regulatory impacts for the chemicals industry, EPA assumed that complying firms would be unable to pass compliance costs through to cu stomers: i.e., complying facilities must absorb all compliance costs within their financial condition at th e time of compliance (see following sections and Appendix 3 of Chapter B3: Economic Impact Analysis for Manufacturers for further information). Financial Health and General Business Outlook Over the past decade, the Ch emicals industry, like other U.S. manufacturing industries, has experienced a range of economic/financial conditions, including substantial cha llenges. In the early 1990s, the domestic chemicals industry was affected by reduced U.S. demand as the economy entered a recessionary period Although domestic market conditions improved by mid-decade, an oversupply of crude oil, weakness in Asian markets, along with other domestic factors, dealt a serious blow to refi ners in 1998. More recently, as the U.S. economy began recovery from its economic weakness, the domestic chemical s industry is showing signs of recovery with higher demand levels and improving financia l performance in 2003. Although the industry weathered difficult periods over the past few years, the strengthening of the i ndustry’s financial condition and general business outlook suggest improved ability to withstand additional regulatory compliance costs without a material financial impact.


## B2B-2 D OMESTIC 

## P RODUCTION 

### The U.S. chemical and allied products industry includes a large number of companies that, in total, produce more than 70,000 different chemical products. These products range from commodity materials used in other industries to finished consumer products such as soaps and deterg ents. The industry accounts for nearly 12 percent of U.S. manufacturing value added, and produces approximately two percent of total national gross domestic product (McGraw-Hill, 2000). Raw materials containing hydrocarbons such as oil, natural gas, and coal are primary feedstocks for the production of organic chemicals. Inorganic chemicals are chemicals that do not contain carbon but are produced from other gases and minerals (McGraw-Hill, 2000). The chemicals and allied products industry is highly energyintensive, consuming about 7 percent of total annual U.S. energy output (McGraw-Hill, 2000). It is one of the largest industrial users of electric energy and also consumes large amounts of oil and natural gas. In tota l, the industry accounts for approximately seven percent of total U.S. energy consumption, including 11 percent of all natural gas use. Just over 50 percent of the industry’s energy consumption is used as feedstock in the pr oduction of chemical products. The remaining energy consumption is for fuel and power for production processes. Oil accounts for approximately 42 percent of total energy consumption by the industry. For some products , e.g., petrochemicals, energy costs account for up to 85§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

1 Terms highlighted in bold and italic font are further explained in the glossary.

B2B-6 

### percent of total production costs. Overall, total energycosts represent seven percent of the value of chemical industry shipments (S&P, 2001). B2B-2.1 Output Figure B2B-1 shows constant dollar value of shipmentsand value added for the three profiled segments between 1987 and 2001 1 

### . Value of shipments and value added are two common measures of manufacturing output. They provide insight into the overall economic hea lth and outlook for an industry. Value of shipments is the sum of the receipts a manufacturer earns from the sale of its outputs; it indicates the overall size of a market or the size of a firm in relation to its market or compe titors. Value added measures the value of production activity in a particular industry. It is the difference between th e value of shipments and the value of inputs used to make the products sold. The Organic Chemicals segment experienced a decrease in both value of shipments and value added between 1988 and 1993, followed by volatility through 1998. The mid 1990s were marked by increased competition in the global market for petrochemicals, which comprise the majority of organic chemical products. The increased competition stems from the considerable capacity expansions for these products seen in developing nations. (McGraw-Hill, 2000). Value of shipments for the seg ment increased through 2000, while value added remained flat. Both value of shipments and value added d eclined significantly in 2001 as the segment faced decreased demand due to the economic slowdown. The Plastics Material and Resins and Inorganic Chemi cals segments remained somewhat more stable over the period between 1987 and 2001. In the early 1990s, domestic producers benefitted from the relatively weak dollar, which made U.S. products more competitive in the global market. During the later part of the 1990s, the strength of the U.S. economy bolstered domestic end-use markets, o ffsetting the effect of reduced U.S. export sales, which resulted from increased global competition and a strengt hened dollar (McGraw-Hill, 2000). The global economic slowdown that began in 2000 led to decreased production, in particular, of chemical goods that are used in the production processes of other industries, notably steel, apparel, textiles, forest products, and technology. Since 2000, these three segments of the chemical industry have experienced significant challenges and weakened financial performance. In 2001, the industry faced high energyand raw material prices at the start of the year, and overcapacity, weak demand, and slowing global economies at the end of the year. All these factors led to poor financial results for the year (C&EN, 2001). Produc tion increased slightly in 2002, and financial results improved, as cost cutting efforts, including significant layoffs, improved earnings (C&EN, 2002). Firms began 2003 with hopes of a turnaround, but continued to face the same problems as the previous two years, as industry was forced to reduce employment and spending against declining earnings (C&EN, 2003c). Currently, the industry continues to face high raw material and energy costs, as well as an increase in competition from abroad. The past three years have seen the indus try struggle to maintain earnings against the global economic decline. Although the U.S. economy has im proved recently, the chemical industry has lagged in increasing growth of sales and earnings. This may change in 2004, as the American Chemistry Council reported that the chemical industry should experience positive growth only slightly lower than GDP in 2004 (C&EN, 2003c). This should better position firms to incur costs associated with regulatory compliance.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-7 - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000198719881989199019911992199319941995199619971998199920002001 Organic Chemicals (SIC 2865, 2869) Organic Chemicals (NAICS to SIC)
Plastics Material an d Resins (SIC 2821)
Plastics Material an d Resins (NAICS to SIC) Inorganic Chemicals (SIC 2812, 2813, 2816, 2819) Inorganic Chemicals (NAICS to SIC)

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000198719881989199019911992199319941995199619971998199920002001 Organic Chemicals (SIC 2865, 2869) Organic Chemicals (NAICS to SIC)
Plastics Material and Resins (SIC 2821) Plastics Material and Resins (NAICS to SIC) Inorganic Chemicals (SIC 2812, 2813, 2816, 2819) Inorganic Chemicals (NAICS to SIC) 

### Figure B2B-1: Value of Shipments and Va lue Added for Profiled Chemical Segments (in millions, $2003)

Value of Shipments

Value Added

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, and 1998-2001; U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-8 

### Table B2B-3 provides the Federal Reserve System’s index of industrial production for the three profiled segments, which shows trends in production since 1997. This index reflects total output in physical terms, whereas value of shipments and value added reflects the value of production. Table B2B-3 shows varying trends in the three segments since 1997, but sharp declines inproduction in all three segments in 2000 or 2001. These declines were caused by the marked slowdown in the U. S. economy, which affected demand in major chemicalusing segments such as steel, apparel, textiles, forest products, and the technology sectors (Chemical Marketing Reporter, 2001). Production declines continued thr ough 2001, but rebounded somewhat in 2002 before dipping again in 2003.

Table B2B-3: Chemicals Industr y Industrial Production Index

Year Basic Inorganic Chemicals a Plastics Material and Resins b Organic Chemicals c Index 1997=100 Percent Change Index 1997=100 Percent Change Index 1997=100 Percent Change 1989 105.1 n/a 78.8 n/a 89.6 n/a 1990 111.9 6.4% 79.6 1.0% 91.6 2.3% 1991 106.6 -4.7% 76.5 -3.8% 87.7 -4.3% 1992 107.2 0.6% 83.2 8.7% 89.1 1.6% 1993 102.1 -4.8% 81.7 -1.9% 86.4 -3.0% 1994 96.6 -5.4% 93.2 14.1% 91.2 5.5% 1995 97.5 1.0% 93.9 0.8% 90.4 -0.8% 1996 98.0 0.5% 91.0 -3.2% 90.2 -0.3% 1997 100.0 2.1% 100.1 10.1% 100.0 10.9% 1998 105.5 5.5% 107.9 7.8% 92.2 -7.8% 1999 106.0 0.4% 112.4 4.1% 99.1 7.5% 2000 96.8 -8.7% 112.3 -0.1% 99.9 0.8% 2001 95.6 -1.3% 100.2 -10.8% 88.2 -11.7% 2002 95.8 0.2% 105.8 5.5% 94.9 7.5% 2003 92.9 -3.0% 104.3 -1.4% 94.6 -0.3% Total Percent Change 1989-2000 -11.6% 32.3% 5.6% Average Annual

Growth Rate -0.9% 2.0% 0.4%

aIncludes NAICS 32512-8. b Includes NAICS 325211.
c Includes NAICS 32511,9. Source: Federal Reserve Board, 2004.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-9 

### B2B-2.2 Prices The producer price index (PPI) measures price changes, by segment , from the perspective of the seller, and indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment. Figure B2B-2 shows the producer price index for the profiled chemical segments. Selling prices for the products of the Organic and Inorganic Chemicals segments increased from 1987 to 1989 and remained stable through 1994. Between 1994 and 1995, prices increased sharply, follo wed by a period of relatively stable prices through 1999. The sharp price rises for Organic Chemicals and Plastics Material and Resins in 2000 resulted in part from increases in the price of natural gas, which is the feed stock for 70 percent of U.S. ethylene production. High natural gas prices put U.S. organic chemicals and, to a lesser extent, plastic resin producers at a disadvantage relative to foreign producers who rely on naphta and gas o il as a feedstock. Natural gas prices declined, however, in 2001 easing pressure on U.S. producers (Chemical Mark eting Reporter, 2001). Price increases for Plastics Material and Resins also reflected a shift by U.S. producers away from production of commodity resins to speciality and higher-value-added pr oducts (McGraw-Hill, 2000). Prices for Plastics Material and Resins followed a trend similar to the other two chemical industry segments but with larger fluctuations (see Figure B2B2). For the chemical industry in general, prices ro se 4 percent in 2002, increased further in 2003, with the producer price index reaching 165 (C&EN, 2003c). Chemical and plastics prices fluctuate in large part as a result of varying energy prices. Basic petrochemicals, which comprise the majority of organic chemical products, depend heavily on energy commodities as inputs to the production process – energy input costs may account for up to 85 percent of total product costs. The prices of natural gas and oil therefore influence the production co sts and the selling price for these products. High basic petrochemical prices affect prices for chemical intermed iates and final end products, including organic chemicals and plastics. Another factor influencing prices for commodity chemical products is the cyclical nature of market supply and demand conditions. The Plastics, Organic Chemicals, and Inorganic Chemicals segments are characterized by large capacity additions which can lead to fluctuations in prices in response to imbalances in supply and demand.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-10 80 90 100 110 120 130 140 150 160 170

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Plastics Material and Resins (SIC 2821) Organic Chemicals (SIC 2865, 2869) Inorganic Chemicals (SIC 2812, 2813, 2816, 2819) 

### Figure B2B-2: Producer Price Indexes for Profiled Chemical Segments

aIndices are an average of each SI C code’s PPI within each segment Source: BLS, 2002.



### B2B-2.3 Number of Facilities and Firms According to the Statistics of U.S. Businesses, the number of facilities in the Inorganic Chemicals segment remained relatively stable between 1989 and 1997, followe d by four consecutive years of decreases in the number of facilities. The other two segments saw overall increases in the number of facilities over the 1989 to 2001 time period, though the Organic Chemicals segment saw declines in 1999 through 2001. The Plastics Material and Resins segment saw significant increases in the number of facilities reported between 1993 and 1996, reflecting growth in the demand for plastics in a number of end-uses (McGraw-Hill, 2000). Table B2B-4 shows the downward trend in the number of fac ilities producing inorganic chemical products following a peak in 1991. The decrease is partly attributable to the consolidati on within the Inorganic Chemicals segment (S&P, 2001).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-11 

### Table B2B-4: Number of Facilities for Profiled Chemical Segments a

Year Inorganic Chemicals Plastics Mat erial and Resins Organic Chemicals Number of Facilities Percent Change Number of Facilities Percent Change Number of Facilities Percent Change 1989 1,387 n/a 504 n/a 844 n/a 1990 1,421 2.5% 517 2.6% 837 -0.8% 1991 1,508 6.1% 529 2.3% 851 1.7% 1992 1,466 -2.8% 460 -13.0% 888 4.3% 1993 1,476 0.7% 502 9.1% 908 2.3% 1994 1,460 -1.1% 499 -0.6% 902 -0.7% 1995 1,425 -2.4% 558 11.8% 907 0.6% 1996 1,396 -2.0% 630 12.9% 868 -4.3% 1997 1,414 1.3% 593 -5.9% 945 8.9% 1998 b 1,310 -7.3% 565 -4.7% 1,093 15.6% 1999 b 1,309 -0.1% 586 3.7% 1,076 -1.5% 2000 b 1,300 -0.7% 597 1.9% 1,072 -0.4% 2001 b 1,266 -2.6% 621 4.0% 1,064 -0.7% Total Percent Change 1989-2001 -8.7% 23.2% 26.1% Average Annual Growth Rate -0.8% 1.8% 2.0%

aThe Statistics of U.S. Business is derive d from Census County Business Patterns data, and reports so mewhat different numbers o f firms and facilities than other Census data sources.
b Before 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2001.



### The trend in the number of firms between 1989 and 2001 is similar to the number of facilities. The number of firms in the Inorganic Chemicals segment peaked in1992 and has trended downward since. The Organic Chemicals segment showed more volatility before peak ing in 1998 with 710 firms; since then, the number of firms has declined somewhat. The number of firms in the Plastics Material and Resins segment increased substantially between 1993 and 1996, from 284 to 403 firms, be fore decreasing in the next two years. Starting in 1999, the Plastics Material and Resins segment showed three years of positive growth in the number of firms. Table B2B-5 on the following page shows the number of firms in the three profiled chemical segments between 1990 and 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-12 

### Table B2B-5: Number of Firms for Profiled Chemical Segments a

Year Inorganic Chemicals Plastics Mat erial and Resins Organic Chemicals Number of

Firms Percent Change Number of Firms Percent Change Number of Firms Percent Change 1990 640 n/a 301 n/a 579 n/a 1991 678 5.9% 319 6.0% 584 0.9% 1992 699 3.1% 255 -20.1% 611 4.6% 1993 683 -2.3% 284 11.4% 648 6.1% 1994 677 -0.9% 295 3.9% 644 -0.6% 1995 657 -3.0% 343 16.3% 644 0.0% 1996 625 -4.9% 403 17.5% 596 -7.5% 1997 611 -2.2% 358 -11.2% 674 13.1% 1998 b 618 1.1% 322 -10.1% 710 5.3% 1999 b 609 -1.3% 337 4.7% 684 -3.6% 2000 b 611 0.2% 352 4.5% 683 -0.1% 2001 b 606 -0.8% 375 6.5% 692 1.3% Total Percent Change 1990-2001 -5.4% 24.6% 19.5% Average Annual

Growth Rate -0.5% 2.0% 1.6%

aThe Statistics of U.S. Business is derive d from Census County Business Patterns data, and reports so mewhat different numbers o f firms and facilities than other Census data sources.
b Before 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2001.


### B2B-2.4 Employment and Productivity Figure B2B-3 below provides information on employment from the Annual Survey of Manufactures. With the exception of minor short-lived fluctuations, employment in the Organic Chemicals and Plastics Material and Resins segments remained relatively stable between 1988 and 2000 before seeing declines of greater than 4.5 percent in 2001. The Inorganic Chemicals segment, how ever, experienced a significant decrease in employment from 103,400 to 80,200 employees over the 1992 to 1996 period. This decrease reflects the industry’s restructuring and downsizing efforts intended to reduce co sts in response to competitive challenges. Employment in this segment remained fairly constant over the next two years before experiencing three years of employment declines greater than 4 percent through 2001. From 1987 to 2001, the Inorganic Chemicals segment had the largest overall decrease in employment at 23 percent. Th e Organic Chemicals segment employment declined 6.4 percent, while the Plastics Material and Resins segment was the only segment to increase employment, rising just over 4 percent for the period. The chemical industry continued to experience more layoffs since 2001 as firms sought to improve financial performance by reducing employment costs. Both 2002 and 2003 saw workforce reductions, though not as severe as 2001, as firms shut plants or reduced operations (C&EN, 2003c).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-13 0 20 40 60 80 100 120 140198719881989199019911992199319941995199619971998199920002001 Organic Chem icals (SIC 2 8 6 5 , 2 8 6 9 ) Organic Chem icals (N A ICS t o SIC) Inorganic Chem icals (SIC 2 8 1 2 , 2 8 1 3 , 2816, 2819) Inorganic Chem icals (N A ICS t o SIC)

P lastics M aterial an d Resin s (SIC 2821) P lastics M aterials and Resins (NAICS t o SIC) 

### Figure B2B-3: Employment for Profiled Chemical Segments a

### (000s)

aBefore 1998, the Department of Commerce comp iled data in the SIC system; since 1998, thes e data have been compiled in the North American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991,1993-1996, and 1998- 2001; U.S. DOC, 1987, 1992, and 1997.


### Table B2B-6 presents the change in va lue added per labor hour, a measure of labor productivity , for each of the profiled industry segments between 1988 and 2001. The trends in each segment show considerable volatility through the 1990s into the 2000s . The gains in productivity in the Inorganic Chemicals segment reflect firms’ attempts to reduce costs by restructuring production and materials handling processes in response to maturing domestic markets and increased global competition (S&P, 2001). Over the 1988 to 2001 period, two segments, Plastics Material and Resins and Organic Chemicals, sawdecreases of 15 and 31 percent, respectively, to value added per labor hour. The Inorganic Chemicals segment, however, improved 10 percent over the same timeframe.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-14 

### Table B2B-6: Productivity Trends for Profiled Chemical Segments ($2003)

Year Inorganic Chemicals Plastics Materi al and Resins Organic Chemicals

Value Added (mill.) Prod. Hours (mill.) Value Added/Hour Value Added (mill.) Prod. Hours (mill.) Value Added/Hour Value Added (mill.) Prod. Hours (mill.) Value Added/Hour ($/hr.) Percent Change ($/hr.) Percent Change ($/hr.) Percent Change 1988 17,923 114 158 18,420 80 231 37,268 152 246 1989 19,366 109 178 13% 17,472 84 209 -10% 39,128 155 253 3% 1990 20,848 115 182 2% 15,792 83 191 -8% 36,869 156 237 -7% 1991 19,673 121 163 -11% 13,778 81 171 -11% 32,628 156 209 -12% 1992 20,437 120 170 4% 15,281 79 195 14% 31,609 155 203 -3% 1993 18,974 108 176 3% 14,289 81 177 -9% 31,542 156 202 -1% 1994 17,626 101 175 -1% 17,914 89 200 13% 34,066 146 234 16% 1995 18,667 100 186 7% 20,195 92 221 10% 38,820 148 263 12% 1996 18,650 97 193 3% 17,235 81 214 -3% 32,022 158 203 -23% 1997 19,204 91 211 9% 19,517 84 234 9% 39,181 150 261 29% 1998 a 25,247 92 276 31% 20,886 83 251 8% 31,727 147 216 -17% 1999 a 18,097 88 206 -25% 20,075 84 238 -5% 32,776 143 230 6% 2000 a 15,042 94 161 -22% 19,397 87 223 -6% 32,973 138 238 4% 2001 a 15,112 87 173 8% 15,639 80 196 -12% 22,768 134 169 -29% Total Percent Change 1988-2001 -16% -23% 10% -15% 0% -15% -39% -11% -31%
Average Annual Percent Change -1% -2% 1% -1% 0% -1% -4% -1% -3%

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, and 1998-2001; U.S. DOC, 1987, 1992, and 1997.


### B2B-2.5 Capital Expenditures The chemicals industry is relatively capital- intensive. According to the Census’s 2001 Annual Survey of Manufactures , facilities in NAICS 325, which includes all the pr ofiled chemical SIC codes, had aggregate capital spending of almost $19 billion in 2001. Capital-intensiv e industries are characterized by large, technologically complex manufacturing facilities which reflect the economies of scale required to manufacture products efficiently. New capital expendituresare needed to extensively modernize, expand, and replace existing capacity to meet growing demand. All three profile d chemical industry segments experienced substantial increases in capital expenditures through the 1990s. Tabl e B2B-7 on the following page shows that capital expenditures in the Inorganic Chemicals segment incr eased, in real terms, from $1.146 billion in 1987 to $2.642§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-15 

### billion in 1998. Although the following three years saw dec lines in capital expenditures, the Inorganic Chemicals segment increased capital expenditures by 80 percent from 1987 to 2001. The Plastics segment more than doubled its capital expenditures from 1987 through 1999, before significant reductions occurred in the subsequent two years. The Organic Chemicals segment peaked in 1996, and has seen its capital expenditures declining since, particularly in 2000 and 2001, for an overall decline of almost 18 percent from 1988 to 2001. Much of the growth in capital expenditures was driven by investment in capac ity expansions to meet the increase in global demand for chemical products. Domestically, the continued substituti on of synthetic materials for other basic materials and rising living standards caused consistent growth in th e demand for chemical commodities (S&P, 2001). As the economy slowed in 2000, chemical industry firms curt ailed capital expenditures in the face of weakening financial performance. As the economy picked up steam , an early 2003 survey of 19 chemical companies found that businesses sought to start increasing capital projects in 2003 (C&EN, 2003b).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-16 

### Table B2B-7: Capital Expenditures for Prof iled Chemical Segments (in millions, $2003)

Year Inorganic Chemicals Plastics Mat erial and Resins Organic Chemicals Capital Expenditures Percent Change Capital Expenditures Percent Change Capital Expenditures Percent Change 1987 1,146 1,800 1988 1,170 2.1% 2,241 24.5% 4,441 1989 1,799 53.7% 2,644 18.0% 5,473 23.2% 1990 1,721 -4.3% 3,155 19.3% 6,618 20.9% 1991 1,722 0.1% 2,817 -10.7% 6,570 -0.7% 1992 1,900 10.4% 2,088 -25.9% 5,818 -11.4% 1993 1,410 -25.8% 2,302 10.3% 4,815 -17.2% 1994 1,527 8.3% 2,968 28.9% 4,107 -14.7% 1995 1,959 28.3% 2,666 -10.2% 5,610 36.6% 1996 2,254 15.0% 3,134 17.6% 7,027 25.3% 1997 2,211 -1.9% 3,238 3.3% 6,438 -8.4% 1998 a 2,642 19.5% 3,757 16.0% 5,470 -15.0% 1999 a 2,236 -15.3% 4,039 7.5% 5,033 -8.0% 2000 a 2,186 -2.2% 2,371 -41.3% 4,834 -4.0% 2001 a 2,067 -5.4% 1,812 -23.6% 3,687 -23.7% Total Percent Change 1987-2001 80.4% 0.6% -17.0% Average Annual

Growth Rate 4.3% 0.0% -1.4%

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, and 1998-2001; U.S. DOC, 1987, 1992, and 1997.


### B2B-2.6 Capacity Utilization Capacity utilization measures actual output as a percentage of total potential output given the available capacity. Capacity utilization reflects excess or insuffici ent capacity in an industry and is an indication of whether new investment is likely. To take advantag e of economies of scale, chemical commodities are typically produced in large facilities. Capacity additions in this industry are often made on a relatively large scale and can substantially affect the industry’s capacity utilization rates. Figure B2B-4 presents the capacity utilization index from 1989 to 2002 for specific 4-digit SIC codes within each of the profiled segments in the chemicals industry. Capacity utilization in the Organic Chemicals segment remained the most stable through this time period with only moderate fluctuations betw een 1989 and 1999, followed by decreased utilization rates in 2000 and 2001, before rebounding in 2002. Plastics Material and Resins capacity utilization showed a downward trend, as the production of many commodity resins shifted over seas. U.S. producers responded by emphasizing the manufacture of speciality and higher-value-added products and by rationalizing capacity to improve profitability (McGraw-Hill, 2000).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-17 

### Overall, the Inorganic Chemicals segment demonstratedthe most volatility in capacity utilization between 1989 and 2002. The chlor-alkali industry (SIC code 2812) e xperienced an almost consistent decline in capacity utilization since its high of 96 percent from 1992 through 1994. This decrease reflects the enactment of treaties and legislation designed to reduce the emission of chlorinated compounds into the environment. These regulations decreased the demand for chlorine which, t ogether with caustic soda, accounts for more than 75 percent of production by this segment. The significant increase in capacity utilization in the industrial gases segment (SIC code 2813) in the mid 1990s reflects the expansion of key intermediate purchasers of chemical commodities such as the primary metals and electronics i ndustries. As these markets and the economy in general started to slow, utilization rates declined as well. Si milarly, capacity utilization in the pigments and other inorganic chemicals segments (SIC codes 2816 and 2819) remained relatively stable between 1989 and 1998, before dropping in the early 2000s. The stability in th ese segments through 1999 reflects the fact that these are essentially mature markets where the demand for products te nds to track growth in gross domestic product (GDP) (McGraw-Hill 2000). As the economy continued its sluggi sh performance in the early 2000s, utilization within this segment dampened, as demand for product decreased.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-18 60 65 70 75 80 85 90 95 100

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Inorganic Pigments (SIC 2816) Inorganic Pigments (NAICS to SIC) Alkalies and Chlorine (SIC 2812) Alkalies and Chlorine (NAICS to SIC) Industrial Gases (SIC 2813) Industrial Gases (NAICS to SIC) Industrial Inorganic Chemicals, NEC (SIC 2819) Industrial Inorganic Chemicals, NEC (NAICS to SIC)

60 65 70 75 80 85 90 95 100

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Plastics M aterial and Resins (SIC 2821) Plastics M aterial and Resins (NAICS to SIC)

60 65 70 75 80 85 90 95 100

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Cy clic Organic Crudes and Intermediates (SIC 2865) Cy clic Organic Crudes and Intermediates (NAICS to SIC) Industrial Organic Chemicals, NEC (SIC 2869) Industrial Organic Chemicals, NEC (NAICS to SIC) 

### Figure B2B-4: Capacity Utilization Rates (Fou rth Quarter) for Profiled Chemical Segments

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1989-2002.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

2 The 1992 Census of Manufactures is the most recent data available by SIC code and State.

B2B-19 

## B2B-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### The chemicals industry continues to restructure and redu ce costs in response to comp etitive challenges, including global oversupply for commodities. In the early 1990s, th e chemical industry’s cost-cutting came largely from restructuring and downsizing. The industry has taken step s to improve productivity, and consolidated to cut costs. Companies seeking growth within these relatively mature industry segments have made acquisitions to achieve production or marketing efficiencies. The Plastics Materi al and Resins segment, for example, experienced sizable consolidations in the late 1990s into 2000 (S&P, 2001). B2B-3.1 Geographic Distribution Chemical manufacturing facilities are located in every state, but almost two-thirds of U.S. chemical production is concentrated in ten states. Given the low value of many commodity chemicals and the handling problems posed by products such as industrial gases, nearly two-thirds of the tonnage shipped was transported less than 250 miles in 1998 (S&P, 2001). Facilities producing cyclic crudes and intermediates (SIC 2865) and unclassified industrial organic chemicals, not elsewhere classified (SIC 2869), are concentrated in Tex as, New Jersey, Ohio, California, New York, and Illinois. Facility sites are typically chosen for their access to ra w materials such as petroleum and coal products and to transportation routes. In addition, since much of the market for organic chemicals is the chemical industry, facilities tend to cluster near such end-users (U.S. EPA, 1995a). Inorganic Chemicals facilities are typically located near c onsumers and, to a lesser extent, raw materials. The largest use of inorganic chemicals is in industria l processes for the manufacture of chemicals and nonchemical products. Facilities are therefore concentrated in the h eavy industrial regions along the Gulf Coast, both East and West coasts, and the Great Lakes region. Since a large portion of inorganic chemicals are used by the organic chemicals manufacturing segment, the geographical distribution of Inorganic Chemicals facilities is very similar to that of Organic Chemicals facilities (U.S. EPA, 1995b). Facilities in the Plastics Material and Resins segment are concentrated in the heavy industrial regions, similar to both the Organic Chemicals and Inorganic Chemicals facilities. Figure B2B-5 shows the distribution of all facilities by St ate in the profiled chemical segments, based on the 1992 Census of Manufactures. 2§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-20 

### 4

7 5 6 9
7 9 5

6 13 14

27
35 47 57 1

88 23 27

70

20 70 86

25 62 67

50 42 147 66 102

56

120 154 165 37 2

28 41
184 27
14 2

225

296

Number of Facilities 0 - 14 15 - 50 51 - 102 103 - 184 185 - 296 

### Figure B2B-5: Number of Chemical Facilities by State for Profiled Chemical Segments

Source: U.S. DOC, 1987, 1992, and 1997.
B2B-3.2 Facility Size Facility size can be expressed by the number of employees and/or by the total value of shipments, with the most accurate depiction of size being a combination of both. The three profiled chemicals industry segments are characterized by a large number of small facilities, with more than 67 percent of facilities employing fewer than 50 employees and only eight percent employing 250 or more employees. However, the larger facilities in the three segments account for the majority of the industries’ output. This fact is most pronounced in the Inorganic Chemicals segment where facilities with fewer than 20 employees account for 63 percent of all facilities but for only 8 percent of the industry’s value of shipments. Inthe Organic Chemicals segment, approximately 29 percent of all facilities employ 100 employees or more. These facilities account for about 87 percent of the value of shipments for the industry. Similarly, facilities in the Plastics Material and Resins segment with more than 100 employees account for only 29 percent of all facilities but for 80 percent of the industry’s value of shipments (see Figure B2B-6 below).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-21 0 100 200 300 400 500 600 700 800 900

1-19 20-49 50-99 100-249 250-499 500-999 1,000- 2,499 2,500+ Inorganic Chemicals (SIC 2812, 2813, 2816, 2819) Plastics (SIC 2821) Organic Chemicals (SIC 2865, 2869)

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000

1-19 20-49 50-99 100-249 250-499 500-999 1,000- 2,499 2,500+ Inorganic Chemicals (SIC 2812, 2813, 2816, 2819) Plastics (SIC 2821) Organic Chemicals (SIC 2865, 2869) 

### Figure B2B-6: Number of Facilities and Value Added by Employment Size Category in 1992 a 

### for Profiled Chemical Segments Number of Facilities

Value of Shipments (in millions)

aThe 1992 Census of Manufactures is the most recent data available by SIC code and facility employment size. Source: U.S. DOC, 1987, 1992, and 1997.



### B2B-3.3 Firm Size The Small Business Administration (SBA) defines small fi rms in the chemical industries according to the firm’s number of employees. Firms in the Inorganic Chemicals segment (SIC codes 2812, 2813, 2816, 2819) and in Industrial Organic Chemicals, NEC (SIC code 2869) are defined as small if they have 1,000 or fewer employees; firms in Plastics Material and Resins (SIC 2821) and Cyclic Organic Crudes and Intermediates (SIC code 2865) are defined as small if they have 750 or fewer employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size cl assifications, therefore preventing precise use of the SBA size threshold in conjunction with SUSB data.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

3 Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced byother industries (e.g., plastics vs. alumi num in beverage containers). Concentration ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.

B2B-22 

### The SUSB data presented in Table B2B-8 show that in 2001, 481 of 606 firms in the Inorganic Chemicals segment had less than 500 employees. Therefore, at least 79 percent of firms in this segment were classified as small. These small firms owned 555 facilities, or 44 percent of all facilities in the segment. In the Plastics and Resins Industry segment, 299 of 375 firms, or 80 percent, had less than 500 employees in 2001. These small firms owned 330 of 621 facilities (53 percent) in the segment. In the Organic Chemicals segment, 74 percent of facilities (512 of 692) had fewer than 500 employees, owning 52 percent of all facilities in that segment. Table B2B-8 below shows the distribution of firms, fac ilities, and receipts in the Inorganic Chemicals, Plastics Material and Resins, and Organic Chemicals segments by the employment size of the parent firm.
Table B2B-8: Number of Firms, Facilities a nd Estimated Receipts by Firm Size Category for Profiled Chemical Segments (2001)
Employment Size Category Inorganic Chemicals Plastics Material and Resins Organic Chemicals
No. of Firms Number of Facilities No. of Firms Number of Facilities No. of Firms Number of Facilities 0-19 288 290 156 156 277 278 20-99 129 162 97 101 156 168 100-499 64 103 46 73 79 111

500+ 125 711 76 291 180 507 Total 606 1,266 375 621 692 1,064

aBefore 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the North American Industry Classification Sy stem (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2001.



### B2B-3.4 Concentration Ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers with more con centrated industries generally having higher barriers. The four-firm concentration ratio(CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things being equal 3 

### . An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the i ndustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, th e HHI of this industry would be equal to 4,600 (602 + 302 + 102). The higher the index, the fewer the number of fi rms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s guidelines for evaluating mergers, markets in which the HHI§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-23 

### is under 1000 are considered unconcentrated, markets inwhich the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHIis in excess of 1800 are considered to be concentrated. Of the profiled chemicals and allied products segments, as shown in Table B2B-9, only Alkalies and Chlorine (SIC 2812), Industrial Gases (SIC 2813), and Inorganic Pigm ents (SIC 2816) would be considered concentrated based on their CR4 and HHI values. In contrast, I ndustrial Inorganic Chemicals, NEC (SIC 2819), Plastics Material and Resins (SIC 2821), Cyclic Crudes and Inte rmediates (SIC 2865), and Industrial Organic Chemicals, NEC (SIC 2869) would be considered competitive. The di versity of products in some of the profiled segments, however, makes generalizations about concentration less reliable than in industries with a more limited product slate. That is, within a single SIC code, the numbers of producers may vary substantially by individual product – firms may possess relatively high market power in products with a smaller number of competing producers even though the total SIC code would appear to have a relativel y low concentration. On the basis of concentration information, some industry segments would therefore appear to be moderately concentrated; accordingly, firms in these segments might possess a moderate degree of market power and thus the ability to pass compliance costs through to customers as price increases. However, as di scussed above and more specifically in the following section, competition from foreign producers in both domestic and export markets, increasingly restrains any discretionary pricing power of U.S. firms in the profiled industry segments.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-24



### Table B2B-9: Selected Ratios for Four-Digit SI C Codes for Profiled Chemical Segments, 1987 and 1992 a

SIC Code Year Concentration Ratios 4 Firm (CR4) 8 Firm (CR8) 20 Firm (CR20) 50 Firm (CR50) HerfindahlHirschman Index Inorganic Chemicals
2812 1987 72% 93% 99% 100% 2,328 1992 75% 90% 99% 100% 1,994
2813 1987 77% 88% 95% 98% 1,538 1992 78% 91% 96% 99% 1,629
2816 1987 64% 76% 94% 99% 1,550 1992 69% 79% 93% 99% 1,910
2819 1987 38% 49% 68% 84% 468 1992 39% 50% 68% 85% 677 Plastics Material and Resins
2821 1987 20% 33% 61% 89% 248 1992 24% 39% 63% 90% 284 Organic Chemicals
2865 1987 34% 50% 77% 96% 542 1992 31% 45% 72% 94% 428
2869 1987 31% 48% 68% 86% 376 1992 29% 43% 67% 86% 336

aThe 1992 Census of Manufactures is the most recent concentration ratio data available by SIC code. Source: U.S. DOC, 1987, 1992, and 1997.


### B2B-3.5 Foreign Trade The chemicals industry is the largest exporter in the Unite d States. The industry generates more than 10 percent of the nation’s total exports, and overseas sales constitute a growing share of U.S. chemical company revenues. The major U.S. producers still derive 50 percent or more of their revenue from domestic sales, however (S&P, 2001). This profile uses two measures of foreign competition: export dependenceand import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to passthrough costs because foreign producers would not incur costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-25 

### import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competiti on in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulati on-induced increases in production costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadva ntage in potentially recovering compliance costs through price increases since export sales are presumed subject to substantial competition from foreign producers. Table B2B-10 presents trade statistics for each of the pr ofiled chemical segments. Both export dependence and import penetration experienced increases in each of these segments between 1989 and 2001. Globalization of markets has become a key factor in the Inorganic Chemicals segment, with both import penetration and export depende nce growing substantially over the 13-year analysis period. During this period, imports rose by almost 12 percent, while exports has climbed 5 percent. The greater growth in imports underscores the increasing competition from foreign producers in domestic markets. Increased globalization has also affected the Plastics Material and Resins segment. Imports and exports of plastics and resins have increased significantly over the tim e period, reflecting the continued growth in the global market. Of the three profiled chemical segments, this segment has shown the largest overall increases in values of imports and exports with total gr owth of 177 percent and 65 percent, respectively, from 1989 through 2001. Import penetration grew more quickly than export de pendence in this segment due to declining export opportunities and increased competition from new foreign cap acity. The United States remained a net exporter of plastics and resins, despite these trends. The market fo r organic chemicals, particularly petrochemicals, has become increasingly competitive. Significant capacityexpansions for petrochemicals worldwide increased competition in domestic markets from imports and be gan to limit export opportunities for U.S. producers. Through 1999, the segment still exported more than it imported. This balance recently changed though as imports exceeded exports in both 2000 and 2001. From 1989 through 2001, imports in this segment grew by 165 percent, while export growth was at 43 percent. In 2001, the Inorganic Chemicals segment’s import pene tration ratio was 26.9 percent, while the Organic Chemicals segment’s import penetration ratio was slightly lower at 25.9 percent. Both segments likely face strong competition from foreign firms in U.S. markets. The Plastics Material and Resins segment had an import penetration ratio of 14.3 percent in2001, suggesting this segment does not presently face strong competition from foreign firms’ presence in U.S. markets. However, the import penetration ratio nearly doubled in the decade from 1991 to 2001, which could indicate that foreign firms have begun aggressive pursuit of these U.S. markets. In 2001, the export dependence ratio was 28.2 percent for th e Inorganic Chemicals segment, 26.1 percent for the Plastics Material and Resins segment, and 24.2 percent for the Organic Chemicals segment. All three segments likely face significant competitive pressure in retaining th ese positions in export markets. Given these levels of exposure to competition from foreign firms in domestic and export markets, the profiled chemicals industry segments likely have little discretionary power to recover compliance costs through price increases. Recent trends in international chemicals markets im ply that U.S. producers will continue to face strong competition from foreign producers. The industry’s trad e balance declined in 2000, due to increased imports from Western Europe, encouraged by the strong U.S. dollar relative to the Euro, and growth in the petrochemical industry in the Middle East. Declines in the dollar re lative to the Euro improved export performance somewhat, but decline in the global economy resulted in mixed trade performance in 2001 (Chemical Market Reporter, 2001). In 2002, the chemical industry’s traditional trade surplus reversed, reaching a deficit of around $4 billion (C&EN, 2003a). After nine months of 2003, the deficit had ballooned to $7.7 billion (C&EN, 2003c).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-26 

### Table B2B-10: Trade Statistics for Profiled Chemical Segments

Year Value of imports (millions, $2003) Value of exports (millions, $2003) Value of shipments (millions, $2003) Implied Domestic Consumption a Import Penetration b Export Dependence c Inorganic Chemicals, Except Pigments 1989 5,688 6,457 28,357 27,588 20.6% 22.8% 1990 5,599 6,037 30,414 29,976 18.7% 19.8% 1991 5,360 6,243 29,492 28,609 18.7% 21.2% 1992 5,095 6,274 29,416 28,237 18.0% 21.3% 1993 4,828 5,764 27,570 26,634 18.1% 20.9% 1994 5,510 6,104 25,373 24,779 22.2% 24.1% 1995 6,432 7,087 26,895 26,240 24.5% 26.4% 1996 7,036 7,174 27,323 27,185 25.9% 26.3% 1997 5,811 6,904 28,100 27,007 21.5% 24.6% 1998 d 5,832 6,119 34,163 33,876 17.2% 17.9% 1999 d 5,812 5,822 27,051 27,041 21.5% 21.5% 2000 d 6,630 6,658 24,679 24,651 26.9% 27.0% 2001 d 6,363 6,784 24,049 23,628 26.9% 28.2% Total Percent Change 1989-2001 11.9% 5.1% -14.4% 23.9% Average Annual

Growth Rate 0.9% 0.7% -1.6% 2.6% Plastics Material and Resins 1989 2,089 7,424 44,728 39,393 5.3% 16.6% 1990 2,345 8,110 40,564 34,799 6.7% 20.0% 1991 2,221 9,237 36,991 29,975 7.4% 25.0% 1992 2,522 8,570 38,286 32,238 7.8% 22.4% 1993 3,010 8,584 37,710 32,136 9.4% 22.8% 1994 3,839 9,864 43,667 37,642 10.2% 22.6% 1995 4,685 11,857 49,844 42,672 11.0% 23.8% 1996 4,701 11,918 45,139 37,922 12.4% 26.4% 1997 4,866 12,024 50,079 42,921 11.3% 24.0% 1998 d 4,948 11,252 49,314 43,010 11.5% 22.8% 1999 d 5,210 11,268 50,230 44,172 11.8% 22.4% 2000 d 6,090 13,093 55,167 48,164 12.6% 23.7% 2001 d 5,791 12,258 46,924 40,457 14.3% 26.1% Total Percent Change 1989-2001 177.2% 65.1% 2.7% 57.4% Average Annual

Growth Rate 8.9% 3.3% 2.1% 1.4% Organic Chemicals, Except Gum & Wood 1989 7,822 13,320 87,856 82,358 9.5% 15.2%§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products 

### Table B2B-10: Trade Statistics for Profiled Chemical Segments

Year Value of imports (millions, $2003) Value of exports (millions, $2003) Value of shipments (millions, $2003) Implied Domestic Consumption a Import Penetration b Export Dependence c

B2B-27 1990 8,123 12,678 84,237 79,682 10.2% 15.1% 1991 8,239 12,670 79,725 75,294 10.9% 15.9% 1992 8,858 12,329 78,063 74,592 11.9% 15.8% 1993 8,765 12,494 75,958 72,229 12.1% 16.4% 1994 10,132 14,500 81,008 76,640 13.2% 17.9% 1995 12,121 17,916 87,077 81,282 14.9% 20.6% 1996 12,985 15,980 84,276 81,281 16.0% 19.0% 1997 17,312 20,079 91,683 88,916 19.5% 21.9% 1998 d 16,683 18,159 77,134 75,658 22.1% 23.5% 1999 d 18,049 18,885 82,553 81,717 22.1% 22.9% 2000 d 22,151 21,221 92,222 93,152 23.8% 23.0% 2001 d 20,728 19,032 78,489 80,185 25.9% 24.2% Total Percent Change 1989-2001 165.0% 42.9% -2.6% 59.9% Average Annual

Growth Rate 8.5% 4.0% 0.7% 4.0%

aCalculated by EPA as sh ipments + imports - exports. b Calculated by EPA as imports divi ded by implied dom estic consumption.
c Calculated by EPA as exports divided by shipments. d Before 1998, data were compiled in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. DOC, 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-28 0 2,500 5,000 7,500 10,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Exp ort s (SIC 2812,2813, 2819) Exp ort s (N A IC S to SIC) Imp orts (SIC 2812,2813, 2819) Imp orts (NAICS to SIC)

0 2,500 5,000 7,500 10,000 12,500 15,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Exp orts (SIC 2821) Exp orts (N A ICS to SIC) Imp orts (SIC 2821) Imports (NAICS to SIC)

0 5,000 10,000 15,000 20,000 25,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Exp orts (SIC 2865, 2869) Exp orts (N A ICS to SIC) Imp orts (SIC 2865, 2869) Imports (NAICS to SIC) 

### Figure B2B-7: Value of Imports and Exports fo r Profiled Chemical Se gments (in millions,$2003) Inorganic Chemicals, Except Pigments

Plastics Material and Resins

Organic Chemicals, Except Gum & Wood

Source: U.S. DOC, 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-29 

## B2B-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the chemical industry are important determinants of its ability to withstand the costs of regulatory compliance without material adverse economic/financial impact. To provide insight into the industry’s financial performance and c ondition, EPA reviewed two key measures of financial performance over the 12-year period, 1992-2003: net profit margin and return on total capital. EPA calculated these measures as a revenue-weighted index of measure values for public reporting firms in the respective industries, using data from the Value Line Investment Survey. Financial performance in the most recent financial reporting period (2003) is obviously not a perfect indicator of conditions at the time of regulatory compliance. However, examining the trend, and deviation from th e trend, through the most recent reporting period gives insight into where the industry may be , in terms of financial performance and condition, at the time of compliance. In addition, the volatility of performance ag ainst the trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requirements are faced: all else equal, the more volatile the historical performance, the more likely the industry maybe in a period of relatively weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenues, and measures profitability, as reflected in the conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectivel y, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from several factors, including: variations in aggregat e economic conditions (incl uding international and U.S. conditions), variations in industry-specific market c onditions (e.g., short-term capacity expansion resulting in overcapacity), or changes in the pricing and availabilityof inputs to the industry’s production processes (e.g., the cost of energy to the chemical process). The extent to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. variable cost structure of the industry’s operations. In a capital intensive industry such as the chemical and allied products industr y, the relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in output or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-h alf of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the return on total capital provides insight into the profitability of a business’ assets independent of financial structure and is thus a “purer” indicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the industry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure B2B-8 presents net profit margin and return on total capital for public-reporting firms in two chemical industry segments – (1) Industrial Chemicals and (2) Plasti cs and Synthetic Fibers – for the 12-year period, 1992 and 2003. The Industrial Chemicals segment corresponds approximately to the Organic Chemicals and Inorganic Chemicals profiled industry segments; the Plastics and Synthetic Fibers segment corresponds approximately to the Plastics Material and Resins profiled industry segme nt. The financial performance information reported in Figure B2B-8 confirms the trends and perfo rmance discussed above in this section. As shown in Figure B2B-8, the Industrial Chemicals (Org anic Chemicals and Inorganic Chemicals) segment has seen moderate volatility of financial performance over the analysis period. Return on total capital moved off a post-recession low near 10 percent in 1992 to achieve le vels in excess of 20 percent during 1995-1997. Recovery of demand accompanied by industry restructuring and downsizing accounted for the upturn in performance. During the latter part of the decade, though, increasedcompetition from foreign producers and demand weakness in Asian markets eroded this performance. As a resu lt, return on capital fell below 15 percent in 1998, and remained at this lower level through 2000. In 2001, a series of factors – high energy and raw material prices at§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-30 

### the start of the year, and overcapacity, the terrorist att acks, and slowing U.S. and global economies at the end of the year – led to a further sharp decline in return on capital performance of approximately 8 percent. Return on total capital improved modestly during 2002 and 2003 but re mained sub-par compared to mid 1990s performance. Net profit margin shows a similar, though less volatile, trend. The same factors largely influenced performance in the Plastics and Synthetic Fibers (Plastics Material and Resins) segment over the 12 year period. Performance inthis segment followed a similar, but less volatile, pattern to that of the Industrial Chemicals segment. Return on total capital rose from a low near 10 percent in 1993 to a period high of 15 percent in 1995. Since th en, performance trended down to reach a period low of approximately 9 percent in 2001. This segment achie ved modest improvement in 2002 and 2003. Net profit margin again shows a similar, though less volatile, trend compared to return on capital. Overall, the profiled segments of the chemical industry remain at weaker levels of financial performance than achieved during the mid 1990s but appear to be rec overing from the sharp weakness of 2001-2002. Continued recovery in 2004 and beyond suggest improved ability to withstand additional regulatory compliance costs without imposing significant financial impacts.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

4 Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use.

B2B-31 0% 5% 10% 15% 20% 25%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Return on Total Capital - Industrial Chemicals Net Profit Margin - Industrial Chemicals

0% 5% 10% 15% 20%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Return on Total Capital - Plastics and Synthetic Fibers Net Profit Margin - Plastics and Synthetic Fibers 

### Figure B2B-8: Net Profit Margin and Return in Total Capital for the Chemical Industry Industrial Chemicals (Organic and Inorganic)

Plastics and Synthetic Fibers

Source: Value Line, 1992-2003.


## B2B-5 F ACILITIES 

## O PERATING 

## C OOLING 

## WATER 

## I NTAKE 

## S TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point s ource facilities that use or propose to use a cooling water intake structure that withdraws cooling water directly from a surface waterbody of the United States. In 1982, the chemical and allied products industry withdrew 2, 797 billion gallons of cooling water, accounting for approximately 3.6 percent of total industria l cooling water intake in the United States 4 

### . The industry ranked 2 nd 

### in industrial cooling water use behind the electric power generation industry (1982 Census of Manufactures).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

5 The proposed Phase III regulation also applies to existing el ectric generating facilities as well as certain facilities in the oil and gas extraction industry and the seafood processing i ndustry. See Chapters B4 and B5 and Part C of this document for more informati on on these industries.

6 EPA applied sample weights to the sampled facilities to acc ount for non-sampled facilities and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industr y Survey, please refer to the Information Collection Request (U.S. EPA, 2000).

B2B-32 

### This section provides information for facilities in the profiled chemical and allied products segments potentially subject to the proposed regulation. Existing facilities that meet all of the following conditions are potentially subject to the proposed regulation: 5



### < 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independe nt supplier who has a cooling water intake structure; or their cooling water intake structure(s) withdraw(s) c ooling water from waters of the U.S., and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;

< 

### Have an National Pollutant Discharge Elimination System (NPDES) permit or are required to obtain one; and

< 

### Have a design intake flow of greater than 2 million gallons per day (MGD). The proposed Phase III regulation also covers substantial additions or modifications to operations undertaken at such facilities. While all facilities that meet these criteri a are subject to the regulation, this section focuses on the estimated 144 facilities nationwide in the profiled chemi cal and allied products segme nts identified in EPA’s 2000 Section 316(b) Industry Survey as being potentially subject to this proposed regulation 6 

### . Information collected in the Detailed Industry Questionnaire found that an estim ated 64 out of 435 Inorganic Chemicals facilities (15 percent), 19 out of 305 Plastics Material and Resins f acilities (6 percent), and 61 out of 423 Organic Chemicals facilities (14 percent) meet the characteristics of a potential Phase III facility. B2B-5.1 Waterbody and Cooling System Type Table B2B-11 shows the distribution of U.S. Phase III facilities in the profiled chemical segments by type ofwaterbody and cooling system. The table shows that most of the U.S. Phase III facilities either have a oncethrough system (62, or 50 percent) or employ a combination of a once through and a recirculating system (37, or 30 percent). The majority of existing facilities draw wate r from a freshwater stream or river (95, or 76 percent). Seven of the 20 facilities that withdraw from an estuary, the most sensitive type of waterbody, use a once-through cooling system. Plants with once-through cooling water systems withdraw between 70 and 98 percent more water than those with recirculating systems.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-33 

### Table B2B-11: Number of Potential Phase III facilit ies by Water Body and Cooling System Type for Profiled Chemical Segments

Water Body Type Cooling System Recirculating Combination Once-Through Other Unknown Total a Numbe r % of Total Numbe r % of Total Numbe r % of Total Numbe r % of Total Numbe r % of Total Inorganic Chemicals Estuary/ Tidal River 0 0% 13 65% 7 35% 0 0% 0 0% 20 Ocean 0 0% 0 0% 9 100% 0 0% 0 0% 9 Freshwater Stream/ River 4 18% 0 0% 17 77% 0 0% 0 0% 22 Lake/ Reservoir 0 0% 4 100% 0 0% 0 0% 0 0% 4 Great Lake 0 0% 0 0% 4 44% 4 44% 0 0% 9 Total a 4 6% 17 27% 37 58% 4 6% 0 0% 64 Plastics Material and Resins Freshwater Stream/ River 0 0% 9 50% 4 22% 0 0% 4 22% 18 Lake/ Reservoir 0 0% 2 100% 0 0% 0 0% 0 0% 2 Total a 0 0% 11 58% 4 21% 0 0% 4 21% 19 Organic Chemicals Freshwater Stream/ River 9 16% 9 16% 30 53% 9 16% 0 0% 57 Great Lake 0 0% 0 0% 4 100% 0 0% 0 0% 4 Total a 9 15% 9 15% 35 57% 9 15% 0 0% 61 Total for Profiled Chemical Facilities Estuary/ Tidal River 0 0% 13 65% 7 35% 0 0% 0 0% 20 Ocean 0 0% 0 0% 9 100% 0 0% 0 0% 9 Freshwater Stream/ River 13 14% 18 19% 52 54% 9 9% 4 4% 96 Lake/ Reservoir 0 0% 6 100% 0 0% 0 0% 0 0% 6 Great Lake 0 0% 0 0% 9 69% 4 31% 0 0% 13 Total a 13 9% 37 26% 76 53% 13 9% 4 3% 144

aIndividual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2000.


### B2B-5.2 Facility Size The 316(b) sample facilities are generally larger than fac ilities in the chemicals industry as a whole, as reported in the Census and discussed previously:

< 

### Ninety-eight percent of all facilities in the Inorganic Chemicals segment had fewer than 100 employees in 1992, compared with 21 percent of the potential Phase III facilities.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-34 13

0 0 13

4 26

11

0 9 23

4 10

4 11 16

0 5 10 15 20 25 30

<100 100-249 250-499 500-999 >=1000 Inorganic Chemicals (SIC 2812, 2813, 2816, 2819) Plastics (SIC 2821) Organic Chemicals (SIC 2865, 2869) 

### < 

### Ninety-four percent of all facilities in the Plas tics Material and Resins segment had fewer than 100 employees in 1992; none of the potential Phase III facilities in that segment fall into that employment category.

< 

### Ninety-four percent of all facilities in the Organic Chemical segment had fewer than 100 employees in 1992; none of the potential Phase III facilities in that segment fall into that employment category. Figure B2B-9 shows the number of potential Phase III facilities in the profiled chemical segments by employment size category.
Figure B2B-9: Number of Potential Phase III facilities by Employment Size Category for Profiled Chemical Segments

Source: U.S. EPA, 2000.



### B2B-5.3 Firm Size EPA used the Small Business Administration (SBA) small entity size standards to determine the number of U.S. Phase III facilities in the three profiled chemical segments thatare owned by small firms. Firms in the Inorganic Chemicals segment (SIC codes 2812, 2813, 2816, 2819) and in Industrial Organic Chemicals, NEC (SIC code 2869) are defined as small if they have 1,000 or fewer employees; firms in Plastics Material and Resins (SIC 2821) and Cyclic Organic Crudes and Intermediates (SIC code 2865) are defined as small if they have 750 or fewer employees.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-35 

### Table B2B-12 shows that, of the 64 potential Phase III facilities in the Inorganic Chemicals segment, four, or 7 percent, are owned by a small firm. All four of these firms are in SIC 2819. None of the 19 potential Phase III facilities in the Plastics Material and Resins segment ar e owned by a small firm. Ninety-three percent of the potential Phase III facilities in the Organic Chemicals segme nt are classified as large. SIC 2869 accounts for all of the facilities owned by small firms in the Organic Ch emicals segment. Overall, the profiled chemicals segment has 135 facilities (94 percent) owned by large firms, and 9 facilities (6 percent) owned by small firms.
Table B2B-12: Number of Potential Phase III facilities by Firm Size for Profiled Chemical Segments

SIC Code Large Small Total No. % of SIC No. % of SIC Inorganic Chemicals 2812 20 100% 0 0% 20 2813 4 100% 0 0% 4 2816 9 100% 0 0% 9 2819 26 87% 4 13% 30 Total 59 93% 4 7% 64 Plastics Material and Resins 2821 19 100% 0 0% 19 Organic Chemicals 2865 9 100% 0 0% 9 2869 48 92% 4 8% 52 Total 57 93% 4 7% 61 Total for Profiled Chemical Facilities Total 135 94% 9 6% 144 Source: U.S. EPA, 2000; U.S. SBA, 2000; D&B, 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-36 

## REFERENCES 

### Bureau of Labor Statistics (BLS). 2002. Producer Price Index . Series: PDU2812#-Alkalies and Chlorine, PDU2813#-Industrial Gases, PDU2816#-Inorganic Pigments , PDU2819#-Industrial Inorganic Chemicals n.e.c., PDU2821#-Plastic Materials and Resins, PDU2865#-Cyc lic Crudes and Intermediates, PDU2869#-Industrial Organic Chemicals, n.e.c. Business Weekly . 2001. “Materials: Plastics.” p. 125. January 8, 2001. Chemical & Engineering News (C&EN) . 2003a. “Chemicals finally showed some signs of life in 2002; this year should be better.” pp. 16-18. January 13, 2003. Chemical & Engineering News (C&EN) . 2003b. “Counting Pennies.” Volume 81, No. 5, pp. 17-21. February 3, 2003. Chemical & Engineering News (C&EN) . 2003c. “2003 Industry Review.” Vo lume 81, No. 51, pp. 18-26. December 22, 2003. Available at: http://pubs.acs.org/cen/business/8151/8151businessreview.html Chemical & Engineering News (C&EN) . 2002. “2002 Industry Review.” Volume 80, No. 50, pp. 17-26. December 16, 2002. Available at: http://pubs .acs.org/cen/coverstory/8050/8050busreview02.html. Chemical & Engineering News (C&EN) . 2001. “2001 Chemical Industry Review.” Volume 79, No. 52, pp. 13- 21. December 24, 2001. Available at: http://pubs.acs.org/cen/topstory/7952/7952bus1.html. Chemical Marketing Reporter . 2001. “U.S. Chemical Industry Outlook: Trade and Domestic Demand”. v260, issue 25, p. 33. June 18, 2001. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. Federal Reserve Board. 2004. Industrial Production and Capacity Utilization . Data extracted May 11, 2004. Available at: http://www.economagic.com/frbg17.htm#IPMarket McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00. Standard & Poor’s. (S&P) 2001. Industry Surveys - Chemicals: Basic . July 5, 2001. U.S. Department of Commerce (U.S. DOC). 1989-2002. Bureau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 2001. Bureauof the Census. International Trade Administration U.S. Department of Commerce (U.S. DOC). 1988- 1991, 1993-1996, and 1998-2001. Bureau of the Census. Annual Survey of Manufactures. U.S. Department of Commerce (U.S. DOC). 2000. Bureau of the Census. Foreign Trade Data. U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-37 

### U.S. Department of Commerce (U.S. DOC). 1987, 1992, and 1997. Bureau of the Census. Census of Manufactures

. U.S. Environmental Protection Agency (U.S. EPA) 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures

. U.S. Environmental Protection Agency (U.S. EPA). 1995a. Profile of the Organic Chemicals Industry

. September, 1995. U.S. Environmental Protection Agency (U.S. EPA) 1995b . Profile of the Inorganic Chemical Industry

. September, 1995. U.S. Small Business Administration (U.S. SBA). 1988-2001. Statistics of U.S. Businesses

. Available at: http://www.sba.gov/advo/stats/int data.html U.S. Small Business Administration (U.S. SBA). 2000. Small Business Size Standards . 13 CFR section 121.201. Value Line. 1992-2003. Value Line Investment Survey

.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis Existing Facilities B2B: Chemicals and Allied Products

B2B-38 

## T HIS 

## P AGE 

## I NTENTIONALLY 

## L EFT 

## B LANK§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-1 

### C HAPTER 

### C ONTENTS 

### B2C-1 Summary Insights from this Profile . . . . . . . . . . B2C-2 B2C-2 Domestic Production . . . . . . . . . . . . . . . . . . . . . B2C-3 B2C-2.1 Output . . . . . . . . . . . . . . . . . . . . . . . . . B2C-3 B2C-2.2 Prices . . . . . . . . . . . . . . . . . . . . . . . . . . B2C-7 B2C-2.3 Number of Facilities and Firms . . . . . . B2C-7 B2C-2.4 Employment and Productivity . . . . . . B2C-10 B2C-2.5 Capital Expenditures . . . . . . . . . . . . . B2C-11 B2C-2.6 Capacity Utilization . . . . . . . . . . . . . . B2C-14 B2C-3 Structure and Competitiveness . . . . . . . . . . . . . B2C-15 B2C-3.1 Geographic Distribution . . . . . . . . . . B2C-15 B2C-3.2 Facility Size . . . . . . . . . . . . . . . . . . . B2C-17 B2C-3.3 Firm Size . . . . . . . . . . . . . . . . . . . . . . B2C-18 B2C-3.4 Concentration Ratios . . . . . . . . . . . . B2C-18 B2C-3.5 Foreign Trade . . . . . . . . . . . . . . . . . . B2C-19 B2C-4 Financial Condition and Performance . . . . . . . B2C-22 B2C-5 Facilities Operating Cooling Water Intake Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2C-23 B2C-5.1 Waterbody and Cooling System Type B2C-24 B2C-5.2 Facility Size . . . . . . . . . . . . . . . . . . . . B2C-25 B2C-5.3 Firm Size . . . . . . . . . . . . . . . . . . . . . . B2C-26 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2C-27 

# Chapter B2C: Petroleum Refining (SIC 2911)

EPA’s Detailed Industry Questionnaire , hereafter referred to as the DQ, identified one 4- digit SIC code in the Petroleum and Coal Products Industry (SIC 29) with at least one existing facility that operates a CWIS, holds a NPDES permit, withdraws at least two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes (facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). Table B2C-1 below provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted to represent national results), and the number and percent of potential Phase III facilities within the estimated national total of facilities in the respective industry SIC code groups.

Table B2C-1: Potential Phase III facilities in the Petroleum and Coal Products Industry (SIC 29)
SIC SIC Description Important Products Manufactured Number of Facilities a
Total Potential Phase III facilities b %

2911 Petroleum Refining Gasoline, kerosene, distillate fu el oils, residual fuel oils, and lubricants, through fractionation or straight distillation of crude oil, redistillation of unfinished petroleum derivatives, cracking, or other processes; aliphatic and aromatic chemicals as byproducts 163 36 22.1%

aNumber of weighted detailed questionnaire survey respondents. b Individual numbers may not a dd up due to independent rounding. Source: U.S. EPA, 2000; Executive Office of the President, 1987. ASM 1998



### The table shows that an estimated 36 out of 163 faciliti es (or 22 percent) in the Petroleum and Coal Products Industry (SIC 29) are potentially subject to this proposed re gulation. EPA also estimated the percentage of total production that occurs at facilities potentially subject to th e proposed regulation. Total value of shipments for the Petroleum and Coal Products Industry (SIC 29) from th e 1998 Annual Survey of Manufacturers is $118.2 billion. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because value of shipments data were not collected usi ng the DQ, these data were not available for the sample of Phase III manufacturing facilities potentially subject to the proposed regulation. Tota l revenue, as reported on the DQ, was used a close approximation for value of shipme nts for these facilities. EPA estimated the total revenue of facilities in the petroleum industry subject to th e proposed regulation is $47.8 billion. Therefore, EPA§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-2 

### estimates that 40 percent of total production in the petroleum industry occurs at facilities potentially subject to the proposed regulation. Table B2C-2 provides the cross-walk between SIC codes and NAICS codes for the profiled petroleum SIC codes. For the Petroleum Refining segment, the translation of NAICS-reported data to the SIC framework is straightforward as these frameworks have a simple one-t o-one match for Petroleum Refining: SIC code 2911 and NAICS code 324110.
Table B2C-2: Relationship between SIC and NAI CS Codes for the Petroleum and Coal Products Industry (1997) SIC Code SIC Description NAICS Code NAICS Description Establishments Value of Shipments ($000) Employment 2911 Petroleum Refining 324110 Petrol eum Refineries 242 157,525,704 65,471 Source: U.S. DOC, 1997.


## B2C-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of Petroleum Refining firms that would be subject to the Phase III regulation to ab sorb compliance costs without material adverse economic/financial effects. Two important factors in the ability of the industry’s abilityto withstand compliance costs are: (1) the extent to which the industry may be expected to shift compliance costs to its customers through price increases and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, th e Petroleum Refining segment is relatively unconcentrated, which suggests that firms in this industry would have less power to pass through to customers a significant portion of their compliance-related costs. As discussed above, the proportion of total value of shipments in the industry potentially subject to the proposed regulation is 40 percent. The actual proportion of total value of shipments subject to regulation-induced compliance costs would be smaller since not all of the facilities would be subject to the national categorical requirements of the proposed regulation: that is, facilities below the proposed design intake flow (DIF) would be subject to permitti ng based on best professional judgement (BPJ) rather than based on national standards, and several facilities currently employ baseline technologies that meet the requirements of the proposed regulation. Given the likelihood that these percentages represent upper bound estimates, EPA believes that the theoretical threshold fo r justifying the use of industry-wide CPT rates in the impact analysis of potential Phase III refineries has not b een met. Even though the Petroleum Refining segment is not characterized by high competitive pressure from forei gn markets, the low market concentration leads EPA to believe that the market power held by individual firms is likely to be quite small. For these reasons, in its analysis of regulatory impacts for the Petroleum Refining segment, EPA assumed that complying firms would be unable to pass compliance costs through to customers: i.e., comply ing facilities must absorb all compliance costs within their financial condition at the time of comp liance (see following sections and Appendix 3 to Chapter B3: Economic Impact Analysis for Manufacturers for further information). Financial Health and General Business Outlook Over the past decade, Petroleum Refining, like other U. S. manufacturing industries, has experienced a range of economic/financial conditions, including substantial cha llenges. In the early 1990s, the domestic Petroleum Refining segment was affected by reduced U.S. de mand as the economy entered a recessionary period Although domestic market conditions improved by mid-decade, overs upply of crude oil, weakness in Asian markets, along with other domestic factors, materially weakened re finers’ financial performance in 1998. As petroleum producing countries reduced crude oil supply and refiners cut production, prices rebounded in the late 1990's into 2000, before another U.S. recession, the attacks of 9/ 11, and global economic downt urn again had a negative§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

1 In addition, there was one operating and one idle refinery in Puerto Rico and one operating refinery in the Virgin Islands.

2 For comparison, preliminary 1997 Census data included 244 es tablishments for NAICS 3241/SIC 2911, whereas U.S. DOE/EIA reported 164 operable refineries as of January 1997.

3 The first step in refining is atmospheric distillation, which uses heat to separate various hydrocarbon components in crude oil

. Beyond this basic step are more complex operations (generally referred to as “downstream” from the initial distillation) that i ncrease the refinery’s capacity to process a wide range of crude oils and increase the yield of lighter (low-boiling point) products such a s gasoline. These downstream operations include vacuum distillation, cracking units, reforming un its, and other processes (U.S. DOE, 1999a)

. B2C-3 

### effect on petroleum refiners. More recently, as the U.S. economy began recovery from its economic weakness, domestic petroleum refiners began show ing signs of recovery with higher demand levels and improving financial performance in 2003. Although the industry has weathere d difficult periods over the past few years, the strengthening of the industry’s financial condition and general business outlook suggest improved ability to withstand additional regulatory compliance costs without imposing significant financial impacts.


## B2C-2 D OMESTIC 

## P RODUCTION 

### The Petroleum Refining segment accounts for about 4 per cent of the value of shipments of the U.S. entire manufacturing segment and 0.4 percent of the manufacturing segment’s employment (U.S. DOE, 1999a). According to the Annual Survey of Manufactures, in 2001, Petroleum Refineries achieved shipments of approximately $206 billion dollars ($2003) and employ ed 63,251 people. Petroleum products contribute approximately 40 percent of the total energy used in the United States, including virtually all of the energy consumed in transportation (U.S. DOE, 1999a). U.S. DOE Energy Information Administration (EIA) data report that there were 149 operable Petroleum Refineries in the U.S. as of January 2003, of which 145 were operating and four were idle (U.S. DOE, 2004) 1



### . Some data reported in this profile are taken from EIA publications. Readers should note that the Census data reported for SIC 2911 cover a somewhat broader range of facilities than do the U.S. DOE/EIA data, and the two data sources are therefore not entirely comparable. 2 

### The petroleum industry includes exploration and production of crude oil, refini ng, transportation, and marketing. Petroleum refining is a capital-intensive process that c onverts crude oil into a variety of refined products. Refineries range in complexity, depending on the types of products produced. Nearly half of all U.S. refinery output is motor gasoline. The number of U.S. refineries has declined by almost half since the early 1980s. The remaining refineries have improved their efficiency and flexibility to process heavier crude oils by adding “downstream” capacity 3 

### . While the number of refineries has declined, the average refi nery capacity and utilization has increased, resulting in an increase in domestic refinery production overall. B2C-2.1 Output Table B2C-3 shows trends in production of petroleum refinery products from 1990 through 2002. In general, output of refined products grew over th is period, reflecting growth in tran sportation demand and other end-uses. Output fell in 1991 due to the domestic economic recession, and the early years of the 2000s experienced little or negative growth due to the downturn of the U.S. economy and events of 9/11 (API, 2003a). At the beginning of 2002, petroleum products were in excess supply in the wo rld market, and the focus was on the elimination of excess supplies and stabilization of prices (U.S. DOE, 2004). In 2003, the industry rebounded, with refinery processing increasing 2 percent, producing record or near record levels of gasoline and distillate (API 2004). Petroleum demand in 2004 is expected to increase 1.1 percent. As the U.S. and global economy improves, Petroleum Refining firms should continue to see improving results in their markets and earnings. This should place companies in a better position to incur any costs associated with regulatory compliance.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

4 Terms highlighted in bold and italic font are further explained in the glossary.
B2C-4 

### Table B2C-3: U.S. Petroleum Refinery Product Production (million barrels per day)
Year Motor Gasoline Distillate Fuel Oil Jet Fuel Residual Fuel Oil Other Products a Total Output Percent Change 1990 6.96 2.92 1.49 0.95 2.95 15.27 n/a 1991 6.98 2.96 1.44 0.93 2.95 15.26 -0.1% 1992 7.08 2.98 1.40 0.89 3.08 15.44 1.2% 1993 7.30 3.13 1.42 0.84 3.09 15.79 2.2% 1994 7.18 3.20 1.45 0.83 3.13 15.79 0.0% 1995 7.46 3.16 1.42 0.79 3.18 15.99 1.3% 1996 7.59 3.32 1.52 0.73 3.21 16.37 2.3% 1997 7.74 3.39 1.55 0.71 3.36 16.76 2.4% 1998 7.89 3.42 1.53 0.76 3.43 17.03 1.6% 1999 7.93 3.40 1.57 0.70 3.39 16.99 -0.2% 2000 7.97 3.59 1.61 0.70 3.42 17.29 1.8% 2001 8.02 3.69 1.53 0.72 3.32 17.28 0.0% 2002 8.17 3.59 1.51 0.60 3.38 17.25 -0.2% Total Percent Change 1990-2002 17.4% 22.7% 1.7% -36.9% 14.5% 13.0% Average Annual

Growth Rate 1.3% 1.7% 0.1% -3.8% 1.1% 1.0%

aIncludes asphalt and road oil, liquified pe troleum gases, petroleum coke, still gas, kerosene, petrochemical feedstocks, lubri cants, wax, aviation gasoline, special naptha s, and miscellaneous products. b Monthly data for motor gasoline production include blending of fuelethanol and an adjustment to correct for the imbalance of motor gasoline blending components. Source: U.S. DOE, 2001b, and 2001c; U.S. DOE, 2004. 

### Value of shipmentsand value added are two common measures of manufacturing output4 

### . They provide insight into the overall economic health and outlook for an i ndustry. Value of shipments is the sum of the receipts a manufacturer earns from the sale of its outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. Value added measures the value of production activity in a particular industry. It is the difference between the value of sh ipments and the value of inputs used to make the products sold. Figure B2C-1 on the following page shows value of ship ments and value added for petroleum products from 1987 to 2001. Value of shipments rose through 1990; however, during and following the recession of 1991, value of shipments fell through 1994. This was followed by so me volatility in value over the next few years until experiencing a sharp drop in 1998, when a range of fact ors led to a dramatic decrease in petroleum prices. Increased production quotas by OPEC, increased production from Iraq through the “oil-for-food” program, weak demand in Asia due to their financial crisis, and a warm winter in the U.S. all increased the supply of petroleum products (U.S. DOE, 1999c). Estimates of worldwid e petroleum supply exceeding demand during 1998 range from 1.47 millions barrels per day to 2.4 million barrels per day (World O il, 1999). As crude oil producers and§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-5 100,000 120,000 140,000 160,000 180,000 200,000 220,000 240,000

198 7 198 8 1 98

9 1 99

0 1 99

1 1 9 92 1 9 93 1 9 94 1 9 95 1996 1997 1998 199 9 200 0 2 00

1 Petroleum Refineries (SIC 2911)
Petroleum Refineries (NAICS 324110)

15,000 20,000 25,000 30,000 35,000 40,000 45,000

1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 92 1 9 9 3 1994 1995 1996 1997 1998 1999 2000 2001 Petroleum Refineries (SIC 2911)

Petroleum Refineries (NAICS 324110) 

### refiners cutback on production, the industry rebounded with significant improvements in 1999 and 2000, before the latest recession and global economic slowdown and w eakening demand decreased the value of shipments in 2001. Value added generally followed the path of va lue of shipments over this time period, though it did not quite have the volatility of the value of shipments.
Figure B2C-1: Value of Shipments and Value Added for Petroleum Refineries (millions, $2003) Value of Shipments

Value Added

aBefore 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA convert ed the NAICS classification data to the SIC code classifications us ing the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996 and 1998 - 2001; U.S. DOC, 1987, 1992 and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-6 40 50 60 70 80 90 100 110 120

19

8 7 1 988 1 98

9 1 990 19 9 1 1 992 19 9 3 1 994 19 9 5 1996 19 9 7 1998 19 9 9 2 000 20 0 1 2 002 Petroleum Refineries (SIC 2911) 

### B2C-2.2 Prices The producer price index (PPI) measures price changes, by segment , from the perspective of the seller, and indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment. Figure B2C-2 shows substantial fluctuations in pe troleum product prices between 1987 and 2002. Through the early 1990s, refiners faced declining prices due to the effects of the 1991 recession and weak demand before rebounding somewhat in the mid 1990s. Prices plummeted in 1998 as a massive oversupply of petroleum products coupled with decreased demand led to significant drops in petroleum prices. As the subsequent production cutbacks took hold and the glut of supply dw indled, prices recovered in 1999 and 2000, as shown in Figure B2C-2. The higher prices reflect low refinery pr oduct inventories and higher crude oil input prices (Value Line, 2001). Excess supply, the global recession, impacts from 9/11, and the relatively warm winter of 2001- 2002 led to decreases in prices in subsequent years (U.S. DOE, 2004).
Figure B2C-2: Producer Price Index for Petroleum Refineries

Source: BLS, 2002.



### B2C-2.3 Number of Facilities and Firms Figure B2C-3 shows historical trends in the number of re fineries and in refinery capacity. This figure shows that the number of operable refineries fell substantially duri ng the 1980s, with a more gradual reduction in refineries continuing through the 1990s and into the 2000s. This decr ease resulted in part from the elimination of the Crude Oil Entitlements Program in the early 1980s. The Entitleme nts Program encouraged smaller refineries to add capacity throughout the 1970s. After the program was elim inated, surplus capacity and falling profit margins led to the closure of less efficient capacity (U.S. DOE, 1999a). The decrease in the number of refineries continued, as the industry consolidated to improve margins. Af ter peaking in the early 1980s, refining capacity decreased throughout the rest of the decade. Refining capacity h as remained relatively stable since the decrease in the 1980s, with a slight upward trend occurring in the latter part of the 1990s into the 2000s. This trend is expected to continue, with no new “greenfield” refineries likely to be built in the U.S., but continuing capacity expansion at existing facilities (S&P, 2001).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-7 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000195019521954195619581960196219641966196819701972197419761978198019821984198619881990199219941996199820002002Thousand bbl/calendar day

100 150 200 250 300 350 400No. of Refineries

U.S. Crude Oil Refining Capacity (000s bbl/day) No. of Operable Refineries 

### Figure B2C-3: Trends in Numbers of Refineries and Refining Capacity 1949-2003

Source: U.S. DOE, 2001a; U.S. DOE, 2004.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-8 

### Data from the Statistics of U.S. Businesses for SIC 2911 (T able B2C-4) show that the number of firms reporting Petroleum Refining as their primary business also declined since 1990.

Table B2C-4: Number of Firms and Facilities for Petroleum Refineries

Year Firms Facilities Number Percent Change Number Percent Change 1990 215 n/a 340 n/a 1991 215 0.0% 346 1.8% 1992 185 -14.0% 303 -12.4% 1993 148 -20.0% 251 -17.2% 1994 161 8.8% 265 5.6% 1995 150 -6.8% 251 -5.3% 1996 173 15.3% 275 9.6% 1997 128 -26.0% 248 -9.8% 1998 a 155 21.1% 304 22.6% 1999 a 145 -6.5% 292 -3.9% 2000 a 162 11.7% 298 2.1% 2001 a 165 1.9% 302 1.3% Total Percent Change 1990 - 2001 -23.3% -11.2% Average Annual Growth Rate -2.4% -1.1%

aBefore 1998, these data were compiled in the Standard Industrial Classification (SIC) system; since 1998, these data have been compiled in the North American Industry Classifi cation System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.

. Source: U.S. SBA, 1989-2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-9 60,000 62,000 64,000 66,000 68,000 70,000 72,000 74,000 76,000

1987 19 88 1989 1990 1991 1992 1993 1994 19 95 1996 1997 1998 1 999 2000 2001 Petroleum Refineries (SIC 2911)

Petroleum Refineries (NAICS 324110) 

### B2C-2.4 Employment and Productivity Employment in the Petroleum Refining segment declined by 15 percent between 1987 and 2001, from 74,600 to 63,258 employees, as shown in Figure B2C-4. After increasing in the early 1990s, employment at Petroleum Refineries declined until 2000, before increasing sli ghtly, reflecting overall industry consolidation.
Figure B2C-4: Employment for Petroleum Refineries

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, and 1998 - 2001; U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-10 

### Table B2C-5 shows substantial year-to-year changes in labor productivity , measured by value added per production hour. These fluctuations reflect volatility in valu e added, which in turn reflect variations in the relationship between input prices (primarily crude oil) and refinery product prices. Changes in production hours from year to year were less volatile, with a net reduc tion over the period 1987 to 2001. Value added , however, was not affected as it more than doubled over the same period.
Table B2C-5: Productivity Trends for Petroleum Refineries ($2003)

Year Value Added (millions) Production Hours (millions) Value Added/Hour ($/hr) Value Added/ Hour 1987 20,524 103 199 n/a 1988 28,875 103 281 41.2% 1989 29,024 105 277 -1.1% 1990 29,553 106 279 0.7% 1991 24,767 107 233 -16.7% 1992 23,361 109 214 -8.1% 1993 22,367 107 210 -1.7% 1994 27,865 110 253 20.6% 1995 27,505 107 258 1.8% 1996 29,276 103 285 10.7% 1997 34,192 100 342 20.0% 1998 a 26,310 98 269 -21.4% 1999 a 34,023 94 362 34.4% 2000 a 38,705 92 419 15.9% 2001 a 41,627 94 445 6.2% Total Percent Change 1987-2001 102.8% -9.5% 124.0%

Annual Average

Growth Rate 5.2% -0.7% 5.9%

aBefore 1998, these data were compiled in the Sta ndard Industrial Classification (SIC) system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. DOC, 1988-1991, 1993-1996, and 1998 - 2001; U.S. DOC, 1987, 1992, and 1997.


### B2C-2.5 Capital Expenditures Petroleum industry capital expenditures increased subs tantially between 1988 and 1993, but generally decreased afterwards through the latest data year, 2001, as shown in Table B2C-6. In 2001, the industry spent almost $5 billion ($2003), as compared with $2.9 billion ($2003) in1988. Although this represents a 69 percent increase from 1988 to 2001, it is a 34 percent drop from what was sp ent in 1993, when capital expenditures peaked at $7.5 billion per year in real terms. Much recent investme nt in Petroleum Refineries has been to expand and de-§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-11 

### bottleneck units downstream from distillation, partially inresponse to environmental requirements. Changes in refinery configurations have incl uded adding catalytic cracking units, in stalling additional sulfur removal hydrotreaters, and using manufacturing additives such as oxygenates. These process changes have resulted from two factors:

< 

### processing of heavier crudes with higher levels of sulfur and metals; and

< 

### regulations requiring gasoline reformulation to redu ce volatiles in gasoline and production of diesel fuels with reduced sulfur content (U.S. EPA, 1996b). Environmentally-related investments have also accounted fo r a substantial part of capital expenditures. In the future, substantial capital investments by refineries will be required to comply with : product quality regulations, including EPA’s Tier 2 Gasoline Sulfur Rule requiring reduc tions in the sulfur content of gasoline; reductions or elimination of the use of MTBE in gasoline; and propo sed sulfur reductions in highway diesel fuel (NPC, 2000).
Table B2C-6: Capital Expendi tures for Petroleum Refineries
Year Capital Expenditures (millions, $2003) % Change 1988 2,937 n/a 1989 3,248 10.6% 1990 4,017 23.7% 1991 4,945 23.1% 1992 7,007 41.7% 1993 7,509 7.2% 1994 7,156 -4.7% 1995 6,466 -9.6% 1996 6,729 4.1% 1997 5,850 -13.1% 1998 a 4,700 -19.7% 1999 a 4,566 -2.9% 2000 a 4,257 -6.8% 2001 a 4,949 16.3% Total Percent Change 1987 - 2001 68.5% Average Annual

Growth Rate 4.1%

aBefore 1998, these data were compiled in the Standard Industrial Cla ssification (SIC) system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA conve rted the NAICS classification data to the SIC code classifications usi ng the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996, and 1998 - 2001; U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-12 Air 75% Spills

0% Other 4% Remediation 3% W astes

6%

Water

12%

0 1,000 2,000 3,000 4,000 5,000 6,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Air/Water/Waste Remediation/Spills 

### Figure B2C-5 shows pollution control expenditures ( capital plus operating costs), reported by American Petroleum Institute (API) members. Expenditures to c ontrol current environmental releases (air, water and waste) account for the largest share of total pollution control expe nditures. API estimates that the U.S. oil and natural gas industry spent $7.875 billion in 2001 for environmental protection. Of the total 2001 environmental expenditures to address air, water, and waste polluti on from on-going operations, 32 percent ($2.5 billion) was capital expenditures and 66 percent ($5.2 b illion) was operating maintenance (API, 2003b).
Figure B2C-5: Environmental Expenditures by Type and Medium for Petroleum Refineries Environmental Expenditures by Type, 2001

Refining Expenditures by A ggregated Types (in millions)

Source: API, 2001; API, 2003b.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-13 84 86 88 90 92 94 96

1989 1990 1991 1992 1993 199 4 19 95 1 996 1997 1998 1999 2000 2001 2002 Petroleum Refineries (SIC 2911) Petroleum Refineries (NAICS 324110) 

### B2C-2.6 Capacity Utilization Refinery capacity is frequently measured in terms of cr ude oil distillation capacity. EIA defines refinery capacity utilization as input divided by calendar day capacity, which is the maximum amount of crude oil input that can be processed during a 24-hour period with certain limitations. Some downstream refinery capacities are measured in terms of “stream days,” which is the amount a unit can process when running full capacity under optimal crude and product mix conditions for 24 hours (U.S. DOE, 1999a ). Downstream capacities are reported only for specific units or products, and are not summed across produc ts, since not all products could be produced at the reported levels simultaneously. Figure B2C-6 below shows the fluctuation in utilization rates over the period 1989-2002, based Census Bureau data. Capacity utilization fluctuated over a relativel y lower range between 1989-1992, followed by an increase in utilization rates for five straight years, concluding in1997. After decreasing in 1998, utilization rates climbed until 2000, before excess supply, recession, and other factor s led to decreases in rates in the early 2000s. The industry appears to be recovering, however, as the Ameri can Petroleum Institute (2004) reports that refineries operated at 92.4 percent of capacity for 2003. Overall re finery utilization has remained high over this entire time period. Capacity utilization relative for production o sp ecific products may vary, however, as the industry adjusts to changes in the desired product mix and characteristics.
Figure B2C-6: Capacity Utilization Rates (F ourth Quarter) for Petroleum Refineries

aBefore 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA convert ed the NAICS classification data to the SIC code classifications us ing the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1989-2002.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

5 The 1992 Census of Manufactures is the most recent data available by SIC code and State.
B2C-14 

## B2C-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### The Petroleum Refining segment in the United States is made up of integrated international oil companies, integrated domestic oil companies, and independent domes tic refining/marketing companies. In general, the petroleum industry is highly integrated, with many firms involved in more than one stage of petroleum industry operations. Large companies, referred to as the “majors, ” are fully integrated across crude oil exploration and production, refining, and marketing. Smaller, nonint egrated companies, referred to as the “independents,” generally specialize in one segment of the industry. Like the oil business in general, refining was dominated inthe 1990s by integrated internationals, specifically a few large companies such as Exxon Corporation, Mobil Corporation, and Chevron Corporation. These three ranked in the top ten of Fortune’s 500 sales during this time period. Substantial diversification by major petroleum companies into other energy and non-energy seg ments was financed by high oil prices in the 1970s and 1980s. With lower profitability in the 1990s, the major producers began to exit nonconventional energy operations (e.g., oil shale) as well as coal and non-ener gy operations in the 1990s. Some have recently ceased chemical production. During the 1990s and into the early 2000s, several merger s, acquisitions, and joint ventures occurred in the Petroleum Refining segment in an effort to cut cost and increase profitability. This consolidation has taken place among the largest firms (as illustrated by the acquisition of Amoco Corporation by British Petroleum in 1999, the merger of Chevron and Texaco in 2001, the merger of Conoco and Phillips in 2002, and the mega-merger of Exxon and Mobil Corporation in 1998) as well as among independent refiners and marketers (e.g., the independent refiner/marketer Ultramar Diamond Shamrock (UDS) acquired Total Petroleum North America in 1997) (U.S. DOE, 1999b, 2004). Merger activity seems to have slowed since 2002, however, possibly as companies seek to address financial issues or wait to see that the recent positive economic growth continues (U.S. DOE, 2004). B2C-3.1 Geographic Distribution Petroleum Refining facilities are more often located in ar eas near crude oil sources and/or near consumers. The cost of transporting crude oil feed stocks and finish ed products is an important influence on the location of refineries. Most Petroleum Refineries are located along the Gulf Coast and near the heavily industrialized areas of both the east and west coasts (U.S. DOE, 1997). Figure B2C-7 shows the distribution of all facilities by State in the profiled petroleum segments, based on the 1992 Census of Manufactures 5 

### . In 1992, 44 refineries were located in Texas, 32 in California, and 20 in Louisiana, accounting for 43 percent of SIC 2911 facilities in the United States.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-15 

### 4

3 2

4
8 2

6 1

7 7

7 2

3 3 6 1 4

7 2 2 7 2

20 14 6 2 32

44

Number of Facilities 0 - 1 2 - 4 5 - 8 9 - 20 21 - 44 

### Figure B2C-7: Geographic Distribution of Petroleum Refineries

Source: U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-16 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

1-4 5-9 10-19 20-49 50-99 100-249 250-499 500-999 1,000- 2,499 0 5 10 15 20 25 30 35 40 45 50

1-4 5-9 10-19 20-49 50-99 100-249 250-499 500-999 1,000- 2,499 

### B2C-3.2 Facility Size A substantial portion of the facilities in SIC 2911 employa large number of employees, with 41 percent having 250 or more employees. Figure B2C-8 shows that approximately 87 percent of the value of shipments for the industry is produced by the 41 percent of establishments with more than 250 employees. Establishments with more than 1,000 employees are responsible for appr oximately 36 percent of all industry shipments.
Figure B2C-8: Value of Shipments and Number of Facilities in 1992 a

### for Petroleum Refineries by Employment Size Category Number of Facilities

Value of Shipments ($ millions)

aThe 1992 Census of Manufactures is the most recent data available by SIC code and facility employment size. Source: U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

6Note that the measured concentration ratio and the HHF are very sensitive to how the industry is defined. An industry with a hi gh concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced byother industries (e.g., plastics vs. aluminum in beverage containers). Concentratio n ratios based on share of domestic production are therefore only one indicator of the extent of competition in an industry.
B2C-17 

### B2C-3.3 Firm Size For SIC 2911, the Small Business Administration defines a small firm as having 1,500 or fewer employees. The size categories reported in the Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing precise use of the SBA size threshold in conjunction with SUSB data. Table B2C-7 below shows the distribution of firms and establishments in SIC 2911 by the employment size of the parent firm. The SUSB data show that 180 of the 302 SIC 2911 establishments reported for 2001 (60 percent) are owned by larger firms (those with 500 employees or more), some of which may still be defined as small under the SBA definition, and 112 (40 percent) are owned by small firms (those with fewer than 500 employees).
Table B2C-7: Number of Firms, Establishments, and Estimated

Receipts for Petroleum Refineries by Firm Employment Size Category (2001) Employment Size Category Number of Firms Number of Establishments

0-19 71 71 20-99 22 23 100-499 23 28

500+ 49 180 Total 165 302

aBefore 1998, the Department of Comme rce compiled data in the SIC system; since 1998, these data have been comp iled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code cl assifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2001.



### B2C-3.4 Concentration Ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers, with more con centrated industries generally having higher barriers. The four-firm concentration ratio(CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things being equal 6 

### . An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the i ndustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, th e HHI of this industry would be equal to 4,600 (602 + 302 + 102). The higher the index, the fewer the number of fi rms supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s guidelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentrated, markets inwhich the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHIis in excess of 1800 are considered to be concentrated.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-18 

### As shown in Table B2C-8, the CR4 and the HHI for SI C 2911 are both below the benchmarks of 50 percent and 1,000, respectively. For the Petroleum Refining segment, the HHI is 422, suggesting the sector is unconcentrated. With the majority of the firms in this industry havi ng small market shares, this suggests limited potential for passing through to customers any increase in produc tion costs resulting from regulatory compliance.

Table B2C-8: Selected Ratios for Petroleum Refineries

SIC Year Total Number of Firms Concentration Ratios
4 Firm (CR4) 8 Firm (CR8) 20 Firm (CR20) 50 Firm (CR50) HerfindahlHirschman Index

2911 1987 200 32% 52% 78% 95% 435 1992 132 30% 49% 78% 97% 414 1997 122 28% 49% 83% 98% 422 Source: U.S. DOE, 1987, 1992, and 1997.


### B2C-3.5 Foreign Trade This profile uses two measures of foreign competition: export dependenceand import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to passthrough costs because foreign producers would not incur costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing comp liance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competiti on in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulati on-induced increases in production costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadva ntage in potentially recovering compliance costs through price increases since export sales are presumed subject to substantial competition from foreign producers. Table 4D-9 presents trade statistics for the profiled Petroleum Refining segment from 1989 to 2001. The table shows that while export dependence has been relativel y stable, import penetration decreased during the economic weakness of the early 1990s, before leveling off thr ough the mid 1990s. Import penetration increased steadily through 2000 and then dropped slightly in 2001. This cycl e follows the growth in the U.S. economy of the late 1990s, followed by the subsequent ec onomic slowdown arriving in the latte r half of 2000 into 2001. Mexico received the largest amount of U.S. exported refined pe troleum products in 2001, followed by Canada and Japan. Imports of refined petroleum products increased 47.3 percent from 1989 to 2001, with 46.6 percent of total imports coming from OPEC countries (U.S. DOE, 2003b).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-19 

### The import penetration ratio for facilities in the Petr oleum Refining segment in 2001 was only 15 percent, well below the U.S. manufacturing segment average of 22 percent. The export dependence ratio for petroleum refiners in 2001 was only four percent compared to the U.S. manufacturing average of 15 percent. Thus, based on the lack of competitive pressures from foreign markets/firms, the petroleum industry appears to be in a position to pass-through to consumers a significant portion of co mpliance-related costs associated with the Phase III regulation. However, given the low HHI for this i ndustry EPA believes that existing market competition among domestic firms most likely nullifies any favorable influe nce the lack of foreign competitors would have on increasing the market power of firms in this industry.
Table B2C-9: Foreign Trade Statistics for Petroleum Refining

Year Value of Imports (millions,

$2003) Value of Exports (millions,

$2003) Value of Shipments (millions,

$2003) Implied Domestic Consumption a Import Penetration b Export Dependence 

### B2989 15,867 5,807 176,444 186,504 8.5% 3.3%

1990 18,477 7,754 206,424 217,147 8.5% 3.8% 1991 13,625 7,952 181,906 187,579 7.3% 4.4% 1992 12,457 7,043 166,625 172,039 7.2% 4.2% 1993 11,646 6,743 155,357 160,260 7.3% 4.3% 1994 10,856 5,804 150,633 155,685 7.0% 3.9% 1995 10,054 6,117 156,200 160,137 6.3% 3.9% 1996 20,837 7,092 177,942 191,687 10.9% 4.0% 1997 d 22,627 7,621 175,693 190,699 11.9% 4.3% 1998 d 18,683 5,680 129,399 142,402 13.1% 4.4% 1999 d 23,627 6,221 155,768 173,174 13.6% 4.0% 2000 d 42,334 9,221 227,748 260,861 16.2% 4.0% 2001 d 36,252 8,333 206,312 234,231 15.5% 4.0% Total Percent Change 1989-2001 128.5% 43.5% 16.9% Average Annual

Growth Rate 7.1% 3.1% 1.3% Calculated by EPA as sh ipments + imports - exports. b Calculated by EPA as imports divi ded by implied dom estic consumption.
c Calculated by EPA as exports divided by shipments. d Before 1998, these data were compiled in the Standard Industrial Classification (SIC) system; since 1998, these data have been compiled in the North American Industry Classification System (NAI CS). For this analysis, EPA converted the NAICS classificati on data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC.

. Source: U.S. DOC, 2001; U.S. DOC 1988-1991, 1993-1996, and 1998 - 2001; U.S. DOE, 2001b.


### The United States consumes more petroleum than it pr oduces, requiring net imports of both crude oil and products to meet domestic demand. In 2002, the U.S. imported 9.05 million barrels pe r day (MBD) of crude oil and 2.31 MBD of refined products. These refined product imports represented roughly 12 percent of the 19.65 MBD of refined products supplied to U.S. consumers. The U.S. exporte d 0.97 MBD of refined products in 2002 (U.S. DOE, 2003b).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-20 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

1 989 1990 1 991 199 2 1 993 199 4 1995 19 96 1997 19 98 1999 2 000 200 1 2 002 Imports (SIC 2911) Imports (NAICS to SIC) Exports (SIC 2911) Exports (NAICS to SIC) 

### Imports of refined petroleum products have fluctuated since 1985. Imports rose to 2.3 MB in the early 1980s, due to rapid growth in oil consumption, especially consump tion of light products, which exceeded the growth in U.S. refining capacity. Imports then declined as a result of the 1990/91 recession and increased upgrading of refinery capacity resulting primarily from the 1990 Clean Air Act Amendments and other environmental requirements (U.S. DOE, 1997). Since the 1995 low point, imports steadily increased through 2000 with the exception of 1998, before dropping again, due to general economic weakness, in 2001 and 2002 (see Figure B2C-9).
Figure B2C-9: Value of Imports and Expo rts for Petroleum Refining (millions, $2003)

aBefore 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOE, 2001b.; U.S. DOE, 2003b.


### Petroleum exports include heavy products such as residual fuel oil and petroleum coke, which are produced as coproducts with motor gasoline and other light products. Production of these heavier products often exceeds U.S. demand, and foreign demand absorbs the excess. Petr oleum coke is the leading petroleum export product, accounting for 35 percent of petroleum exports in 2002, follo wed by residual fuel oil (18 percent of exports) and motor gasoline (almost 13 percent) (U.S. DOE, 2003b). E xports generally reflect fo reign demand, but other factors influence exports as well. For example, exports of motor gasoline increased due to high prices in Europe at the time of the 1990 Persian Gulf war. U.S. refiners and marketers have gained experience in marketing to diverse world markets, and U.S. products are now sold widely abroad (U.S. DOE, 1997). As reported by the International Trade Administration and shown in Figure B2C- 9, the real value of petroleum exports has fluctuated between $5 and $10 billion during the years 1989 and 2002.


## B2C-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the Petroleum Refining segment are important determinants of its ability to withstand the costs of regulatory compliance w ithout material adverse economic/financial impact. To provide insight into the industry’s financial perform ance and condition, EPA reviewed two key measures of financial performance over the 12-year period, 1992-2003: net profit margin and return on total capital. EPA§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

7 Crude oils processed by U.S. refineries have become heavier and more contaminated w ith materials such as sulfur. This trend reflects reduced U.S. dependence on the more expensive high gravity (“light”) and low su lfur (“sweet”) crude oils produced in t he Middle East, and greater reliance on crude oil from Latin America (especia lly Mexico and Venezuela), which is relatively heavy and contains higher sulfur (“sour”) (U.S. DOE, 1999a).

8 Demand for lighter products such as gasoline and diesel fuelhas increased, and demand for heavier products has decreased.

9 Reductions in costs resulted from:
< divesting marginal refineries and gasoline outlets;
< divesting less profitable activities (e.g., gasoline credit cards);
< reducing corporate overhead costs, including eliminating redundancies through restructuring;
< outsourcing some administrative activities; and
< use of new technologies requiring less labor.
B2C-21 

### calculated these measures as a revenue-weighted index of measure values for public reporting firms in the respective industries, using data from the Value Line Investment Survey. Financial performance in the most recent financial reporting period (2003) is obviously not a perfect indicator of conditions at the time of regulatory compliance. However, examining the trend, and devi ation from the trend, through the most recent reporting period gives insight into where the industry may be , in terms of financial performance and condition, at the time of compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requirements are faced: all else equal, the more volatile the historical performance, the more likely the industry maybe in a period of relatively weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in th e conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectivel y, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from several factors, including: variations in aggregat e economic conditions (incl uding international and U.S. conditions), variations in industry-specific market c onditions (e.g., short-term capacity expansion resulting in overcapacity), or changes in the pricing and availabilityof inputs to the industry’s production processes (e.g., the cost of energy to the petroleum refining process). The extent to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. vari able cost structure of the industry’s operations. In a capital intensive industry such as Petroleum Refining, th e relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in out put or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-h alf of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the return on total capital provides insight into the profitability of a business’ assets independent of financial structure and is thus a “purer” indicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the industry collectively, must generate, over time, a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure B2C-10 below shows trends in net profit margins and return on total capital for the Petroleum Refining segment between 1992 and 2003. Through the first half of the 1990s, the petroleum industry was characterized by unusually low product margins, low profitability, and substantial restructuring. These low profit margins resulted from three cost-side factors – (1) increases in ope rating costs as a result of governmental regulations; (2) expensive upgrading of processing units to accommodate lower-quality crude oils; 7 

### and (3) upgrading of operations to adapt to changes in demand for refinery products 8 

### – coupled with lower product prices, resulting from competitive pressures (API, 1999). In the late 1990s, the petroleum industry pursued cost-cutting measures throughout their operations (Rodekohr, 1999) 9 

### . These cost-cutting measures, along with increases in the prices of§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

10 Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use.

11 The proposed Phase III regulation also applies to existing el ectric generating facilities as well as certain facilities in the oil and gas extraction industry and the seafood processing i ndustry. See Chapters B4 and B5 and Part C of this document for more informati on on these industries.
B2C-22 0% 5% 10% 15% 20% 25%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Return on Total Capital - Petroleum Refining Net Profit Margin - Petroleum Refining 

### petroleum refining products, resulted in significantly im proved financial performance in the Petroleum Refining segment. Refinery profits remained high in 2000 and the first half of 2001, due to low product inventories and high operating rates. The latter half of 2001 and 2002 saw the effects of the global recession, the attacks of 9/11, and a mild winter. These factors, coupled with worl d supply in excess of demand, led to decreases in refiner margins, as crude oil prices increases and petroleum product prices decreased. In 2003, as the U.S. economy began recovery from its economic weakness, the domestic Petroleum Refining segment returned to relatively strong financial performance.
Figure B2C-10: Net Profit Margin and Return on Total Capital for Petroleum Refining

Source: Value Line 1999-2003


## B2C-5 F ACILITIES 

## O PERATING 

## C OOLING 

## WATER 

## I NTAKE 

## S TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point sour ce facilities that use, or propose to use, a cooling water intake structure that withdraws cooling water directly from a surface waterbody of the United States. In 1982, the Petroleum and Coal Products industry (SIC 29) withdr ew 590 billion gallons of cooling water, accounting for approximately 0.8 percent of total industria l cooling water intake in the United States 10 

### . The industry ranked 4 th

### in industrial cooling water use, behind the electric power generation industry and the chemical and primary metals industries (1982 Census of Manufactures). This section provides information for facilities in the petroleum segment potentially subject to the proposed regulation. Existing facilities that meet all of the following conditions are potentially subject to the proposed regulation: 11



### < 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supp lier who has a cooling water intake structure; or their cooling water§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

12 EPA applied sample weights to the sampled facilities to acc ount for non-sampled facilities and facilities that did not respond to the survey. For more information on EPA’s 2000 Section 316(b) Industr y Survey, please refer to the Information Collection Request (U.S. EPA, 2000).
B2C-23 

### intake structure(s) withdraw(s) cooling water from waters of the U.S., and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;
< 

### Have a National Pollutant Discharge Elimination Sy stem (NPDES) permit or are required to obtain one; and
< 

### Have a design intake flow of greater than 2 million gallons per day (MGD). The proposed Phase III regulation also covers substantial additions or modifications to operations undertaken at such facilities. While all facilities that meet these criteri a are potentially subject to the regulation, this section focuses on the 36 facilities nation-wide in the petroleum segment identified in EPA’s 2000 Section 316(b) Industry Survey as being potentially subject to the proposed regulation 12 

### . Information collected in the Detailed Industry Questionnaire found that an estimated 36 of 163 Pe troleum Refining facilities, or 22 percent, meet the characteristics of a potential Phase III facility. B2C-5.1 Waterbody and Cooling System Type Table B2C-10 shows the distribution of existing Section 316(b) Petroleum Refineries by type of water body and cooling system. Twenty-six facilities, or 74 percent, obt ain their cooling water from either a freshwater stream or a river. Five facilities (14 percent) of refineries obtain th eir cooling water from either an estuary or a tidal river. Two facilities, or 6 percent, obtain their cooling water fro m a Great Lake. The other two sources of cooling water reported for Petroleum Refineries were oceans and lakes/reservoirs, accounting for three percent each. The most common cooling water system used by Petroleum Refineries is a recirculating cooling system, representing approximately 53 percent of all systems used by refineries. Thirty-one percent of all refineries use a combination cooling system. The remaining 14 percent use a once-through cooling system. Of the five plants that withdraw from an estuary, the most sensitive type of waterbody, two use a once-through system. Plants with once-through cooling water systems withdraw between70 and 98 percent more water than those with recirculating systems.
Table B2C-10: Number of Section 316(b) Petrol eum Refining Facilities by Water Body Type and Cooling System Type

Water Body Type Cooling System
Total Recirculating Combination Once-Through
Number % of Total Number % of Total Number % of Total Estuary/ Tidal River 0 0% 3 60% 2 40% 5 Ocean 0 0% 0 0% 1 100% 1 Lake/ Reservoir 1 100% 0 0% 0 0% 1 Freshwater Stream/ River 18 69% 6 23% 2 8% 26 Great Lake 0 0% 2 100% 0 0% 2 Total a 19 53% 11 31% 5 14% 36

aIndividual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2000.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-24 0 9 7 14

7

0 2 4 6 8 10 12 14

<100 100-249 250-499 500-999 >=1000 

### According to the American Petroleum Institute and EPA, water use at Petroleum Refi neries has been declining because facilities are increasing their reuse of water (U.S. EPA, 1996a). B2C-5.2 Facility Size Section 316(b) sample facilities are larger than facilities in the petroleum refining industry as a whole, as reported in the Census and discussed previously:

< 

### Forty percent of all facilities in the refineries segment had fewer than 100 employees in 1992; none of the potential Phase III facilities in that segment fall into that employment category. Figure B2C-11 shows the number of potential Phase III facilities by employment size category.
Figure B2C-11: Number of Section 316(b) Petroleum Refineries by Employment Size Category

Source: U.S. EPA, 2000.



### B2C-5.3 Firm Size EPA used the Small Business Administration (SBA) small entity thresholds to determine the number of existing Section 316(b) petroleum refineries owned by small firms. Firms in this industry are considered small if they employ fewer than 1,500 people. Table B2C-11 shows th at all of the Section 316(b) Petroleum Refineries are owned by large firms.
Table B2C-11: Number of Section 316(b) Petroleum Refineries by Firm Size

SIC Large Small Total No. % of SIC No. % of SIC 2911 36 100% 0 0% 36 Source: U.S. EPA, 2000; U.S. SBA, 2000; D&B, 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-25 

## REFERENCES 

### American Petroleum Institute (API). 2004. “Year-end API monthly statistical report.” January 14, 2004. American Petroleum Institute (API). 2003a. “Year-end statistical report, 2002.” January 15, 2003. American Petroleum Institute (API). 2003b. Policy Analysis and Statistics Department. U.S. Petroleum Industry’s Environmental Expenditures, 1992-2001 . February 20, 2003. American Petroleum Institute (API). 2001. Policy Analysis and Statistics Department. U.S. Petroleum Industry’s Environmental Expenditures, 1990-1999 . January 19, 2001. American Petroleum Institute (API). 1999. Polic y Analysis and Strategic Planning Department. Economic State of the U.S. Petroleum Industry. February 26, 1999. Bureau of Labor Statistics (BLS). 2002. Producer Price Index . Series: PCU29__#–Petroleum Refining and Related Products. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. Rodekohr, Dr. Mark. Financial Developments in ‘96-‘97: How th e U.S. Majors Survived the 1998 Crude Oil Price Storm . Presentation. May 27, 1999. Available at: http://www.eia.doe.gov/emeu/finance/highlite7/sld001.htm Standard & Poor’s. (S&P) 2001. Industry Surveys - Oil & Gas: Production & Marketing. March 8, 2001. U.S. Department of Commerce (U.S. DOC). 1989-2002. Bureau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 2001. Bureau of the Census. International Trade Administration. U.S. Department of Commerce (U.S. DOC). 1988-1991, 1993-1996, and 1998 - 2001. Bureau of the Census. Annual Survey of Manufactures. U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. 1997 Economic Census Bridge Between NAICS and SIC. U.S. Department of Commerce (U.S. DOC). 1987, 1992, and 1997. Bureau of the Census. Census of Manufactures

. U.S. Department of Energy (U.S. DOE). 2004. Energy Information Administration. Performance Profiles of Major Energy Producers 2002 . DOE/EIA-0206(04). February 2004. U.S. Department of Energy (U.S. DOE). 2003a. Energy Information Administration. Petroleum Supply Annual 2002, Volume 1 . DOE/EIA-0340(02)/1. June 2003. U.S. Department of Energy (U.S. DOE). 2003b. Energy Information Administration. Annual Energy Review 2002 . DOE/EIA-0384(2002). October 2003. U.S. Department of Energy (U.S. DOE). 2001a. Energy Information Administration. Petroleum Supply Annual 2000, Volume 1 . DOE/EIA-0340(00)/1. June 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Fac ilities B2C: Petroleum Refining

B2C-26 

### U.S. Department of Energy (U.S. DOE). 2001b. Energy Information Administration. Annual Energy Review 2000 . DOE/EIA-0384(00). August 2001. U.S. Department of Energy (U.S. DOE). 2001c. Energy Information Administration. Monthly Energy Review

. DOE/EIA-0035(2001/10). October 2001. U.S. Department of Energy (U.S. DOE). 1999a. Energy Information Administration. Petroleum: An Energy Profile, 1999 . p. 25. DOE/EIA-0545(99). July 1999. U.S. Department of Energy (U.S. DOE). 1999b. Energy Information Administration. The U.S. Petroleum Refining and Gasoline Marketing Industry. Recent Structur al Changes in U.S. Refining: Joint Ventures, Mergers, and Mega-Mergers. July 9, 1999. U.S. Department of Energy (U.S. DOE). 1999c. Energy Information Administration. Petroleum Marketing Annual 1998 . DOE/EIA-0487(98). October 1999. U.S. Department of Energy (U.S. DOE). 1997. Energy Information Administration. Petroleum 1996: Issues and Trends

. p. 15. DOE/EIA-0615(96). September 1997. U.S. Department of Energy (U.S. DOE). Financial Reporting System (FRS) historical data. U.S. Environmental Protection Agency (U.S. EPA). 2000. Detailed Industry Questionnaire: Phase II Cooling Water Intake Structures. U.S. Environmental Protection Agency (U.S. EPA). 1996a. Office of Water. Preliminary Data for the Petroleum Refining Category . EPA-821-R-96-016. July, 1996. U.S. Environmental Protection Agency (U.S. EPA). 1996b. Office of Solid Waste. Study of Selected Petroleum Refining Residuals: Industry Study . August, 1996. U.S. Small Business Administration (U.S. SBA). 1989-2001. Statistics of U.S. Businesses. Available at: http://www.sba.gov/advo/stats/int_data.html U.S. Small Business Administration (U.S. SBA). 2000. Small Business Size Standards . 13 CFR section 121.201. Value Line. 1992-2003. Value Line Investment Survey. Value Line. 2001. “Petroleum (Integrated) Industry.” September 21, 2001. World Oil. 1999. “1998: A year of infamy.” Febr uary 1, 1999. Vol. 220. No.2 Available at: http://www.worldoil.com/magazine/MAGAZINE_D ETAIL.asp?ART_ID=478&MONTH_YEAR=Feb-1999§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-1 

### C HAPTER 

### C ONTENTS 

### B2D-1 Summary Insights from this Profile . . . . . . . . . . B2D-3 B2D-2 Domestic Production . . . . . . . . . . . . . . . . . . . . . B2D-4 B2D-2.1 Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2D-5 B2D-2.2 Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2D-9 B2D-2.3 Number of Facilities and Firms . . . . . . . . . B2D-9 B2D-2.4 Employment and Productivity . . . . . . . . . B2D-11 B2D-2.5 Capital Expenditures . . . . . . . . . . . . . . . . B2D-14 B2D-2.6 Capacity Utilization . . . . . . . . . . . . . . . . . B2D-15 B2D-3 Structure and Competitiveness . . . . . . . . . . . . . B2D-16 B2D-3.1 Geographic Distribution . . . . . . . . . . . . . B2D-17 B2D-3.2 Facility Size . . . . . . . . . . . . . . . . . . . . . . . B2D-18 B2D-3.3 Firm Size . . . . . . . . . . . . . . . . . . . . . . . . . B2D-20 B2D-3.4 Concentration Ratios . . . . . . . . . . . . . . . . B2D-20 B2D-3.5 Foreign Trade . . . . . . . . . . . . . . . . . . . . . . B2D-22 B2D-4 Financial Condition and Performance . . . . . . . B2D-24 B2D-5 Facilities Operating Cooling Water Intake Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2D-25 B2D-5.1 Waterbody and Cooling System Type . . . B2D-26 B2D-5.2 Facility Size . . . . . . . . . . . . . . . . . . . . . . . B2D-27 B2D-5.3 Firm Size . . . . . . . . . . . . . . . . . . . . . . . . . B2D-28 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2D-29 

# Chapter B2D: Steel (SIC 331)

EPA’s Detailed Industry Questionnaire, hereafter referred to as the DQ, identified five 4- digit SIC codes in the Steel Works, Blast Furnaces, and Rolling and Finishing Mills Industries (SIC 331) with at least one existing facility that operates a CWIS, holds a NPDES permit, withdraws equal to or greater than two million gallons per day (MGD) from a water of the United States, and uses at least 25 percent of its intake flow for cooling purposes (facilities with these characteristics are hereafter referred to as facilities potentially subject to the Phase III regulation or “potential Phase III facilities”). For each of the five SIC codes, Table B2D-1 below provides a description of the industry segment, a list of primary products manufactured, the total number of detailed questionnaire respondents (weighted to represent national results), and the number and percent of potential Phase III facilities within the estimated national total of facilities in the respective industry SIC code groups.
Table B2D-1: Potential Phase III facilities in the Steel Industry (SIC 331)
SIC SIC Description Important Products Manufactured Number of Facilities a Total Potential Phase III facilities b % Steel Mills (SIC 3312)

3312 Steel Works, Blast Furnaces (Including Coke Ovens), and Rolling Mills Hot metal, pig iron, and silvery pig iron from iron ore and iron and steel scrap; converting pig iron, scrap iron, and scrap steel into steel; hot-rolling iron and steel into basic shapes, such as plates, sheets, strips, rods, bars, and tubing; merchant blast furnaces and byproduct or beehive coke ovens 161 46 28.6%

Steel Products (SICs 3315, 3316, 3317)
3315 Steel Wiredrawing and Steel Nails and Spikes Drawing wire from purchased iron or steel rods, bars, or wire; further manufacture of products made from wire; steel nails and spikes from purchased materials 122 7 5.7%

3316 Cold-Rolled Steel Sheet, Strip, and Bars Cold-rolling steel sheets and strip from purchased hotrolled sheets; cold-drawing steel bars and steel shapes from hot-rolled steel bars; producing other cold finished steel 57 10 17.5%
3317 Steel Pipe and Tubes Production of welded or seamless steel pipe and tubes and heavy riveted steel pipe from purchased materials 130 5 3.8% Total Steel Products 309 21 6.8%§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel 

### Table B2D-1: Potential Phase III facilities in the Steel Industry (SIC 331)
SIC SIC Description Important Products Manufactured Number of Facilities a Total Potential Phase III facilities b %

B2D-2 Other Segments

3313 Electrometallurgical Products, Except Steel Ferro and nonferrous metal additive alloys by electrometallurgical or metallothermic processes, including high percentage ferroalloys and high percentage nonferrous additive alloys 6 2 33.3%
Total Steel (SIC 331) Total SIC Code 331 476 68 14.3%

aNumber of weighted detailed questionnaire survey respondents. b Individual numbers may not a dd up due to independent rounding. Source: U.S. EPA, 2000; Executive Office of the President, 1987


### The table shows that an estimated 68 out of 476 facilities (or 14 percent) in the Steel Industry (SIC 331) are potentially subject to this proposed regulation. EPA also estimated the percentage of total production that occurs at facilities potentially subject to the proposed regulation. Total value of shipments for the steel industry from the 1998 Annual Survey of Manufacturers is $76.2 billion. Value of shipments, a measure of the dollar value of production, was selected for the basis of this estimate. Because value of shipments data were not collected using the DQ, these data were not available for the sample of Phase III manufacturing facilities potentially subject to the proposed regulation. Total revenue , as reported on the DQ, was used a close approximation for value of shipments for these facilities. EPA estimated the total re venue of facilities in the steel industry subject to the proposed regulation is $38.4 billion. Therefore, EPA es timates that 50 percent of total production in the steel industry occurs at facilities potentially subject to the proposed regulation. The responses to the Detailed Questionnaire indicate that two main steel segments account for the largest numbers of potential Phase III facilities: (1) Steel Mills (SIC code3312) and (2) Steel Products (SIC codes 3315, 3316, and 3317). Of the 70 potential Phase III facilities in the steel industry, 46, or 66 percent, are Steel Mills, and 22, or 32 percent, are Steel Products facilities. The remainder of the steel industry profile therefore focuses on these two industry segments Table B2D-2 provides the cross-walk between SIC cod es and the new NAICS codes for the profiled steel SIC codes. The table shows that both cold finishing of steel shapes (SIC 3316) and steel pipe and tubes (SIC 3317) have a one-to-one relationship to NAICS codes. The other SIC codes in the profiled steel segments correspond to two NAICS codes.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-3 

### Table B2D-2: Relationships between SIC a nd NAICS Codes for the Steel Industries (1997)
SIC Code SIC Description NAICS Code NAICS Description Number of Establishments Value of Shipments

($1000) Employment

3312 Blast furnaces and steel mills 324199 All other petroleum and coal products manufacturing (pt) 8 438,107 1,731 Blast furnaces and steel mills 331111 Iron and steel mills (pt) 193 56,358,764 144,074

3313 Electrometallurgical products 331112 Electrometallurgical ferroalloy product manufacturing 24 1,409,834 3,724

Electrometallurgical products 331492 Secondary smelting, refining, and alloying of nonferrous metal (except copper and aluminum) (pt) 4 125,945 311

3315 Steel wire and related products 331222 Steel wire drawing 273 4,920,798 23,489 Steel wire and related products 332618 Other fabricated wire product manufacturing (pt) 31 370,492 2,265
3316 Cold finishing of steel shapes 331221 Cold-rolled steel shape manufacturing 186 6,343,466 14,362
3317 Steel pipe and tubes 331210 Iron and steel pipes and tubes manufacturing from purchased steel 235 7,565,377 27,723
Source: U.S. DOC, 1997


## B2D-1 S UMMARY 

## I NSIGHTS FROM THIS 

## P ROFILE 

### A key purpose of this profile is to provide insight into the ability of steel industry firms that would be subject to the 316(b) regulation to absorb compliance costs without material adverse economic/financial effects. Two important factors in the ability of the industry’s ability to withstand compliance costs are: (1) the extent to which the industry may be expected to shift compliance co sts to its customers through price increases and (2) the financial health of the industry and its general business outlook. Likely Ability to Pass Complian ce Costs Through to Customers As reported in the following sections of this profile, th e steel industry is relatively unconcentrated, which would suggest that firms in this industry would have difficulty in passing through to customers a significant portion of their compliance-related costs. In addition, the dom estic steel industry faces high competition from imports into the U.S. market, further curtailing the potential of firms in this industry to pass through to customers a significant portion of their compliance-related costs. As discussed above, the proportion of total value of shipments in the industry potentially subject to the proposed regulation is 50 percent. The actual proportion of total value of shipments subject to regulation-induced compliance costs would be smaller since not all of the facilities would be subject to the national categorical requirements of the proposed regulation: that is, facilities below the proposed design intake flow (DIF) would be subject to permitti ng based on best professional judgement (BPJ) rather than based on national standards, and several facilities currently employ baseline technologies that meet the requirements of the proposed regulation. Given the likelihood that these percentages represent upper bound estimates, EPA believes that the theoretical threshold fo r justifying the use of industry-wide CPT rates in the impact analysis of existing Phase III steel facilities has not been met. For these reasons, in its analysis of regulatory impacts for the steel industry, EPA assumed th at complying firms would be unable to pass compliance costs through to customers: i.e., complying facilities must absorb all compliance costs within their financial§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

1 Large integrated producers include such companies as Bethlehe m Steel, LTV, and U.S. Steel. Nucor is the largest U.S. minimill producer.

2 Production from open hearth furnaces, which dominated produc tion until the early 1950s, ended in 1991. BOF facilities have traditionally been referred to as integrated producers, because they combined iron-making from coke, production of pig iron in a blast furnace, and production of steel in the BOF. In recent years, some facilities have closed thei r coke ovens. These BOF facilit ies are no longer fully integrated.
B2D-4 

### condition at the time of compliance (see following sections and Appendix 3 to Chapter B3: Economic Impact Analysis for Manufacturers for further information). Financial Health and General Business Outlook Over the past decade, the steel industry, like other U.S. manufacturing industries, experienced a range of economic/financial conditions, including substantial challenges. The U.S. steel industry went through a difficult restructuring process in the 1980s and early 1990s, incl uding the closing of a number of inefficient mills, substantial investment in new technologies, and reducti ons in the labor force. Although U.S. demand for steel was strong in the late 1990s, low-priced imports increased substantially in 1998, which caused a number of U.S. steel bankruptcies and steelworker layoffs. The increased imports resulted from the Asian financial crisis, with the associated decline in Asian demand for steel and currency devaluations. Tariffs provided temporary relief through 2002; however, all tariffs were removed by the end of 2003. The steel industry was also negatively affected by economic recession in 2000 and 2001 and has been slow to recover. The industry has weathered difficult periods over the past few years and may be in position for better performance with continued strengthening of the U.S. economy. However, until such improvement manifests more concretely, the industry’s relatively weak financial condition suggest a lower ability(among the industries subject to the 316(b) regulation) to withstand additional regulatory compliance cost s without imposing significant financial impacts.


## B2D-2 D OMESTIC 

## P RODUCTION 

### Steel is one of the most important products of the U.S. industrial metals industry. For most of the twentieth century, the U.S. steel industry consisted of a few larg e companies utilizing an integrated steelmaking process to produce the raw steel used in a variety of commodity steel products. The integrated process requires a large capital investment to process coal, iron ore, limestone, and other raw materials into molten iron, which is then transformed into finished steel products (S&P, 2001). In recent decades, the integrated steel industry has undergone a dramatic downsizing as a result of increasedsteel imports, decreased consumption by the auto industry, and the advent of “minimills” (S&P, 2001) 1 

### . While the traditional integrated facilities using basic oxygen furnaces (BOF) still account for a substantial percent of U.S. steel mill product production, the share of electric arc furnace (EAF) facilities using scr ap steel as an input has grown steadily 2 

### . By 2002, about 72 companies operating about 107 steelmaking plants used the EAF steelmaking process; these non-integrated, minimill facilities produced 46.1 million metric tons of steel, an increase of about eight percent compared with that of 2001, and accounted for 50.4 percent of total steelmaking (USGS, 2002). The range of products produced by EAFs has also expanded over time. Initially, EAFs produced primarily lower-quality structural materials. Starting in the 1990s, EAFs began pr oducing higher quality sheet products as well. All recent capacity additions have been at EAF facilities. Basic steel mill products include carbon steel, steel alloys, and stainless steel. Steel forming and finishing operations may take place at facilities co-located with st eelmaking or at separate facilities. These operations take steel (in the form of blooms, billets, and slabs) and use heating, rolling or drawing, pickling, cleaning, galvanizing, and electroplating processes in various combin ations to produce finished bars, wire, sheets, and coils (semifinished steel products). Establishments that produce hot rolled products, along with basic BOF and EAF steelmaking facilities, are included in SIC 3312. SI C codes 3315, 3316, and 3317 perform additional processing of steel bars, wires, sheets, and coils (including cold-rolling of sheets) to produce steel products for a variety of end-uses (U.S. EPA, 1995).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-5 

### The steel industry is the fourth largest energy-consuming industry in the U.S. economy. Energy costs account for approximately 17 percent of the total manufacturing cost (AISI 2000). Steelmakers use coal, oil, electricity, and natural gas to fire furnaces and run process equipment. Minimill producers require large quantities of electricity to operate the electric arc furnaces used to melt and refi ne scrap metal, while integrated steelmakers depend on coal for up to 60 percent of their total energy requirements (McGraw-Hill, 1998). B2D-2.1 Output Steel mill products are sold to service centers (which buyfinished steel, often process it further, and sell to a variety of fabricators, manufacturers, and constructi on industry clients), to vehicle producers, and to the construction industry. The rapid growth in sales of h eavy sports utility vehicles contributed to increased U.S. steel consumption in the 1990s. Efforts to increase the fu el efficiency of vehicles has eroded steel’s position in the automotive market as a whole, however, as aluminum and plastic have replaced steel in many automotive applications. Other end-uses for steel include a wide range of agricultural, industrial, appliance, transportation, and container applications. Use of steel in beve rage cans has been largely replaced by aluminum. Table B2D-3 shows trends in production from the two majo r groups of steel producers: BOF and EAF facilities.
Table B2D-3: U.S. Steel Production by Type of Producer
Year Steel Production Percent from BOF Percent from EAF Million MT % Change 1990 a 89.7 n/a 59.1% 37.3% 1991 b 79.7 -11.1% 60.0% 38.4% 1992 84.3 5.8% 62.0% 38.0% 1993 88.8 5.3% 60.6% 39.4% 1994 91.2 2.7% 60.7% 39.3% 1995 95.2 4.4% 59.6% 40.4% 1996 95.5 0.3% 57.4% 42.6% 1997 98.5 3.1% 56.2% 43.8% 1998 98.6 0.1% 54.9% 45.1% 1999 97.4 -1.2% 53.7% 46.3% 2000 102 4.7% 53.0% 47.0% 2001 90.1 -11.7% 52.6% 47.4% 2002 91.6 1.7% 49.6% 50.4% 2003 c 91.5 -0.1% 48.0% 52.0% Total Percent Change 1990-2003 2.0% Average Annual Growth Rate change 0.2%

a3.5 percent of 1990 production was from open hearth furnaces. b 1.6 percent of 1991 production was from open hearth furnaces.
c Estimated. Source: AISI, 2001b; USGS, 2000; USGS, 1997; USGS 2004; USGS, Iron and Steel Statistical Compendium.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

3 World steel trade is characterized by noncompetitive practices in a number of countri es, which have resulted in substantial f riction over trade issues since the late 1960s. Since 1980, almost 40 percent of the unfair trade practice cases investigated in the U. S. have been related to steel products (U.S. DOC, 2000).

4 Terms highlighted in bold and italic font are further explained in the glossary.
B2D-6 

### This table shows the cyclical nature of the U.S. steel industry, with variations in growth from year to year reflecting general U.S. and world economic conditions, persistent excess production capacity worldwide, the competitive strength of imports, and trends in steel’s shar e of the automotive and other end-use markets for steel. The U.S. steel industry went through a difficult restructuring process in the 1980s and early 1990s, including the closing of a number of inefficient mills, substantial i nvestment in new technologies, and reductions in the labor force. The U.S. became a world lead er in low-cost production, lead by the minimill producers. Although U.S. demand for steel was strong in the late 1990s, low-priced imports increased substantially in 1998, which led to a number of U.S. steel bankruptcies and steelworker la yoffs. The increased imports resulted from the Asian financial crisis, with the associated decline in Asian demand for steel and currency devaluations. The U.S. government initiated the Steel Action Program in response to the crisis, focusing on strong enforcement of trade laws through the World Trade Organization and bilatera l efforts to address market-distorting practices abroad 3



### . The industry began to show signs of recovery in th e second half of 1999, and by early 2000 capacity utilization recovered to above 90 percent and earnings were up for most major steel companies (U.S. DOC, 2000). However, beginning in 2000, the weakening of the U.S. economy significantly reduced steel demand and total U.S. steel production fell by nearly 12 percent in 2001. In March 2002, the U.S. steel industry received temporary relief under Section 201 of the 1974 Trade Act with 3 years of tariffs ranging up to 30 percent on certain steel imports. Relief from imports was nullified to some extent when the U.S. Department of Commerce exempted 727 imported steel products from the tariff in June 2002. By year end, 2002 was the fourth highest steel import year in U.S. history. (USGS, 2002). Re moval of all tariffs occurred on December 4, 2003. (S&P, 2004). The steel industry is recovering, but slowly, from the im port penetration in the late 90's followed by the economic recession in 2001. In 2003, the integrated steel industry had poor operating results, as high raw material costs outweighed increased sales and higher volumes. As a result, most domestic steel producers instituted a raw material surcharge to offset sharply rising costs for raw materials such as scrap, iron ore and coke. Additionally, worldwide capacity remains in excess of long-term needs. Imports will most likely rise in 2004 after the removal of tariffs. However, to the extent that imports put downward pressure on prices, they may force the shutdown of marginal capacity currently operating. These capacity reductions will reduce domestic supply, and may set the stage for better financial performance in later years (S&P, 2004). Value of shipmentsand value added are two common measures of manufacturing output4 

### . They provide insight into the overall economic health and outlook for an i ndustry. Value of shipments is the sum of the receipts a manufacturer earns from the sale of its outputs; it indicates the overall size of a market or the size of a firm in relation to its market or competitors. Value added measures the value of production activity in a particular industry. It is the difference between the value of sh ipments and the value of inputs used to make the products sold. Figure B2D-1 presents trends in constant-dollar value of shipments and value added for Steel Mills and Steel Products. Value of shipments and value added from St eel Mills declined in the early 1990s, and recovered through 1997, prior to the 1998 import crisis and the late r U.S. economic recession. This segment continued to decline through 2001. Value of shipments and value added for Steel Products were less volatile, increasing gradually over the period 1990 through 1997. Value added stayed relatively constant through 2001, while value of shipments slightly declined.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-7 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Steel Mills (SIC 3312) Steel Mills (NAICS to SIC 3312) Steel Products (SIC 3315, 3316, 3317) Steel Products (NAICS to SIC 3315, 3316, 3317)

0 2,000 4,000 6,000 8,000 10,000 12,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Steel Mills (SIC 3312) Steel Mills (NAICS to SIC 3312) Steel Products (SIC 3315, 3316, 3317) Steel Products (NAICS to SIC 3315, 3316, 3317) 

### Figure B2D-1: Value of Shipments and Value Added for Profiled Steel Industry Segments (millions,$2003) Value of Shipments

Value Added

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996 and 1998-2001; US. DOC, 1987, 1992, 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-8 95 100 105 110 115 120 125 130

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Steel Mills (SIC 3312)
Steel Products (SIC 3315, 3316, 3317) 

### B2D-2.2 Prices The producer price index (PPI) measures price changes, by segment , from the perspective of the seller, and indicates the overall trend of product pricing, and thus supply-demand conditions, within a segment. Figure B2D-2 below shows that prices increased from 1987 to 1989 and then decreased in the early 1990s, due to a depressed domestic economy and the resulting decline in the demand for steel. Prices rebounded sharply through 1995 before eroding again, due to the global ove rsupply and increases in exports discussed above. Basic steel prices declined sharply with the growth of imports in the late 1990s, recovere d in 2000, but dropped again in 2001with the decline in steel demand (S&P, 2001; AISI, 2001a). Prices increased slightly in 2002 with the beginning of the economic recovery. The reason prices inthe Steel Mill segment have declined since 1997, while prices in the Steel Products segment have remained cons tant, is most likely due to the advent of mini-mill technology, which lowers the cost of produc tion and therefore lowers prices as well.
Figure B2D-2: Producer Price Index for Profiled Steel Industry Segments

Source: BLS, 2002.



### B2D-2.3 Number of Facilities and Firms The number of operating Steel Mills fluctuated si gnificantly between 1989 and 2001, as the U.S. industry underwent a substantial restructuring. Table B2D-4 shows substantial decreases in the number of facilities in 1992 and 1993 due to a significant decrease in global demand for Steel Products and resulting overcapacity. This decrease was followed by a significant recovery in 1995 and 1996. The number of facilities continued to rise through 2001, with the largest increase around 1998. This increase could result in part from the advent of minimills discussed above. The import crisis in 1998 ultimately led to bankruptcy for a number of U.S. producers, including LTV and Bethlehem Steel (S&P, 2001). Additionally, 7 major bankruptcies occurred over 2002 and early 2003, including Bayou Steel Corp, Kentucky Electric Steel Inc, Slater Steel Inc, and Weirton Steel Corp. (USGS, 2004)§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-9 

### In contrast to the volatility in the number of Steel Mills , the number of facilities in the Steel Products segment has remained relatively stable for the past twelve years, with increases towards the end of the period.
Table B2D-4: Number of Facilities in the Profiled Steel Industry Segments

Year Steel Mills Steel Products Number of Facilities Percent Change Number of Facilities Percent Change 1989 476 n/a 784 n/a 1990 497 4.4% 776 -1.0% 1991 531 6.8% 807 4.0% 1992 412 -22.4% 831 3.0% 1993 343 -16.7% 833 0.2% 1994 339 -1.2% 804 -3.5% 1995 391 15.3% 791 -1.6% 1996 483 23.5% 770 -2.7% 1997 297 -38.5% 727 -5.6% 1998 346 16.5% 801 10.2% 1998 a 398 34.0% 865 19.0% 1999 a 685 72.1% 919 6.2% 2000 a 981 43.2% 1,026 11.7% 2001 a 1,352 37.9% 1,028 0.2% Total Percent Change 1989-2001 184.0% 10.3% Average Annual

Growth Rate 9.1% 2.3%

aBefore 1998, data were compiled in the SIC system ; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA converted the NAICS classification data to the SIC code cla ssifications using the 1997 Economic Census Bridge Between NAICS and SIC. Source: U.S. SBA, 1989-2001.


### The trend in the number of firms over the period between1990 and 2001 is similar to the trend in the number of facilities in both industry segments. The number of firm s in the Steel Mill segment decreased to a period-low of 216 in 1997, before increasing over the rest of the period. According to the American Iron and Steel Institute(AISI), 23 U.S. steel companies either declared bankruptcy or ceased operations entirely from 1997 through mid2001, as a result of the continuing trade difficulties and weakness in the U.S. economy (AISI, 2001a). The number of firms in the Steel Products segment also decreased from 1992 to 1998, before rising steadily through 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-10 

### Table B2D-5 shows the number of firms in th e two profiled steel segments between 1990 and 2001.
Table B2D-5: Number of Firms in the Profiled Steel Industry Segments

Year Steel Mills Steel Products Number of Firms Percent Change Number of Firms Percent Change 1990 408 n/a 597 n/a 1991 433 6.1% 635 6.4% 1992 321 -25.9% 661 4.1% 1993 261 -18.7% 641 -3.0% 1994 258 -1.1% 618 -3.6% 1995 309 19.8% 607 -1.8% 1996 397 28.5% 583 -4.0% 1997 216 -45.6% 544 -6.7% 1998 267 23.6% 601 10.5% 1998 a 314 45.3% 666 22.4% 1999 a 593 89.0% 716 7.4% 2000 a 885 49.2% 810 13.2% 2001 a 1,254 41.6% 811 0.1% Total Percent Change 1990-2001 207.4% 35.8% Average Annual

Growth Rate 10.7% 2.8%

aBefore 1998, data were compiled in the SIC system; si nce 1998, these data have been compiled in the North American Industry Classification System (NAICS). For th is analysis, EPA converted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. SBA, 1989-2001.


### B2D-2.4 Employment and Productivity Figure B2D-3 below provides information on Employment from the Annual Survey of Manufactures for the Steel Mills and Steel Products segments. The figure shows that employment levels in the Steel Mills segment decreased by a total of 33 percent between 1987 and 2001. Employment is a significant cost component for steelmakers, accounting for approximately 30 percent of total costs (McGraw-Hill, 1998). Labor cost reductions enabled Steel Mills to improve profitability and comp etitiveness in the face of limited opportunity for price increase in the highly competitive market for Steel Produc ts. The steady decline in employment reflects the smaller number of Steel Mill facilities and firms, in conjunction with aggressive efforts to improve worker productivity in order to cut labor costs and improve prof its (McGraw-Hill, 1998). Employment declined further as a result of the 1998 import crisis, with almost 26,000 U.S. steelworkers reportedly losing their jobs (AISI, 2001a). Employment in the Steel Products segment over the period 1987-2001 has remained fairly constant.
Figure B2D-3: Employment for Profiled Steel Industry Segments§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-11 0 50,000 100,000 150,000 200,000 250,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Steel Mills (SIC 3312) Steel Mills (NAICS to SIC 3312) Steel Products (SIC 3315, 3316, 3317) Steel Products (NAICS to SIC 3315, 3316, 3317)

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996 and 1998-2001; U.S. DOC, 1987, 1992, 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-12 

### Table B2D-6 presents the change in va lue added per labor hour, a measure of labor productivity , for the Steel Mill and Steel Products segments between 1987 and 2001. Labor productivity at Steel Mills increased slightly over this period. Value added per labor hour incr eased around seven percent between 1987 and 2001. Much of this increase in labor productivity can be attributed to th e restructuring of the U.S. steel industry and the increased role of minimills in production. Minimills are capable of producing rolled steel from scrap with substantially lower labor needs than integrated mills (McGraw-Hill, 1998). Labor productivity in the Steel Products segment has also fluctuated, but increased nine percent overall from 1987 to 2001.
Table B2D-6: Productivity Trends for the Profiled Steel Industry Segments ($2003)

Year Steel Mills Steel Products
Value Added (millions) Production Hours (millions) Value Added/Hour Value Added (millions) Productio n Hours (millions) Value Added/Hour ($/hr) Percent Change ($/hr) Percent Change 1987 9,269 306 30 n/a 2,355 108 22 n/a 1988 9,817 324 30 0% 2,550 94 27 24% 1989 9,631 348 28 -9% 2,447 112 22 -20% 1990 9,490 315 30 9% 2,445 93 26 21% 1991 8,682 279 31 3% 2,342 106 22 -17% 1992 8,605 277 31 0% 2,424 87 28 27% 1993 8,369 268 31 1% 2,551 109 23 -16% 1994 8,529 266 32 2% 2,572 91 28 21% 1995 8,604 263 33 2% 2,647 114 23 -18% 1996 8,389 260 32 -2% 2,645 134 20 -15% 1997 8,206 252 33 1% 2,645 110 24 21% 1998 a 8,170 245 33 2% 2,702 113 24 0% 1999 a 7,715 237 33 -2% 2,588 108 24 0% 2000 a 7,836 241 32 0% 2,641 109 24 0% 2001 a 6739 210 32 -1% 2427 100 24 0% Total Percent Change 1987-2001 -27.3% -31.4% 6.7% 3.1% -7.4% 9.1% Average Annual

Growth Rate -2.3% -2.7% 0.5% 0.2% -0.5% 0.6%

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996 and 1998-2001; U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-13 

### B2D-2.5 Capital Expenditures Steel production is a relatively capital intensive process. The integrated production process requires a capital investment of approximately $2,000 per ton of capacity for plants and equipment. The nonintegrated process employed in minimills is significantly less capital inte nsive with capital costs of approximately $500 per ton of capacity (McGraw-Hill, 1998). New capital expendituresare needed to modernize, expand, and replace existing capacity to meet growing demand. Capital expenditures in the Steel Mills and the Steel Products segments between 1987 and 2001 are presented in Table B2D-7 below. The table shows thatcapital expenditures in both the Steel Products and the Steel Mills dropped significantly between 1987 and 2001. Capital outlays increased in the late 1980s and early 1990s, rising by a total of 131 percent from 1987 to 1991. Th is substantial increase coincides with the advent of thin slab casting, a technology that allowed minimills to compete in the market for flat rolled sheet steel. The significant decreases in capital expenditures by Steel Mills that followed this expansion reflects the bottoming out of the demand for Steel Products in the early 1990s. The recovery in capital expenditures in the mid 1990s reflected increased demand and higher utilization rates (McGraw-Hill, 1998). However, the import crisis of the late 1990s and later weakening of the U.S. economy put pressure on the domestic industry, and expenditures for new capacity have decreased steadily since 1997 (McGraw-Hill, 2000).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-14 

### Table B2D-7: Capital Expenditures for the Pr ofiled Steel Industry Segments (millions,$2003)

Year Steel Mills Steel Products Capital Expenditures Percent Change Capital Expenditures Percent Change 1987 1,761 n/a 783 n/a 1988 2,642 50.0% 597 -23.8% 1989 3,360 27.2% 678 13.6% 1990 3,307 -1.6% 677 -0.1% 1991 3,736 13.0% 482 -28.8% 1992 2,704 -27.6% 496 3.0% 1993 2,126 -21.4% 542 9.2% 1994 3,059 43.9% 626 15.4% 1995 3,156 3.2% 611 -2.4% 1996 3,173 0.5% 658 7.7% 1997 2,871 -9.5% 605 -8.0% 1998 a 2,821 -1.7% 578 -4.5% 1999 a 2,391 -15.2% 488 -15.6% 2000 a 2,175 -9.0% 507 3.9% 2001 a 1,378 -36.6% 437 -13.9% Total Percent Change 1987-2001 -21.7% -44.2% Average Annual

Growth Rate -1.7% -4.1%

aBefore 1998, the Department of Commerce compiled data in the SIC system; since 1998, these data have been compiled in the North American Industry Classification System (NAICS). For this analysis, EPA conve rted the NAICS classification data to the SIC code classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1988-1991, 1993-1996 and 1998-2001; U.S. DOC, 1987, 1992, and 1997.


### B2D-2.6 Capacity Utilization Capacity utilization measures actual output as a percentage of total potential output given the available capacity. Capacity utilization provides insight into the exte nt of excess or insufficient capacity in an industry, and into the likelihood of investment in new capacity. Fi gure B2D-4 presents the capacity utilization index from 1989 to 2002 for the 4-digit SIC codes that make up the Steel Mill and Steel Products segments. As shown in the figure, the index follows similar trends in each segment. For all segments, capacity utilization peaked in 1994 and decreased through 2001, with a slight increase in 2002. Th is trend reflects the over-capacity in the U.S. steel industry, which has followed the substantial capacity additions in the late 1980s and early 1990s and increased imports throughout the 1990s. Worldwide capacity remains in excess of long-term needs (S&P, 2004).§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-15 40 90 140 190 240

1989 1991 1993 1995 1997 1999 2001 Steel Mills (SIC 3312)
Steel Mills (NAICS to SIC 3312) Steel Products (SIC 3315, 3316, 3317) Steel Products (NAICS to SIC 3315, 3316, 3317) 

### Figure B2D-4: Capacity Utilization Rates (Fourt h Quarter) for Profiled Steel Industry Segments

aBefore 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. Source: U.S. DOC, 1989-2001.


## B2D-3 S TRUCTURE AND 

## C OMPETITIVENESS 

### The companies that manufacture steel operate in a highl y capital intensive industry. The Steel Mill segment is comprised of two different kinds of facilities, integratedmills and minimills. The integrated steelmaking process requires expensive plant and equipment purchases th at will support production capacities ranging from two million to four million tons per year. Until the early 1960s, integrated steelmaking was the dominant method of U.S. steel manufacturing. Since then, the integrated steel business underwent dramatic downsizing due to competition from minimills and imports. These trends re duced the number of integrated steelmakers (S&P, 2001). Minimills vary in size, from capacities of 150,000 t ons at small facilities to larger facilities with annual capacities of between 400,000 tons and two million tons. Integrated companies have significant capital costs of approximately $2,000 per ton of capacity compared w ith minimills’ $500 per ton. Because minimills do not require as much investment in capital equipment as integr ated steelmakers, minimills have been able to lower prices, driving integrated companies out of many of the commodity steel markets (S&P, 2001). The advent of minimills, with their lower initial capital investments, h as made it easier for new producers to enter the market.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

5 The 1992 Census of Manufactures is the most recent data available by SIC code and State.
B2D-16 

### 42 2 7 4

2 7

1 8

7

5 5 6

14 17 1

16 17

23 17 23 20 8 32

20

58

17 50

20 4

14 23
2428
3 6

79 84 100 104

Number of Facilities 0 - 3 4 - 8 9 - 32 33 - 58 59 - 104 

### B2D-3.1 Geographic Distribution Steel mills are primarily concentrated in the Great Lakes Region (New York, Pennsylvania, Ohio, Indiana, Illinois, and Michigan). In 2003, Indiana accounted for about 20 percent of total raw steel production, followed by Ohio, 15 percent, Michigan, seven percent, and Pe nnsylvania six percent (USGS, 2004). Historically, mill sites were selected for their proximity to water (both fo r transportation and for use in cooling and processing) and the sources of their raw materials, iron ore and coal. The geographic concentration of the industry has begun to change as minimills can be built anywhere where electricityand scrap are available at a reasonable cost and where a local market exists (U.S. EPA, 1995). Figure B2D-5 below shows the distribution of all facilities by State in both profiled steel segments (Steel Mills and SteelProducts), based on the 1992 Census of Manufactures. 5


### Figure B2D-5: Geographical Distribution of Facilities in the Profiled Steel Industry Segments

Source: U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-17 

### B2D-3.2 Facility Size Seventy-one percent of all Steel Mills employed 100 or more employees in 1992, as shown in Figure B2D-6. These facilities accounted for approximately 98 percent of 1992 value of shipments. Facilities with more than 1,000 employees accounted for approximately 69 percent of all Steel Mill shipments. For 1997, Census of Manufactures data for Iron and Steel Mills (NAICS 331111) , which is roughly comparable to the SIC 3312 data shown in Figure B2D-6, show that the 11 percent of facilities with more than 1,000 employees accounted for a somewhat smaller percentage, 63 percent, of total value of shipments. The declining share of total production in the largest facilities reflects growth in the minimill pr oduction segment, which, on average, have smaller capacity and lower employment than integrated mills. The Steel Products segment is characterized by smaller facilities than steel making, with only 26 percent of facilities in the segment employing 100 or more employees in 1992. While the majority of facilities in the Steel Products segment had fewer than 100 employees, most of the output from this segment was produced at the largest facilities. Figure B2D-6 shows that Steel Produc ts facilities with more than 100 employees accounted for approximately 74 percent of the industry’s 1992 value of shipments.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-18 0 50 100 150 200 250

1-9 10-19 20-49 50-99 100-249 250-499 500-999 1000- 2499 2500+ Steel Mills (SIC 3312) Steel Products (SIC 3315, 3316, 3317)

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000

1-9 10-19 20-49 50-99 100-249 250-499 500-999 1,000- 2,499 2500+ Steel Mills (SIC 3312) Steel Products (SIC 3315, 3316, 3317) 

### Figure B2D-6: Number of Facilities and Value of Shipments in 1992 a

### by Employment Size Category for the Profiled Steel Industry Segments Number of Facilities

Value of Shipments (in millions)

aThe 1992 Census of Manufactures is the most recent data available by SIC code and facility employment size. Source: U.S. DOC, 1987, 1992, and 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

6 Note that the measured concentration ratio and the HHF are very sensitive to how th e industry is defined. An industry with a high concentration in domestic production may nonetheless be subject to significant competitive pressures if it competes with foreign producers or if it competes with products produced byother industries (e.g., plastics vs. aluminumin beverage containers). Concentratio n ratios based on share of production are therefore only one indi cator of the extent of competition in an industry.
B2D-19 

### B2D-3.3 Firm Size For both Steel Mills and Steel Products, the Small Business Administration defines a small firm as having 1,000 or fewer employees. The size categories reported in th e Statistics of U.S. Businesses (SUSB) do not correspond with the SBA size classifications, therefore preventing pr ecise use of the SBA size threshold in conjunction with SUSB data. Table B2D-8 below shows the distribution of firms, facilities, and receipts by the employment size of the parent firm. The SUSB data presented in Table B2 D-8 show that in 2001, 1,172 of 1,254 firms in the Steel Mills segment had less than 500 employees. Therefore, at least 93 percent of firms in this segment were classified as small. These small firms owned 1,179 facilities, or 87 percent of all facilities in the segment. Of the 811firms with facilities that manufacture Steel Products, 706, or 87 percent, employ fewer than 500 employees, and are therefore considered small businesses. Small firms own 74 percent of facilities in the industry.
Table B2D-8: Number of Firms, Facilit ies, and Estimated Receipts in the Profiled Steel Industry Segments by Employment Size Category, 2001
Employment Size Category Steel Mills Steel Products Number of

Firms Number of Facilities Number of Firms Number of Facilities 0-19 959 959 438 438 20-99 154 154 162 175 100-499 58 66 106 149

500+ 82 173 105 266 Total 1,254 1,352 811 1,028 Source: U.S. SBA, 2001.



### B2D-3.4 Concentration Ratios Concentration is the degree to which industry output is concentrated in a few large firms. Concentration is closely related to entry barriers with more con centrated industries generally having higher barriers. The four-firm concentration ratio(CR4) and the Herfindahl-Hirschman Index (HHI) are common measures of industry concentration. The CR4 indicates the market share of the four largest firms. For example, a CR4 of 72 percent means that the four largest firms in the industry account for 72 percent of the industry’s total value of shipments. The higher the concentration ratio, the less competition there is in the industry, other things being equal 6 

### . An industry with a CR4 of more than 50 percent is generally considered concentrated. The HHI indicates concentration based on the largest 50 firms in the i ndustry. It is equal to the sum of the squares of the market shares for the largest 50 firms in the industry. For example, if an industry consists of only three firms with market shares of 60, 30, and 10 percent, respectively, the HHI of this industry would be equal to 4,600 (60 2 

### + 30 2 

### + 10 2 

### ). The higher the index, the fewer the number of firm s supplying the industry and the more concentrated the industry. Based on the U.S. Department of Justice’s guidelines for evaluating mergers, markets in which the HHI is under 1000 are considered unconcentrated, markets inwhich the HHI is between 1000 and 1800 are considered to be moderately concentrated, and those in which the HHIis in excess of 1800 are considered to be concentrated.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-20 

### Table B2D-9 shows that Steel Mills have an HHI of 511 and that Steel Products, comprised of SIC 3315, 3316, and 3317, have HHIs of 201, 604, and 194, respectively. The Steel Mills and Steel Products segments are considered competitive, based on standard measures of con centration. The CR4 and the HHI for the relevant SIC codes are below the benchmarks of 50 percent and 1,000, r espectively. Moreover, the table shows that each of the industry segments became more competitive between 1987 and 1992. The relatively low concentration values suggest that this factor would not contribute to the industry’s ability to pass through compliance costs as price increases to customers.
Table B2D-9: Selected Ratios for the Profiled Steel Industry Segments

SIC Code Year Total Number of

Firms Concentration Ratios 4 Firm (CR4) 8 Firm (CR8) 20 Firm (CR20) 50 Firm (CR50) HerfindahlHirschman Index Steel Mills
3312 1987 271 44% 63% 81% 94% 607 1992 135 37% 58% 81% 96% 551 Steel Products
3315 1987 274 21% 34% 54% 78% 212 1992 271 19% 32% 54% 80% 201
3316 1987 156 45% 62% 82% 95% 654 1992 158 43% 60% 81% 96% 604
3317 1987 155 23% 34% 58% 85% 242 1992 166 19% 31% 53% 80% 194

aThe 1992 Census of Manufactures is the most recent concentration ratio data available by SIC code. Source: U.S. DOC, 1987, 1992, 1997.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-21 

### B2D-3.5 Foreign Trade This profile uses two measures of foreign competition: export dependenceand import penetration

. Import penetration measures the extent to which domestic firms are exposed to foreign competition in domestic markets. Import penetration is calculated as total imports divided by total value of domestic consumption in that industry: where domestic consumption equals domestic production plus imports minus exports. Theory suggests that higher import penetration levels will reduce market power and pricing discretion because foreign competition limits domestic firms’ ability to exercise such power. Firms belonging to segments in which imports account for a relatively large share of domestic sales would therefore be at a relative disadvantage in their ability to passthrough costs because foreign producers would not incur costs as a result of the Phase III regulation. The estimated import penetration ratio for the entire U.S. manufacturing sector (NAICS 31-33) for 2001 is 22 percent. For characterizing the ability of industries to withstand compliance cost burdens, EPA judges that industries with import ratios close to or above 22 percent would more lik ely face stiff competition from foreign firms and thus be less likely to succeed in passing compliance costs through to customers. Export dependence, calculated as exports divided by value of shipments, measures the share of a segment’s sales that is presumed subject to strong foreign competiti on in export markets. The Phase III regulation would not increase the production costs of foreign producers with whom domestic firms must compete in export markets. As a result, firms in industries that rely to a greater extent on export sales would have less latitude in increasing prices to recover cost increases resulting from regulati on-induced increases in production costs. The estimated export dependence ratio for the entire U.S. manufacturing sector for 2001 is 15 percent. For characterizing the ability of industries to withstand compliance cost burdens , EPA judges that industries with export ratios close to or above 15 percent are at a relatively greater disadva ntage in potentially recovering compliance costs through price increases since export sales are presumed subject to substantial competition from foreign producers. The global market for steel continues to be extremely competitive. From 1945 until 1960, the U.S. steel industry enjoyed a period of tremendous prosperity and was a net exporter until 1959. However, by the early 1960s, foreign steel industries had thoroughly recovered from World War II and had begun c onstruction of new plants that were more advanced and efficient than the U.S. integrated steel mills. Foreign producers also enjoyed lower labor costs, allowing them to take substantial market share from U.S. producers. This increased competition from foreign producers, combined with decreased consumption in some key end use markets, served as a catalyst for the restructuring and downsizing of the U.S. steel i ndustry. The industry emerged from this restructuring considerably smaller, more technologically advanced and internationally competitive (S&P, 2001). Table B2D-10 presents trade statistics for the profiled steel industry segments from 1990 to 2001. The table shows that while the trend in export dependence has beenrelatively stable, import penetration has increased from the early 1990s until 1998 and has since dropped. The drop after 1998 results from the trade protection measures mentioned above. Historically, the U.S. steel industr y has exported a relatively small share of shipments compared to the steel industries of other developed nations (McGraw-Hill, 2000). U.S. exports rose in 1995 to the highest level since 1941, and remained relatively hi gh through 2001. Imports penetration rose to 21 percent in 1998, after hovering around 15 percent in the early 1990s. This increase in imports reflected excess steel capacity worldwide and the competitiveness of foreign steel produ cers, as described previously. Canada received the largest amount of U.S. exported steel in 2003, followed byMexico. Imports of steel mill products increased 8.4 percent from 2001 to 2002. Brazil, Canada, the EU, Japan , the Republic of Korea, Mexico, Russia, and Turkey were major sources of steel mill product imports (USGS, 2002). The steel industry’s import penetration ratio was 19 per cent in 2001, implying that the industry currently faces moderate competition from foreign firms in setting prices fo r U.S. sales. However, as noted above, the removal of temporary import restrictions will leave the industry mo re exposed to competition from foreign producers. The steel industry’s export dependence ratio in 2001 was eight percent, therefore the industry will not likely be affected by competitive pressures from abroad in export sal es. This finding implies that the steel industry is not characterized by competitive pressures from foreign firms/ markets and thus market power and cost pass through potential are not diminished by export penetration. Howeve r, it is questionable that firms in an industry will have a comparatively high cost pass-through potential simply b ecause firms in that industry are not active in export§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-22 

### markets. From the standpoint of firms gaining market power, EPA believes that the finding of low export dependence diminishes the importance of export competition as indicator of market power. Thus, other indicators must be relied upon to gauge the amount of market power firms in the steel industry are expected to hold. On balance, the U.S. steel industry is subject to signifi cant international competitive pressure, largely manifesting though the penetration of foreign pr oduct into domestic markets. Although the U.S. industry’s competitiveness against foreign producers improved in recent years, the industry remains substantially vulnerable to foreign competition, indicating a low likelihood that steel indus try producers subject to the 316(b) regulation would be able to pass a material share of compliance costs through to customers.
Table B2D-10: Import Penetration and Export Dependence: Steel Mill Products

Year Value of Imports (millions,

$2003) Value of Exports (millions,

$2003) Value of Shipments (millions,

$2003) Implied Domestic Consumption a Import Penetration b Export Dependence


### B2989 12,440 3,864 84,803 93,379 13.3% 4.6%

1990 11,158 3,701 78,913 86,370 12.9% 4.7% 1991 10,204 4,729 69,041 74,516 13.7% 6.9% 1992 10,169 3,815 69,936 76,290 13.3% 5.5% 1993 10,884 3,496 73,280 80,668 13.5% 4.8% 1994 15,419 3,675 80,479 92,223 16.7% 4.6% 1995 14,529 5,506 84,557 93,580 15.5% 6.5% 1996 15,338 4,812 82,446 92,972 16.5% 5.8% 1997 16,224 5,603 83,830 94,451 17.2% 6.7% 1997 de 16,436 5,754 83,830 94,512 17.4% 6.9% 1998 de 19,683 5,416 81,744 96,011 20.5% 6.6% 1999 de 15,241 4,946 74,877 85,172 17.9% 6.6% 2000 de 17,415 5,544 73,771 85,642 20.3% 7.5% 2001 de 13,240 5,181 61,996 70,055 18.9% 8.4% Total Percent Change 1989-2001 18.7% 40.0% -21.4% -18.9% Average Annual

Growth Rate 1.4% 2.8% -2.0% -1.7%

aCalculated by EPA as sh ipments + imports - exports. b Calculated by EPA as imports divi ded by implied dom estic consumption.
c Calculated by EPA as exports divided by shipments. d Before 1998, the Department of Commerce co mpiled data in the SIC system; since 1998, th ese data have been compiled in the Nort h American Industry Classification System (NAI CS). For this analysis, EPA converted th e NAICS classification data to the SIC cod e classifications using the 1997 Economic Census Bridge Between NAICS and SIC

. eAs Census Trade data are not available before 1997, export a nd import values are taken from the International Trade Administration for years 1989-1997. Source: ASM 1997-2001; ITA 1989-1997§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-23 

## B2D-4 F INANCIAL 

## C ONDITION AND 

## P ERFORMANCE 

### The financial performance and condition of the steel industry are important determinants of its ability to withstand the costs of regulatory compliance without material adve rse economic/financial impact. To provide insight into the industry’s financial performance and condition, EPA reviewed two key measures of financial performance over the 12-year period, 1992-2003: net profit margin and return on total capital. EPA calculated these measures as a revenue-weighted index of measure values for public reporting firms in the respective industries, using data from the Value Line Investment Survey. Financial pe rformance in the most recent financial reporting period (2003) is obviously not a perfect indicator of conditi ons at the time of regulatory compliance. However, examining the trend, and deviation from the trend, through the most recent reporting period gives insight into where the industry may be , in terms of financial performance and condition, at the time of compliance. In addition, the volatility of performance against the trend, in itself, provides a measure of the potential risk faced by the industry in a future period in which compliance requi rements are faced: all else equal, the more volatile the historical performance, the more likely the industry maybe in a period of relativel y weak financial conditions at the time of compliance. Net profit margin is calculated as after-tax income before nonr ecurring gains and losses as a percentage of sales or revenue, and measures profitability, as reflected in th e conventional accounting concept of net income. Over time, the firms in an industry, and the industry collectivel y, must generate a sufficient positive profit margin if the industry is to remain economically viable and attract capital. Year-to-year fluctuations in profit margin stem from a several factors, including: variations in aggregat e economic conditions (incl uding international and U.S. conditions), variations in industry-specific market c onditions (e.g., short-term capacity expansion resulting in overcapacity), or changes in the pricing and availabilityof inputs to the industry’s production processes (e.g., the cost of energy to the steel production process). The ex tent to which these fluctuations affect an industry’s profitability, in turn, depends heavily on the fixed vs. vari able cost structure of the industry’s operations. In a capital intensive industry such as the steel industry, th e relatively high fixed capital costs as well as other fixed overhead outlays, can cause even small fluctuations in out put or prices to have a large positive or negative affect on profit margin. Return on total capital is calculated as annual net profit, plus one-h alf of annual long-term interest, divided by the total of shareholders' equity and long-term debt (total capital). This concept measures the total productivity of the capital deployed by a firm or industry, regardless of the financial source of the capital (i.e., equity, debt, or liability element). As such, the return on total capital provides insight into the profitability of a business’ assets independent of financial structure and is thus a “purer” indicator of asset profitability than return on equity. In the same way as described for net profit margin , the firms in an industry, and the industry collectively, must generate over time a sufficient return on capital if the industry is to remain economically viable and attract capital. The factors causing short-term variation in net profit margin will also be the primary sources of short-term variation in return on total capital

. Figure B2D-7 presents trends in net profit margins and return on total capital for the steel industry between 1992 and 2003. The graph shows considerable volatility in the tr end over this period. After registering improvement in financial performance in the first half of the 1990s, steel industry financial performance declined markedly from 1997/1998 forward to 2003, due first to increasing imports and later to general economic weakness. Measures of financial performance increased in 2002 when the U.S. steel industry received temporary relief with tariffs ranging up to 30 percent on certain steel imports. In 2003, however, the integrated steel industry had poor operating results, as high raw material costs outweighed increased sales and higher volumes.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

7 Data on cooling water use are from the 1982 Census of Manufactures . 1982 was the last year in which the Census of Manufactures reported cooling water use.

8 The proposed Phase III regulation also applies to existing electric generating facilities as well as certain facilities in the oil and gas extraction industry and the seafood processing i ndustry. See Chapters B4 and B5 and Part C of this document for more informati on on these industries.
B2D-24 -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Net Profit Margin - Iron and Steel Industry Return on Total Capital - Iron and Steel Industry 

### Figure B2D-7: Net Profit Margin and Return on Total Capital for the Iron and Steel Industry

Source: Value Line, 1992-2003.


## B2D-5 F ACILITIES 

## O PERATING 

## C OOLING 

## WATER 

## I NTAKE 

## S TRUCTURES 

### Section 316(b) of the Clean Water Act applies to point source facilities which use or propose to use a cooling water intake structure that withdraws cooling water di rectly from a surface waterbody of the United States. In 1982, the Primary Metals industries as a whole (incl uding Nonferrous and Steel producers) withdrew 1,312 billion gallons of cooling water, accounting for approximately 1.7 percent of total industrial cooling water intake in the United States 7 

### . The industry ranked 3 rd 

### in industrial cooling water use, behind the electric power generation industry, and the chemical industry (1982 Census of Manufactures). This section provides information for facilities in the pr ofiled steel segments potentially subject to the proposed regulation. Existing facilities that meet all of the following conditions are potentially subject to the proposed regulation: 8



### < 

### Use a cooling water intake structure or structures, or obtain cooling water by any sort of contract or arrangement with an independent supp lier who has a cooling water intake structure; or their cooling water intake structure(s) withdraw(s) cooling water from waters of the U.S., and at least twenty-five (25) percent of the water withdrawn is used for contact or non-contact cooling purposes;
< 

### Have an National Pollutant Discharge Elimination Sy stem (NPDES) permit or are required to obtain one; and
< 

### Have a design intake flow of greater than 2 million gallons per day (MGD). The proposed regulation also covers substantial additions or modificati ons to operations undertaken at such facilities. While all facilities that meet these criteria ar e subject to the regulation, this section focuses on the 66§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

9 EPA applied sample weights to the sampled facilities to account for non-sampled facilities and facilities that did not respo nd to the survey. For more information on EPA’s 2000 Section 316(b) Industry Survey, please refer to the Information Collection Request (U.S. EPA, 2000).
B2D-25 

### facilities nation-wide in the profiled steel segments id entified in EPA’s 2000 Section 316(b) Industry Survey as being potentially subject to this proposed regulation 9 

### . Information collected in the Detailed Industry Questionnaire found that an estimated 46 out of 161 SteelMills (29 percent) and 21 out of 309 Steel Product manufacturers (7 percent) meet the characteristics of a potential Phase III facility. B2D-5.1 Waterbody and Cooling System Type Minimills use electric-arc-furnace (EAF) to make steel fro m ferrous scrap. The electric-arc-furnace is extensively cooled by water and recycled through cooling towers (U.S . EPA, 1995). This is important to note since most new steel facilities are minimills. Table B2D-11 shows the distribution of potential Phase III facilities in the profiled steel segments by type of water body and cooling system. The table shows that most of the potential Phase III facilities employ a combination of a once-through and recirculating system (23, or 35%) or a once through system (22, or 33%). The largest proportion of existing facilities draw water from a freshwater stream or river (52, or 79%).
Table B2D-11: Number of Potential Phase III Facilities in the Profiled Steel Industry Segments by Water Body Type and Cooling System Type

Water Body Type Cooling Systems Recirculating Combination Once-Through Other Total Numbe r % of Total Numbe r % of Total Numbe r % of Total Numbe r % of Total Steel Mills Freshwater Stream/ River 5 16% 9 28% 11 34% 8 25% 32 Great Lake 0 0% 10 77% 3 23% 0 0% 13 Total † 5 11% 19 41% 14 30% 8 17% 46 Steel Products Freshwater Stream/ River 10 50% 3 15% 7 35% 0 0% 20 Lake/ Reservoir 0 0% 0 0% 1 100% 0 0% 1 Total † 10 48% 3 14% 8 38% 0 0% 21 Total for Profiled Steel Industry Freshwater Stream/ River 15 29% 12 23% 18 35% 8 15% 52 Great Lake 0 0% 10 77% 3 23% 0 0% 13 Lake/ Reservoir 0 0% 0 0% 1 100% 0 0% 1 Total a 15 23% 23 35% 22 33% 8 12% 66

aIndividual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2000.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-26 0 0 5 7 8 7 5 3 28

5

0 5 10 15 20 25 30

<100 100-249 250-499 500-999 >=1000 Steel Mills (SIC 3312) Steel Products (SIC 3315, 3316, 3317) 

### B2D-5.2 Facility Size Section 316(b) sample Steel Mills and Steel Products facilities are larger than facilities in their industries as a whole, as reported in the Census and discussed previously:

< 

### Sixty-four percent of all facilities in the steel segment had fewer than 100 employees in 1992; none of the potential Phase III facilities in that segment fall into that employment category. Figure B2D-8 shows the number of potential Phase III facilities by employment size category.
Figure B2D-8: Number of Potential Phase III Facilities in the Profiled Steel Industry Segments by Employment Size

Source: U.S. EPA, 2000.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-27 

### B2D-5.3 Firm Size EPA used the Small Business Administration (SBA) sm all entity size standards to determine the number of existing Section 316(b) profiled steel industry facilities owne d by small firms. Firms in the Steel Mills and Steel Products segments are defined as small if they have 1000 or fewer employees. Table B2D-12 shows that 7 of the 46 Section 316(b) Steel Mills, or 15 percent, are owned bysmall firms, while 6 (or 30 percent) of the Section 316(b) Steel Product facilities are owned by small firms. Overall, 53 facilities (80 percent) are owned by large firms, and 13 facilities (20 percent) are owned by small firms.

Table B2D-12: Number of Potential Phase III Fac ilities by Firm Size for the Profiled Steel Segments

SIC Code Large Small Total Number % of SIC Number % of SIC Steel Mills 3312 39 85% 7 15% 46 Steel Products 3315 3 50% 3 50% 7 3316 7 69% 3 31% 10 3317 5 100% 0 0% 5 Total † 15 73% 6 30% 21 Total for Profiled Steel Facilities Total a 53 80% 13 20% 66

aIndividual numbers may not add up to total due to independent rounding. Source: U.S. EPA, 2000; U.S. SBA, 2000; D&B, 2001.§ 316(b) Proposed Rule: Phase III – EA, Part B: Economic Analysis for Existing Facilities B2D: Steel

B2D-28 

## REFERENCES 

### American Iron and Steel Institute (AISI). 2001a. “Impor ts Continue at Severely Depressed Prices; United U.S. Steel Industry Urges Effective 201 Trade Remedy.” September 25, 2001. American Iron and Steel Institute (AISI). 2001b . July 2001 Selected Steel Industry Data

. American Iron and Steel Institute (AISI). 2001c. “S hipments Down 10 Percent Through August 2001.” October 12, 2001. Bureau of Labor Statistics (BLS). 2002. Producer Price Index . Series: PCU33__#-Primary Metal Industries. Dun and Bradstreet (D&B). 2001. Data extracted from D&B Webspectrum August 2001. 

### Executive Office of the President. 1987. Office of Management and Budget. Standard Industrial Classification Manual. Federal Reserve Board. 2004. Industrial Production and Capacity Utilization . Data extracted May 11, 2004. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 2000. U.S. Industry & Trade Outlook ‘00. McGraw-Hill and U.S. Department of Commerce, International Trade Administration. 1998. U.S. Industry & Trade Outlook ‘98. Standard & Poors (S&P). 2004. Sub-Industry Outlook: Steel . February 21, 2004. Standard & Poors (S&P). 2001. Industry Surveys - Metals: Industrial . July 12, 2001. U.S. Department of Commerce (U.S. DOC). 2000. International Trade Administration. Report to the President: Global Steel Trade


### S Structural Problems and Future Solutions . July, 2000. U.S. Department of Commerce (U.S. DOC). 1997. Bureau of the Census. Bridge Between NAICS and SIC. U.S. Department of Commerce (U.S. DOC). 1989-2002. Bureau of the Census. Current Industrial Reports. Survey of Plant Capacity

. U.S. Department of Commerce (U.S. DOC). 1988- 1991, 1993-1996, and 1998-2001. Bureau of the Census. Annual Survey of Manufactures. U.S. Department of Commerce (U.S. DOC). 1987, 1992, and 1997. Bureau of the Census. Census of Manufactures

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