TO:	Tom Walton		

FROM:	Brooks Depro

DATE:	June 2, 2008

SUBJECT:	Economic Impact Analysis for Portland Cement NSPS

Using the engineering cost analysis inputs, we have prepared an initial
assessment of the economic impacts of the new source performance
standards for portland cement plants.  We report the new source unit
costs ($/metric ton of capacity), conduct sales tests and compare them
with industry operating profit rates, examine potential cement price and
consumption changes, and provide results of a small business screening
analysis. 

Engineering Cost Analysis

Existing data on planned capacity expansions suggests 20 new kilns will
be constructed in the next 5 years.  EPA estimates up to four of these
kilns may use high sulfur raw materials while the remaining 16 will
likely use moderate or low sulfur raw materials.  

The engineering cost analysis suggests new kiln using high sulfur raw
materials could potentially spend up to $6.4 million dollars per year to
meet the selected control options for NOx, SO2, and PM (see Table 1). 
The average cost per ton of capacity is approximately $5.  In contrast,
new kilns using moderate or low sulfur raw materials could potentially
spend $1.5 million dollars per year.   The average cost per ton of
capacity is approximately $1.   

Table 1.  Model Plant Costs (Clinker Capacity =1.1 million metric tons
per year)

Kiln Type	Number of Kilns (5-Year Period)	Total Annualized Costs
($Million)	New Source Unit Cost ($/metric ton of capacity)

High Sulfur Raw Materials	4	$6.4	$5

Moderate or Low Sulfur Raw Materials	16	$1.5	$1

	

Sales Test

Using a range of national price data and engineering unit cost data, we
conducted sales tests for two types of kilns (high sulfur raw materials
and moderate/low sulfur raw materials):

Sales Test Ratio= Control Costs ($/ton)/F.O.B Cement Prices ($/ton)

The USGS reports that the real price of cement per metric ton (2005
dollars) has typically ranged between $75 and $100 since 1990 (see
Figure 1).  For high sulfur raw material kilns, this implies a sales
test ratio between 5 to 7 percent. For moderate/low sulfur raw material
kilns, the sales test ratio is one to two percent. 

Economic Impacts

From 2000 to 2006, the Portland Cement Association (PCA, 2007) reports
that the average operating profit rates for the industry ranged from 17
to 21 percent.  If this profit data is representative of operating
profit rates for new kilns, new kilns using high sulfur content raw
materials could potentially significantly reduce their operating profit
rates.  As a result, companies may have the incentive to look for less
expensive alternatives to meet the SO2 emission standards (e.g. lower
sulfur content materials or technologies other than wet scrubbers). 
Although anecdotal evidence suggests these opportunities exist, EPA does
not currently have sufficient information to do a formal evaluation of
these alternatives.  If these alternatives are limited or not cost
effective, the NSPS may lead companies to consider delaying rates of
construction of these new kilns until market conditions change (e.g.
increases in demand that lead cement prices rise) to cover these
additional control costs. 

We also considered potential market-level changes in prices and
consumption for markets anticipating entry of new kilns. If we consider
a long run partial equilibrium model with a horizontal market supply
function, the sales tests reported earlier also provide an estimate of
the percentage change in market price.  The sales tests suggest long run
cement price changes could range from one to seven percent, depending on
the actual baseline market cement price and the type of kiln entering
the market.  Applying EPA’s econometric estimate of the cement demand
elasticity (–0.88) to these price changes, cement consumption could
potentially fall between one to six percent.  

We acknowledge these estimates likely overstate the price and
consumption impacts in markets with significant imports since this type
of competition tends to constrain market prices increases.  Although
import competition may mitigate prices increase and benefit cement
consumers, cement companies would be more likely to consider
construction delays in markets with strong import competition.  However,
preliminary analysis suggests that planned capacity expansions are
slated for markets that do not face substantial import competition.   

Small Business Screening Analysis

Using the SBA firm size standards, existing data on planned capacity
expansions suggests one of the 20 kilns is considered small.  EPA’s
engineering analysis found that this company is unlikely to install a
wet scrubber to the meet the NSPS.  As a result, the sales test ratio
for this firm is estimated to be between one and two percent of sales.

Figure 1.	U.S. Cement Prices (F.O.B.):  1990 to 2007 

Sources:	1990–2003: Kelly, T. and G. Matos. 2007  XE "Kelly, T. and G.
Matos. 2007b"  . “Historical Statistics for Mineral and Material
Commodities in the United States: Cement Supply and Demand
Statistics.” U.S. Geological Survey Data Series 140, Version 1.2.
Available at   HYPERLINK "http://minerals.usgs.gov/ds/2005/140/" 
http://minerals.usgs.gov/ds/2005/140/ . Last modified April 11, 2006.

2004–2007: U.S. Department of the Interior, U.S. Geological Survey.
2008  XE "U.S. Department of the Interior, U.S. Geological Survey. 2008"
 . Minerals Commodity Summaries, Cement 2008. Washington, DC: U.S.
Department of the Interior. Available at   HYPERLINK
"http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2008-cemen.
pdf" 
http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2008-cemen.p
df .  		        Price Deflator:  U.S. Department of Labor, Bureau of
Labor Statistics (BLS). 2008. “Consumer Price Index All Items - U.S.
City Average Data: Customizable Data Tables.” Available at
<http://www.bls.gov/cpi/>. As obtained on March 14, 2008.

References:

Kelly, T. and G. Matos.  2007.  “Historical Statistics for Mineral and
Material Commodities in the United States:  Cement Supply and Demand
Statistics.”  U.S. Geological Survey Data Series 140, Version 1.2. 
Available at:    HYPERLINK "http://minerals.usgs.gov/ds/2005/140/" 
http://minerals.usgs.gov/ds/2005/140/   Last Modified April 11, 2006.

Portland Cement Association (PCA). 2007. Annual Yearbook 2007. Skokie,
IL: PCA’s Economic Research Department.

U.S. Department of the Interior, U.S. Geological Survey. 2008. Minerals
Commodity Summaries, Cement 2008. Washington, DC: U.S. Department of the
Interior.  Available at:    HYPERLINK
"http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2008-cemen.
pdf" 
http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2008-cemen.p
df 

U.S. Department of Labor, Bureau of Labor Statistics. 2008a. “Consumer
Price Index:  U.S. City Average, All Consumers; Series ID:
CUUR0000SA0.” Washington, DC: U.S. Department of Labor.

U.S. Department of Labor, Bureau of Labor Statistics (BLS). 2008.
“Consumer Price Index All Items - U.S. City Average Data: Customizable
Data Tables.” Available at <http://www.bls.gov/cpi/>. As obtained on
March 14, 2008.

Tom Walton

  DATE  \@ "MMMM d, yyyy"  \* MERGEFORMAT  June 2, 2008 

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