Larry Sorrels To: Arthur_ G._ Fraas@ omb. eop. gov, 02/ 20/ 2004 06: 15 PM Edmond_ Toy@ omb. eop. gov cc: Ron Evans/ RTP/ USEPA/ US@ EPA, Lisa Conner/ RTP/ USEPA/ US@ EPA, Mary Kissell/ RTP/ USEPA/ US@ EPA, Ken Hustvedt/ RTP/ USEPA/ US@ EPA Subject: Current RIA version  plywood NESHAP Attached are the individual chapters for the plywood NESHAP RIA as they stand now. Note: the qualitative benefits chapter is consistent with the language in the utility MACT and IAQR benefits reports. Thanks.

( See attached file: Covlogo pcwpRIAfinalomb204. wpd) ( See attached file: pcwcria tocfinalomb204. wpd)( See attached file: acropcwcria. wpd) ( See attached file: exsumpcwpriafinalomb204. wpd)( See attached file: pcwcria ch1finalomb204. wpd)( See attached file: pcwcria ch2finalomb204. wpd)( See attached file: pcwcria ch3finalomb204. wpd)( See attached file: pcwcria ch4finalomb204. wpd)( See attached file: pcwcria ch5finalomb204. wpd)( See attached file: pcwcria ch6finalomb204. wpd)

Larry Sorrels Economist US EPA/ OAQPS C339 01 RTP, NC 27711 ( 919) 541 5041 fax: ( 919) 541 0839 United States Office Of Air Quality Environmental Protection Planning And Standards February 2004 Agency Research Triangle Park, NC 27711 FINAL REPORT Air Regulatory Impact Analysis of the Plywood and Composite Wood Products NESHAP Final Report TABLE OF CONTENTS Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ES 1 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1.1 Scope and Purpose of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1.2 Need for Regulatory Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1.3 Requirements for the Regulatory Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 1.4 Other Federal Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 1.5 Organization of the Regulatory Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 1.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 2 Profile of the Plywood and Composite Wood Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 2.2 The Supply Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 2.3 The Demand Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 20 2.4 Industry Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 29 2.5 Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 42 2.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 60 3 Regulatory Alternatives, Emissions, Emission Reductions, and Control and Administrative Costs 3.1 Regulatory Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 3.2 Emissions and Emission Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 15 3.3 Control Equipment and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 26 3.4 Testing, Monitoring, Reporting, and Recordkeeping Costs . . . . . . . . . . . . . . . . . . . . 3 37 3.5 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 40 4 Economic Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 4.1 Results in Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 4.2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 4.3 Economic Impact Analysis Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2 4.4 Economic Impact Analysis Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 4.5 Economic Impact Analysis Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6 4.6 Analysis of Economic Impacts on Engineered Wood Products Sector . . . . . . . . . . . . 4 15 4.7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 22 5 Small Business Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 5.1 Results in Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 5.2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 5.3 Screening Analysis Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2 5.4 Screening Analysis Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2 5.5 Screening Analysis Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 5.6 Screening Analysis Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 5.7 Screening Analysis Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 10 5.8 EIA Results for Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 5.9 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 12 6 Qualitative Assessment of Benefits of Emission Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1 6.1 Identification Of Potential Benefit Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1 6.2 Qualitative Description of Air Related Benefits  HAP and CO . . . . . . . . . . . . . . . . . 6 1 6.3 Qualitative Description of Effects from Reductions and Increases in Emissions from Other Pollutants Due to HAP Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 6.4 Lack of Approved Methods to Quantify HAP Benefits . . . . . . . . . . . . . . . . . . . . . . . 6 12 6.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 13 6.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 14 LIST OF EXHIBITS Exhibit 2 1: SIC & NAICS Codes for the Plywood and Composite Wood Industries . . . . . . . . . . . . . 2 2 Exhibit 2 2: Other Primary SIC Codes for the Plywood and Composite Wood Industries . . . . . . . . . . . 2 3 Exhibit 2 3: SIC and NAICS Codes and Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 12 Exhibit 2 4: Specialization and Coverage Ratios, 1982  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 13 Exhibit 2 5: Summary of Annual Costs and Shipments, 1992  1997 . . . . . . . . . . . . . . . . . . . . . . . . 2 14 Exhibit 2 6: Materials Consumed By Kind for Softwood Plywood and Veneer, 1997 . . . . . . . . . . . . 2 17 Exhibit 2 7: Materials Consumed by Kind for Reconstituted Wood Products, 1997 . . . . . . . . . . . . . 2 18 Exhibit 2 8: Industry Outputs, by SIC Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 21 Exhibit 2 9: MDF Shipments by Downstream Market, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 23 Exhibit 2 10: Particleboard Shipments by Downstream Market, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 2 24 Exhibit 2 11: Housing Market Indicators, 1988  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 25 Exhibit 2 12: Trade for Household Furniture ( SIC 251), 1989  1996 . . . . . . . . . . . . . . . . . . . . . . . . 2 25 Exhibit 2 13: Use of Wood and Non wood Products in Residential Construction 1976  1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 27 Exhibit 2 14: Demand Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 29 Exhibit 2 15: Concentration Ratios by SIC Code, 1982 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 30 Exhibit 2 16: Facilities with Compliance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 31 Exhibit 2 17: Full Production Capacity Utilization Rates, Fourth Quarters, 1992  1997 . . . . . . . . . . 2 33 Exhibit 2 18a: 1998 Employment at Facilities with Compliance Costs . . . . . . . . . . . . . . . . . . . . . . . 2 34 Exhibit 2 18b: 1998 Employment at Facilities with Compliance Costs . . . . . . . . . . . . . . . . . . . . . . . 2 34 Exhibit 2 19: Number of Mills, Average Capacity and Utilization, 1977  1997 . . . . . . . . . . . . . . . . 2 36 Exhibit 2 20: Summary of Capital Expenditures, 1992  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 37 Exhibit 2 21: Size Distribution of Firms Owning Affected Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 2 38 Exhibit 2 22: Types of Firm Ownership for Lumber and Wood Products ( SIC 24), 1992 . . . . . . . . . 2 39 Exhibit 2 23: Indicators of Financial Condition, 1995 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 41 Exhibit 2 24: Trade Balance and Selected Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 44 Exhibit 2 25: Production, Trade and Consumption Volumes for Selected Products ( 1988 1997) . . . . 2 45 Exhibit 2 26: 1997 U. S. Wood Products Imports by Region and Major Trading Partner . . . . . . . . . . 2 48 Exhibit 2 27: 1997 U. S. Wood Product Exports by Region and Major Trading Partner . . . . . . . . . . . 2 50 Exhibit 2 28: Lumber and Wood Products Producer Price Index, 1988 1997 . . . . . . . . . . . . . . . . . . 2 51 Exhibit 2 29: Producer Price Indices of Plywood and Wood Composite Products . . . . . . . . . . . . . . . 2 52 Exhibit 2 30: F. O. B. Prices of Southern plywood, OSB, and Particleboard . . . . . . . . . . . . . . . . . . . . 2 53 Exhibit 2 31: APA Forecasted Structural Panel Production and Demand . . . . . . . . . . . . . . . . . . . . . . 2 56 Exhibit 2 32: APA Actual and Forecasted Structural Panel Capacity and Production . . . . . . . . . . . . 2 57 Exhibit 3 1: Illustration of Total HAP Calculation for an Emission Source . . . . . . . . . . . . . . . . . . . . . 3 5 Exhibit 3 2: Summary of MACT for PCWP Process Units at New and Existing Sources . . . . . . . . . . 3 7 Exhibit 3 3: Cost Effectiveness Analysis Of Beyond The Floor Control Options . . . . . . . . . . . . . . . . . 3 9 Exhibit 3 4: Illustration Of Total HAP Calculation For An Emission Source . . . . . . . . . . . . . . . . . . 3 17 Exhibit 3 5: Uncontrolled and Baseline HAP Emissions Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . 3 21 Exhibit 3 6: Speciated Nationwide Uncontrolled HAP Emissions by Product . . . . . . . . . . . . . . . . . . 3 22 Exhibit 3 7: Speciated Nationwide Baseline HAP Emissions by Product . . . . . . . . . . . . . . . . . . . . . . 3 23 Exhibit 3 8: Estimated Number of Major Sources By Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 24 Exhibit 3 9: Estimated Nationwide Reduction in Total HAP and THC . . . . . . . . . . . . . . . . . . . . . . . 3 25 Exhibit 3 10: Press Enclosure Exhaust Flow Rates and Capital Costs . . . . . . . . . . . . . . . . . . . . . . . . 3 33 Exhibit 3 11: Control Equipment Costed for Process Units with Controlled MACT Floor . . . . . . . . 3 34 Exhibit 3 12: Default Flow Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 36 Exhibit 3 13: Estimated Nationwide Control Costs for the PCWP Industry . . . . . . . . . . . . . . . . . . . . 3 38 Exhibit 3 14: Dollars ( In Total Annualized Costs) Per Ton Of HAP And THC Reduced . . . . . . . . . . 3 39 Exhibit 4 1: Baseline Characterization of Plywood and Composite Wood Markets: 1997 . . . . . . . . . 4 3 Exhibit 4 2. Market Level Impacts of the Proposed NESHAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 Exhibit 4 3. Industry Level Impacts of the Proposed NESHAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 10 Exhibit 4 4: Distribution of Industry Level Impacts of Proposed NESHAP: Affected and Unaffected Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 12 Exhibit 4 5: Distribution of Social Costs Associated with the Proposed NESHAP . . . . . . . . . . . . . . 4 13 Exhibit 4 6: Primary Uses and Substitutes for LSL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 16 Exhibit 4 7: Characteristics of LSL Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 17 Exhibit 4 8: Primary Uses and Substitutes for PSL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 17 Exhibit 4 9: Characteristics of PSL Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 18 Exhibit 4 10: Retail Prices of GL and PSL Beams Delivered to Los Angeles . . . . . . . . . . . . . . . . . . . 4 18 Exhibit 5 1: Net Profit Margins by Product Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 Exhibit 5 2: Affected Firms by Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 Exhibit 5 3: Affected Firms by Process Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 Exhibit 5 4: Affected Firms with C/ S Ratios of 3 Percent or Greater . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 Exhibit 5 5: Affected Firms with C/ S Ratios of 1 Percent or Greater . . . . . . . . . . . . . . . . . . . . . . . . . 5 7 Exhibit 5 6: C/ S to R/ S Comparison for Firms with C/ S of One Percent or Greater . . . . . . . . . . . . . . . 5 8 Exhibit 5 7: Economic Impacts on Small Businesses Associated with Projected Market Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11 Exhibit 6 1: Potential Health and Welfare Effects Associated with Exposure to Hazardous Air Pollutants.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 Exhibit 6 2: Key Health Effects of Exposure to Ambient Carbon Monoxide . . . . . . . . . . . . . . . . . . . . 6 6 Exhibit 6 3: Summary of Subpopulations Potentially at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 LIST OF FIGURES Figure 2 1: Plywood and Veneer Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6 Figure 2 2: Softwood Plywood and Veneer Value of Shipments and Production Costs, 1992  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 15 Figure 2 3: Reconstituted Wood Products Value of Shipments and Production Costs, 1992  1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 16 Figure 2 4: Materials Consumed by Softwood Plywood and Veneer Products, 1997 . . . . . . . . . . . . . 2 17 Figure 2 5: Materials Consumed by Reconstituted Wood Product Producers, 1997 . . . . . . . . . . . . . . 2 19 Figure 2 6 Industry Outputs of Softwood Plywood and Veneer Industry . . . . . . . . . . . . . . . . . . . . . . 2 22 Figure 2 7: Industry Outputs of Reconstituted Wood Products Industry . . . . . . . . . . . . . . . . . . . . . . 2 23 Figure 2 8: Plywood and Composite Wood Facility Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 32 Figure 2 9: Full Production Capacity Utilization, Fourth Quarters, 1992 1997 . . . . . . . . . . . . . . . . . 2 33 Figure 2 10: Value of Product Shipments, 1989 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 46 Figure 2 11: Apparent Consumption, 1989 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 47 Figure 2 12: APA Projected Housing Starts ( 000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 55 Figure 3 1: Variation in RTO Purchased Equipment Cost with Flow Rate . . . . . . . . . . . . . . . . . . . . . 3 27 Figure 3 2: Relationship between RTO Electricity Consumption and Flow Rate . . . . . . . . . . . . . . . . 3 28 Figure 3 3: Relationship between RTO Natural Gas Consumption and Flow Rate . . . . . . . . . . . . . . 3 28 Figure 3 4: Variation in RTO Total Capital Investment with Flow . . . . . . . . . . . . . . . . . . . . . . . . . . 3 30 Figure 3 5: Variation in RTO Total Annualized Cost with Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 30 Figure 4 1: Supply Curves for Affected Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5 Figure 4 2: Market Equilibrium Without and With Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6 Select List of Acronyms and Abbreviations BID  Background Information Document CAA  Clean Air Act CAPMS  Criteria Air Pollution Modeling System CO  Carbon Monoxide COPD  Chronic Obstructive Pulmonary Disease C/ S Cost to Sales Ratio EFB  Electrified Filter Beds EO  Executive Order EPA  Environmental Protection Agency EWP  Engineered Wood Products HAP  Hazardous Air Pollutant HB  Hardboard ICR  Information Collection Request lb  Pound LDs  Loss Days LRS  Lower Respiratory Symptoms LSL  Laminated Strand Lumber LVL  Laminated Veneer Lumber MACT  Maximum Achievable Control Technology MDF  Medium Density Fiber NAAQS  National Ambient Air Quality Standards NAICS  North American Industrial Classification System NESHAP  National Emission Standards for Hazardous Air Pollutants NOx Nitrogen Oxides NPR  Notice of Proposed Rulemaking NSPS  New Source Performance Standards NSR  New Source Review OEM Original Equipment Manufacturers OMB  Office of Management and Budget O& M  Operation and Maintenance OSB Oriented Strandboard ODT  Oven Dry Tons PB  Particleboard P/ E  Partial Equilibrium PM  Particulate Matter PSL  Parallel Strand Lumber ppbdv  Parts Per Billion, dry volume ppm  Parts Per Million PRA  Paperwork Reduction Act of 1995 PTE  Permanent Total Enclosure RCO Regenerative Catalytic Oxidizer viii RTO  Regenerative Thermal Oxidizer RIA  Regulatory Impact Analysis RFA  Regulatory Flexibility Act R/ S  Return to Sales Ratio SAB  Science Advisory Board SBA  Small Business Administration SBREFA  Small Business Regulatory Enforcement Fairness Act of 1996 SIC  Standard Industrial Classification SOA  Secondary Organic Aerosols SO2  Sulfur Dioxide SPV  Softwood Plywood Veneer TAC  Total Annualized Cost THC  Total Hydrocarbon tpd  Tons Per Day tpy  Tons Per Year UMRA  Unfunded Mandates Reform Act URS  Upper Respiratory Symptoms VOS  Value of Shipments VOCs  Volatile Organic Compounds WESP  Wet Electrostatic Precipitator WLDs  Work Loss Days ix This page intentionally 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DRAFT ES 1 EXECUTIVE SUMMARY EPA is issuing a rule to reduce hazardous air pollutant ( HAPs) emissions from existing and new plywood and composite wood products facilities that are major sources. This rule, which will be promulgated in February 2004, is a National Emission Standards for Hazardous Air Pollutants ( NESHAP), and will reduce HAP emissions by requiring affected plywood and composite wood products facilities to meet a level of emissions reductions needed to meet the Maximum Achievable Control Technology ( MACT) floor for these sources. This MACT floor level of control is the minimum level these sources must meet to comply with the proposed rule. The major HAPs whose emissions will be reduced are formaldehyde, acetaldehyde, acrolein, methanol, phenol, and propionaldehyde. The proposed rule will also lead to emission reductions of other pollutants such as volatile organic compounds ( VOC), particulate matter ( PM10), carbon monoxide ( CO), and emission increases in nitrogen oxides ( NOx) due to the application of incineration based controls. Increased electricity use due to application of controls will also lead to general increases in the levels of sulfur dioxide ( SO2) and NOx emitted from electric utilities.

This rule allows an affected source to use a production based compliance option, defined in units of mass of pollutant per unit of production, or any of six control system compliance options if an affected source is equipped with an add on control system. As explained in the Federal Register notice, the options entail HAP reductions of 90 percent or limiting the concentration of HAPs in the exhaust from the control system. In addition, an affected source may choose to comply with an emissions averaging option that allows the sources to not control or under control some process units while controlling other affected process units. Finally, a source can be eligible to become part of a delisted low risk subcategory and thus not be required to control HAP emissions to meet the final rule requirements if the source's emissions have a sufficiently low risk level.

The rule is expected to reduce HAP emissions by 11,000 tons per year in the third year after its issuance. The rule is also expected to reduce VOC emissions, measured as total hydrocarbon, by 27,000 tons per year, PM10 emissions by 13,000 tons per year, and CO emissions by 11,000 tons per year in the third year. The increased electricity required to operate the control systems is also expected to increase NOx and SO2 emissions at electricity generating utilities by 1,200 and 2,000 tons, respectively. The compliance costs, which include the costs of control and monitoring, recordkeeping and reporting requirements, are estimated at $ 143 million ( 1999 dollars). The total social costs, which account for the behavioral response of consumers and producers to higher pollution control costs, are estimated at $ 135.1 million ( 1999 dollars). Economic impacts associated with these costs include price increases nationally of 0.9 to 2.5 percent for products affected by this rule, and a reduction in output of only 0.1 to 0.7 percent nationally for the affected industries. An analysis of small business impacts shows that there are 17 small firms affected, with 10 of them having annual compliance costs of 1 percent or greater than their sales, and 3 of these having annual compliance costs of 3 percent or greater than their sales. The Agency has certified that there is no significant impact on a substantial number of small entities ( SISNOSE) associated with this rule. Also, an analysis of the energy impacts associated with this rule indicates that there is no significant adverse effect on supply, distribution, or use of energy from implementation of this rule. Impact results DRAFT ES 2 considering the effect of a delisted low risk subcategory show reductions in all impacts with a particular effect on costs.

The Agency is unable to monetize the benefits from the HAP, VOC, and CO emissions reductions due to lack of credible data for assigning a benefits value to these reductions. While the Agency has done so in past RIAs and may do so in the future, for this rule, the Agency has not monetized the benefits and disbenefits associated with the criteria pollutant ( PM, NOx, SO2) emission decreases and increases, respectively. This lack of inclusion of a monetized benefits estimate for criteria pollutant emission changes is not meant to imply that the Agency will choose not to provide such monetized benefit estimates for other NESHAPs and other standards. 1 1 1 INTRODUCTION Under the authority of Section 112( d) of the Clean Air Act as amended in 1990, the U. S. Environmental Protection Agency ( EPA or the Agency) is a regulation requiring facilities that manufacture plywood and composite wood products to reduce their emissions of hazardous air pollutants ( HAPs). This regulation, a National Emission Standard for Hazardous Air Pollutants ( NESHAP), will apply to major sources of HAPs in this industry. This economic impact analysis ( EIA) presents the supporting documentation and analyses developed by the Agency that describe and quantify the expected impacts of the Plywood and Composite Wood Products NESHAP.

1.1 Scope and Purpose of the Report The NESHAP will require the manufacturers of plywood and composite wood products to install additional pollution controls to reduce their emissions of HAPs to the air. The purpose of this EIA is to present the results of the Agency's evaluation of the cost, economic impacts, and benefits from compliance with the requirements of the NESHAP.

The NESHAP will apply to all new and existing major sources of HAPs that manufacture plywood and composite wood products. These sources emit HAPs associated with heating of wood and related to their use of resins, adhesives, and additives in the pressing and drying stages of the production process. The EPA estimates that there are 447 facilities that produce plywood and composite wood products. Of these, the EPA determined that 223 facilities are major sources of HAPs.

1.2 Need for Regulatory Action The purpose of this NESHAP is to protect public health by reducing emissions of HAP from plywood and composite wood products facilities. The authority for doing this lies in Section 112 of the Clean Air Act ( CAA), which requires EPA to list categories and subcategories of major and area sources of HAP and to establish NESHAP for the listed source categories and subcategories. The plywood and composite wood products source category was originally listed as the plywood and particleboard source category on July 16, 1992 ( 57 FR 31576). The name of the source category was changed to plywood and composite wood products on November 18, 1999 ( 64 FR 63025) to more accurately reflect the types of manufacturing facilities covered by the source category. A major source of HAP is defined as any stationary source source or group of stationary sources within a continuous area and under common control that emits or has the potential to emit, considering controls, in the aggregate, 9.1 Megagrams ( Mg)/ year ( 10 tons/ yr) or more of any single HAP or 22.7 Mg/ year or more ( 25 tons/ yr) of multiple HAP. Section 112 of the CAA requires EPA to establish NESHAP for the control of HAP from both existing and new sources. The CAA requires the NESHAP to reflect the maximum degree of reduction in emissions of HAP that is achievable. This level of control is commonly referred to as the maximum achievable control technology ( MACT).

The MACT floor is the minimum level of control allowed for NESHAP and is defined under section 112 ( d) ( 3) of the CAA. In essence, the MACT floor ensures that the standard is set at a level that assures all major sources achieve the control level that is at least as stringent as that already achieved by 1 2 the better controlled and lower emitting sources in each source category or subcategory. For new sources, the MACT floor cannot be less stringent than the emission control that is achieved in practice by the bestcontrolled similar source. The MACT standards for existing sources can be less stringent than standards for new sources, but they cannot be less stringent than the average emission limitation achieved by the bestperforming 12 percent of existing sources in the category or subcategory ( or, the best performing 5 sources for categories or subcategories with fewer than 30 sources.)

In the course of rule development, we may also consider control options that are more stringent than the floor. EPA may establish standards more stringent than the floor based on the consideration of cost of achieving the emissions reductions, any non air quality health and environmental impacts, and energy requirements.

1.3 Requirements for this Economic Impact Analysis This section describes various legislative and executive requirements that govern the analytical requirements for Federal rulemakings, and describes how each analytical requirement is addressed in this EIA.

1.3.1 Executive Order 12866 Under Executive Order 12866 ( 58 FR 51735, October 4, 1993) as amended by Executive Order 13258 ( 67 FR 9385, February 28, 2002), the EPA must determine whether the regulatory action is " significant" and therefore subject to review by the Office of Management and Budget ( OMB) and the requirements of the Executive Order. The Executive Order defines " significant regulatory action" as one that is likely to result in a rule that may:

1) Have an annual effect on the economy of $ 100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities;

2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs, or the rights and obligation of recipients thereof;

4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

Pursuant to the terms of Executive Order 12866 as amended by Executive Order 13258, it has been determined that this rule is a " significant regulatory action" because the annual costs of complying with the rule are expected to exceed $ 100 million. Consequently, this action was submitted to OMB for review under Executive Order 12866 as amended by Executive Order 13258. 1 Where appropriate, agencies can propose and justify alternative definitions of " small entity." This RIA and the screening analysis for small entities rely on the SBA definitions.

1 3 1.3.2 Regulatory Flexibility Act and Small Business Regulatory Enforcement Fairness Act of 1996 The Regulatory Flexibility Act ( RFA) of 1980 ( PL 96 354) generally requires that agencies conduct a screening analysis to determine whether a regulation adopted through notice and comment rulemaking will have a significant impact on a substantial number of small entities ( SISNOSE), including small businesses, governments, and organizations. If a regulation will have such an impact, agencies must prepare an Initial Regulatory Flexibility Analysis, and comply with a number of procedural requirements to solicit and consider flexible regulatory options that minimize adverse economic impacts on small entities. Agencies must then prepare a Final Regulatory Flexibility Analysis that provides an analysis of the effect on small entities from consideration of flexible regulatory options. The RFA's analytical and procedural requirements were strengthened by the Small Business Regulatory Enforcement Fairness Act ( SBREFA) of 1996 to include the formation of a panel if a proposed rule was determined to have a SISNOSE. This panel would be made up of representatives of the EPA, the Small Business Administration ( SBA), and OMB.

For reasons explained more fully in Chapter 5 of this economic impact analysis for the rule, EPA has determined that there is no SISNOSE for this rule. While there are some impacts to some small firms, these impacts are not sufficient for a SISNOSE. Therefore, the EPA has not prepared a Final Regulatory Flexibility Analysis for this rule.

The RFA and SBREFA require the use of definitions of " small entities," including small businesses, governments, and organizations such as non profits, published by the SBA. 1 Screening analyses of economic impacts presented in Chapter 5 of this report examine potential impacts on small entities.

1.3.3 Unfunded Mandates Reform Act of 1995 The Unfunded Mandates Reform Act ( UMRA) of 1995 ( PL 4) was enacted to focus attention on federal mandates that require other governments and private parties to expend resources without federal funding, to ensure that Congress considers those costs before imposing mandates, and to encourage federal financial assistance for intergovernmental mandates. The Act establishes a number of procedural requirements. The Congressional Budget Office is required to inform Congressional committees about the presence of federal mandates in legislation, and must estimate the total direct costs of mandates in a bill in any of the first five years of a mandate, if the total exceeds $ 50 million for intergovernmental mandates and $ 100 million for private sector mandates.

Section 202 of UMRA directs agencies to provide a qualitative and quantitative assessment ( or a " written statement") of the anticipated costs and benefits of a Federal mandate that results in annual expenditures of $ 100 million or more. The assessment should include costs and benefits to State, local, and tribal governments and the private sector, and identify any disproportionate budgetary impacts. Section 205 of the Act requires agencies to identify and consider alternatives, including the least costly, most cost effective, or least burdensome alternative that achieves the objectives of the rule. 1 4 Since this rule may cause a mandate to the private sector of more than $ 100 million, EPA did provide an analysis of the impacts of this rule on State and local governments to support compliance with Section 202 of UMRA. A summary of this analysis is in Chapter 4 of this EIA. In short, no government entity is affected by this rule  only businesses.

1.3.4 Paperwork Reduction Act of 1995 The Paperwork Reduction Act of 1995 ( PRA) requires Federal agencies to be responsible and publicly accountable for reducing the burden of Federal paperwork on the public. EPA has submitted an OMB 83I form, along with a supporting statement, to the OMB in compliance with the PRA. The OMB 83I and the supporting statement explains the need for additional information collection requirements and provides respondent burden estimates for additional paperwork requirements to State and local governments associated with this rule.

1.3.5 Executive Order 12898 Executive Order 12898, " Federal Actions to Address Environmental Justice in Minority Populations and Low Income Populations," requires Federal agencies to consider the impact of programs, policies, and activities on minority populations and low income populations. Disproportionate adverse impacts on these populations should be avoided to the extent possible. According to EPA guidance, agencies are to assess whether minority or low income populations face risk or exposure to hazards that is significant ( as defined by the National Environmental Policy Act) and that " appreciably exceeds or is likely to appreciably exceed the risk or rate to the general population or other appropriate comparison group." ( EPA, 1996). This guidance outlines EPA's Environmental Justice Strategy and discusses environmental justice issues, concerns, and goals identified by EPA and environmental justice advocates in relation to regulatory actions. The plywood and composite wood products rule is expected to provide health and welfare benefits to populations around the United States, regardless of race or income.

1.3.6 Executive Order 13045 Executive Order 13045, " Protection of Children from Environmental Health Risks and Safety Risks," directs Federal agencies developing health and safety standards to include an evaluation of the health and safety effects of the regulations on children. Regulatory actions covered under the Executive Order include rulemakings that are economically significant under Executive Order 12866 as amended by Executive Order 13258, and that concern an environmental health risk or safety risk that the agency has reason to believe may disproportionately affect children. EPA has developed internal guidelines for implementing E. O. 13045 ( EPA, 1998).

The plywood and composite wood products rule is a " significant economic action," because the annual costs are expected to exceed $ 100 million. Exposure to the HAPs whose emissions will be reduced by this rule are known to affect the health of children and other sensitive populations. However, this rule is not expected to have a disproportionate impact on children. 1 5 1.3.7 Executive Order 13211 Executive Order 13211, " Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use," was published in the Federal Register on May 22, 2001 ( 66 FR 28355). This executive order requires Federal Agencies to weigh and consider the effect of regulations on supply, distribution, and use of energy. To comply with this executive order, Federal Agencies are to prepare and submit a " Statement of Energy Effects" for " significant energy actions." The executive order defines " significant energy action" as the following:

1) an action that is a significant regulatory action under Executive Order 12866 or any successor order, and 2) is likely to have a significant adverse effect on the supply, distribution, or use of energy; or 3) that is designated by the Administrator of the Office of Information and Regulatory Affairs as a significant energy action.

An analysis of the effects of this rule on supply, distribution, and use of energy is summarized in Chapter 4.

1.4 Other Federal Programs The only other federal program that may have an effect on these sources is the wood building products surface coating NESHAP, a rulemaking promulagated in February, 2003. However, the overlap of coverage of these rules will be minimal. The wood furniture manufacturing operations NESHAP, a rule signed in December 1995, may apply to some facilities that will be affected by the plywood and composite wood products rule, but there are no overlapping requirements for individual process units.

1.5 Organization of the Economic Impact Analysis This report includes six chapters that present a description of the industry, the costs associated with the regulatory control options associated with the NESHAP, results of the economic impact analysis, and a summary of impacts on small businesses.

$ Chapter 2 profiles the plywood and composite wood products industries.

$ Chapter 3 summarizes the approach to estimating the costs of the NESHAP, presents the results of the cost analysis, and provide the emissions reductions for the proposed alternative.

$ Chapter 4 summarizes the approach to performing the economic impact analysis of the NESHAP and presents the results of the analysis. An analysis of impacts on energy distribution, supply, or use is also in this chapter.

$ Chapter 5 includes the results of the analyses of the NESHAP's impact on small businesses.

$ Chapter 6 presents a qualitative assessment of the benefits associated with this final rule. 1 6 Throughout this report, a distinction is made between " affected" and " unaffected" facilities and firms. Affected facilities are those that will incur compliance costs ( control and monitoring, recordkeeping, and reporting ) to comply with the rule. In general, unaffected facilities and firms have no compliance costs. However, of the group of unaffected facilities, 51 of these will incur costs associated with monitoring, reporting, and record keeping ( MRR). MRR costs are estimated to be $ 25,194 per year. The distinction between affected and unaffected facilities and firms will be noted throughout the document.

1.6 References Federal Register, 1993. Executive Order 12866, Regulatory Planning and Review. Vol. 58, October 4, 1993, pg. 51735.

U. S. Environmental Protection Agency, 1996. Guidance for Providing Environmental Justice Concerns in EPA's NEPA Compliance Analyses ( Review Draft). Office of Federal Activities, Washington, D. C., July 12, 1996.

U. S. Environmental Protection Agency, 1996. Memorandum from Trovato and Kelly to Assistant Administrators. Subject: " Implementation of Executive Order 13045, Protection of Children from Environmental Health and Safety Risks." April 21, 1998.

Federal Register, 2001. Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. Vol. 66, May 22, 2001, pg. 28355.

Federal Register, 2002. Executive Order 13258, Amending Executive Order 12866  Regulatory Planning and Review. Vol. 67 , February 28, 2002, pg. 9385. 2 1 2 PROFILE OF THE PLYWOOD AND COMPOSITE WOOD PRODUCTS INDUSTRIES 2.1 Introduction Through a 1998 information collection request ( ICR), the EPA identified plants potentially impacted by the NESHAP. This profile presents information on several industries that comprise the plywood and composite wood source category because they will be impacted by the regulation in some way. These industries fall into three categories based on their Standard Industrial Classification ( SIC) or North American Industry Classification System ( NAICS) classifications.

° Softwood plywood and veneer ° Reconstituted wood products ° Structural wood members The industries are represented by the three SIC codes and four NAICS codes presented in Exhibit 2 1. The NAICS codes replaced SIC codes in federal statistical data beginning in 1997. The SIC code for Structural Wood Members, Not Elsewhere Classified ( n. e. c.) was divided into two NAICS codes for Engineered Wood Members and Truss Manufacturing. The ICR surveyed 416 potentially impacted facilities ( EPA, 1998) , and an additional 15 facilities were identified that either did not respond to the survey or have commenced operation since the date of the survey. The Agency determined that of these 431 facilities, 223 were impacted facilities, owned by 52 firms.

EPA expects this rule to primarily impact certain facilities engaged in the manufacturing of softwood plywood, reconstituted wood products, and structural wood members. Exhibit 2 1 shows, for each of the three industry categories, the number of facilities EPA expects will experience compliance costs as a result of this MACT standard and the total number of facilities. The total estimated capital costs associated with the new MACT standard are $ 479 million. The annualized costs for affected facilities are $ 138 million on an annual basis, including monitoring, reporting, and record keeping costs ( in 1999 dollars). Some unaffected facilities will also have monitoring, reporting, and record keeping costs of approximately $ 4 million per year. Therefore, the total annualized compliance costs are $ 142 million ( 1999 dollars).

Including costs associated with monitoring, reporting, and record keeping requirements, EPA expects 88 softwood plywood and veneer facilities to experience approximately 22 percent of the costs, 38 oriented strandboard facilities to experience approximately 18 percent of the costs, 82 other wood composite ( including medium density fiber ( MDF), particle board ( PB), and hardboard ( HB)) to experience approximately 58 percent of costs, and engineered wood product facilities to bear the remaining 2 percent. Most of the discussions contained in this profile will emphasize the softwood plywood and reconstituted wood products industries because facilities in these industries will experience the greatest impacts associated with the new MACT standard. A discussion of the affected EWP facilities is presented in Section 4.4 of this chapter. 1See section <IP_ADDRESS> for a description of how primary SIC codes were assigned to the surveyed facilities.

2 2 Exhibit 2 1: SIC & NAICS Codes for the Plywood and Composite Wood Industries SIC Code SIC Description NAICS Code NAICS Description Impacted Facilities* Total Facilities in Category 2436 Softwood Veneer and Plywood 321212 Softwood Veneer and Plywood 66 155 2493 Reconstituted Wood Products 321219 Reconstituted Wood Products Total: 97 317 OSB: 23 PB/ MDF: 56 HB: 18 2439 Structural Wood Members, Not Elsewhere Classified 321213 Engineered Wood Members ( Except Truss) 3 53 321214 Truss Manufacturing 0 992 * Does not include number of facilities with MRR costs only. Sources: MRI ( 1999), U. S. Environmental Protection Agency ( 1998), Dun & Bradstreet ( 1999a), U. S. Department of Commerce ( 1999a).

Producers of plywood and composite wood products also engage in additional manufacturing activities including furniture and wholesale timber production. In some cases, their primary SIC code1 may be one other than those listed in Exhibit 2 1. The facilities with a primary SIC codes other than for plywood and wood composite manufacturers are shown in Exhibit 2 2. The operations related to these other SIC codes are unlikely to be affected by the MACT standard. In addition, the number of facilities identified as potentially affected by this rule relative to the total number of establishments in all categories is extremely small ( under one percent for all categories). Therefore, this profile focuses on the SIC and NAICS listed in Exhibit 2 1. In particular, the profile will focus on the softwood plywood and veneer and reconstituted wood products industries. All facilities that are impacted by the MACT standard are included in these analyses, regardless of their primary SIC or NAICS code. 2 3 Exhibit 2 2: Other Primary SIC and NAICS Codes for the Plywood and Composite Wood Industries SIC Description NAICS NAICS Title Facilities in ICR Impacted Facilities Total Facilities in Category 2421 Sawmills and Planning Mills, General 321113 321912 321918 321999 Sawmills Cut Stock, Resawing Lumber, & Planning Other Millwork ( including Flooring) All Other Miscellaneous Wood Product Manufacturing 32 13 5,815 2426 Hardwood Dimension and Flooring Mills 321113 321912 321918 387215 Sawmills Cut Stock, Resawing Lumber, & Planning Other Millwork ( including Flooring) Showcase, Partition, Shelving, and Locker Manufacturing 5 0 833 2448 Wood Pallets and Skids 321920 Wood Container and Pallet Manufacturing 1 0 1,929 2499 Wood Products, Not Elsewhere Classified 321920 333414 339999 321999 Wood Container and Pallet Manufacturing Heating Equipment Manufacturing All Other Miscellaneous Manufacturing All Other Miscellaneous Wood Product Manufacturing 4 0 2,760 2511 Wood Household Furniture, Except Upholstered 337122 337215 Non upholstered Wood Household Furniture Manufacturing Showcase, Partition, Shelving, and Locker Manufacturing 13 0 2,785 Sources: MRI ( 1999), U. S. Environmental Protection Agency ( 1998), Dun & Bradstreet ( 1999a), U. S. Department of Commerce ( 1999a).

Section 2.2 of this chapter describes the supply side of the affected industries and characterizes the production process, the products concerned, and the costs of production. Section 2.3 examines the demand side of the affected industries, product uses, and consumers. Section 2.4 characterizes the facilities and firms that comprise the industry, their organization, and their financial conditions. Finally, Section 2.5 describes the markets and discusses domestic production and consumption, international trade, and prices.

2.2 The Supply Side The following section contains information concerning the supply of plywood and composite wood products. This section describes the production processes of each of the aforementioned industries. It then presents the products, by products, and co products of each industry. Lastly, the costs of production for each of the three industries are presented. Factors, such as industry shipments, costs of materials, fuels and electricity, payroll, capital expenditures, and materials consumed are all examined. 2The descriptions contained in this section rely primarily on U. S. EPA's Lumber and Wood Products Sector Notebook ( 1995).

2 4 2.2.1 Production Process This section discusses three categories of plywood and composite wood production: plywood and veneer; particleboard, strand and fiber composites; and structural wood members. The construction of plywood, consists basically of combining an odd number of layers of veneer, with each layer having one or more plies. Hardwood plywood is generally made by applying a hardwood veneer to the face and back of a softwood plywood, MDF, or particleboard panel. The differences between the hardwood and softwood processes occur because of different inputs and markets. Particleboard, oriented strandboard, fiberboard, and hardboard are all processed similarly. These three types of reconstituted wood products are manufactured by combining fragmented pieces of wood and wood fiber into a cohesive mat of wood particles, fibers, and strands. Structural wood members are the products of multiple manufacturing techniques. This section describes the production of glue laminated timber and the three types of structural composite lumber: laminated veneer lumber, parallel strand lumber, and laminated strand lumber.

<IP_ADDRESS> General Considerations for Plywood and Composite Wood Product Manufacturing Release of hazardous air pollutants ( HAPs) is primarily associated with drying and pressing processes in the manufacturing of plywood and composite wood products. Coating processes are intrinsically related to the manufacturing process and result in further emissions through drying and pressing. Conventional composite wood products are generally made with a thermosetting or heat curing resin or adhesive that holds wood fiber together. Commonly used resin binder systems include phenolformaldehyde urea formaldehyde, melamine formaldehyde, and propionaldehyde. A number of additives are used in the manufacturing of wood composites as well. Most notably, wax is used to provide finished products with resistance to water penetration. Other additives include preservatives, fire retardants, and impregnating resins.

While there is a broad range of plywood and composite wood products and many applications for such products, this section of the profile groups the production processes of these products into three general categories: plywood and veneer; particle board, strand and fiber composites; and structural wood members. Further descriptions of the production processes for each of these categories are provided in this section.

<IP_ADDRESS> Plywood and Veneer2 Construction of plywood relies on combining an odd number of layers of veneer. Layers consist of one or more than one ply with the wood grain running in the same direction. Outside plies are called faces or face and back plies, while the inner plies are called cores or centers. Layers may vary in number, thickness, species, and grade of wood. To distinguish the number of plies ( individual sheets of veneer in a panel) from the number of layers ( number of times the grain orientation changes), panels are sometimes described as three ply, three layer, or four ply, three layer.

As described above, veneer is one of the main components of plywood. Most softwood plants produce plywood veneer for their own use. Of facilities reporting drying of veneer, 86 percent of the 2 5 veneer produced was used for in facility plywood production. Only approximately 7 percent of the facilities in the ICR survey produced veneer solely for outside sales and non internal plywood use ( EPA, 1998).

The general processes for making softwood includes: log debarking, log steaming and/ or soaking, veneer cutting, veneer drying, veneer preparation, glue application, pressing, panel trimming, and panel sanding. Softwood plywood is generally made with relatively thick faces ( 1/ 10 inch and thicker) and with exterior or intermediate glue. This glue provides protection in construction and industrial uses where moderate delays in providing weather protection might be expected or conditions of high humidity and water leakage may exist. Figure 2 1 below presents a diagram of the plywood production process.

Logs delivered to a plant are sorted, then debarked and cut into peeler blocks. Almost all hardwood and many softwood blocks are heated prior to peeling the veneer to soften the wood. The peeler blocks are heated by steaming, soaking in hot water, spraying with hot water, or combinations of these methods. Heated blocks are then conveyed to a veneer lathe. The block, gripped at either end and rotated at high speed, is fed against a stationary knife parallel to its length. Veneer is peeled from the block in continuous, uniform sheets. Depending on its intended use, veneer may range in thickness from 1/ 16 to 3/ 16 ( 1.6mm to 4.8mm) for softwood and much thinner for hardwood and decorative plywood uses ( Youngquist, 1999). Slicing methods are also used to produce hardwood decorative veneers generally in thicknesses of 1/ 24 inch and thinner.

After peeling, the continuous sheets of veneer are transported by conveyor to a clipping station where it is clipped. In softwood mills and some hardwood mills, high speed clippers automatically chop the veneer ribbons to usable widths and defects are removed. In many hardwood mills, clipping may be done manually to obtain the maximum amount of clear material. Wet clipped veneer is then dried. Proper drying is necessary to ensure moisture content is low enough for adhesives to be effective.

Dryers Two types of dryers are used in softwood veneer mills: roller resistant dryers, heated by forced air; and " platen" dryers, heated by steam. In older roller dryers, also still widely used for hardwood veneer, air is circulated through a zone parallel to the veneer. Most plants built in recent years use jet dryers ( also called impingement dryers) that direct a current of air, at a velocity of 2,000 to 4,000 feet per minute, through small tubes on the surface of the veneer. Veneer dryers may be heated indirectly with steam, generated by a separate boiler, which is circulated through internal coils in contact with dryer air. Dryers may also be heated directly by the combustion gases of a gas or wood fired burner. The gas fired burner is located inside the dryer, whereas combustion gases from a wood fired burner are mixed with recirculating dryer air in a blend box outside the dryer and then transported into the dryer. Veneer dryers tend to release organic aerosols, gaseous organic compounds, and small amounts of wood fiber into the atmosphere. Once dried, veneer is sorted and graded for particular uses. 2 6 Figure 2 1: Flow Diagram of Veneer and Plywood Production Figure 2 1:

Source: U. S. EPA ( 1995). 3The descriptions in this section rely primarily on Chapter 10 of the USDA's Forest Products Laboratory Wood Handbook ( Youngquist, 1999).

2 7 Adhesives Plywood manufacturing begins with the veneer sent to a lay up area for adhesive application. Various adhesive application systems are used including hard rolls, sponge rolls, curtain coaters, sprayers, and foam extruders. The most common application for softwood plywood is an air or airless spray system, which generally uses a fixed head applicator capable of a 10 foot wide spray at a nozzle pressure of 300 pounds per square inch ( psi). The phenol formaldehyde ( PF) adhesives typical in softwood plywood manufacturing is made from resins synthesized in regional plants and shipped to individual plywood mills. At the mills, the resins are combined with extenders, fillers, catalysts, and caustic to modify the viscosity of the adhesive. This glue mixing has several additional effects: allowing the adhesive to be compatible with the glue application method ( curtain, roll, spray, foam); allowing for better adhesive distribution; increasing the cure rate; and lowering cost.

Presses Following the application of glue, the panels must be pressed. The purpose of the press is to bring the veneers into close contact so that the glue layer is very thin. At this point, resin is heated to the temperature required for the glue to bond. Most plywood plants first use a cold press at lower pressure prior to final pressing in the hot press. This allows the wet adhesive to " tack" the veneers together, permits easier loading of the hot press, and prevents shifting of the veneers during loading. Pressing is usually performed in multi opening presses, which can produce 20 to 40 4x8 foot panels in each two to sevenminute pressing cycle.

Finishing After pressing, stationary circular saws trim up to one inch from each side of the pressed plywood to produce square edged sheets. Approximately 20 percent of annual softwood plywood production is then sanded. As sheets move through enclosed automatic sanders, pneumatic collectors above and below the plywood continuously remove the sander dust. Sawdust in trimming operations is also removed by pneumatic collectors. The plywood trim and sawdust are burned as fuel or sold to reconstituted panel plants.

<IP_ADDRESS> Particle, Strand, and Fiber Composites3 This group of products falls into the SIC or NAICS code category of reconstituted wood products. The impacted facilities in this category manufacture the following products ( MRI, 1999).

° Medium density fiberboard ° Oriented stand board ° Particleboard ° Hardboard 2 8 All particle, strand and fiber composites are processed in similar ways. Raw material for particleboard, oriented strandboard ( OSB), fiberboard, and hardboard is obtained by flaking or chipping wood. The general process then includes wood drying, adhesive application, and forming a mat of wood particles, fibers, or strands. The mat is then pressed in a platen type press under heat and pressure until the adhesive is cured. The bonded panel is finally cooled and further processed into specified width, length, and surface qualities. Specific details regarding the production processes for different products are provided below.

Particleboard Generally, particleboard is produced by mechanically reducing wood materials into small particles, applying adhesive to the particles, and consolidating a loose mat with heat and pressure into a panel product. Particleboard is typically made in three layers with the faces consisting of finer material and the core using coarser material. Particleboard can also be made from a variety of agricultural residues, including kenaf core, jute stick, cereal straw, and rice husks depending on the region. EPA does not expect facilities that produce particleboard made from agricultural residues, also called agriboard, to experience compliance cost impacts associated with the new MACT standard. EPA expects only one facility that produces molded particleboard to experience compliance cost impacts ( MRI, 1999).

The raw materials, or " furnish," that are used to manufacture reconstituted wood products can be either green or dry wood residues. Green residues include planer shavings from green lumber and green sawdust. Dry process residues include shavings from planing kiln dried lumber, sawdust, sander dust, and plywood trim. The wood residues are ground into particles of varying sizes using flakers, mechanical refiners, and hammermills, and are then classified according to their physical properties.

After classification, the furnish is dried to a low moisture content ( two to seven percent) to allow for moisture that will be gained by the adding of resins and other additives during blending. Most dryers currently in operation in particle and fiber composite manufacturing plants use large volumes of air to convey material of varied size through one or more passes within the dryer. Rotating drum dryers requiring one to three passes of the furnish are most common. The use of triple pass dryers predominates in the United States. Dryer temperatures may be as high as 1,100  1,200

F with a wet furnish. However, dry planer shavings require that dryer temperatures be no higher than 500

F because the ignition point of dry wood is 446

F. Many dryers are directly heated by dry fuel suspension burners. Others are heated by burning oil or natural gas. Direct fired rotary drum dryers release emissions such as wood dust, combustion products, fly ash, and organic compounds evaporated from the extractable portion of the wood. Steam heated and natural gas fired dryers will have no fly ash.

The furnish is then blended with synthetic adhesives, wax, and other additives distributed via spray nozzles, simple tubes, or atomizers. Resin may be added as received ( usually as an aqueous solution), or mixed with water, wax emulsion, catalyst, or other additives. Waxes are added to impart water repellency and dimensional stability to the boards upon wetting. Particles for particleboard are mixed with the additive in short retention time blenders, through which the furnish passes in seconds. The furnish and resin mixture is then formed into mats using a dry process. This procedure uses air or a mechanical system to distribute the furnish onto a moving caul ( tray), belt, or screen. Particleboard mats are often formed of layers of different sized particles, with the larger particles in the core, and the finer particles on the outside of the board. The mats are hot pressed to increase their density and to cure the resin. Most plants use 2 9 multi opening platen presses. Though more popular in Europe, the continuous press is currently being used in particleboard plants in the United States.

Primary finishing steps for all reconstituted wood panels include cooling or hot stacking, grading, trimming/ cutting, and sanding. Cooling is important for UF resin cured boards since the resin degrades at high temperatures after curing. Boards bonded using PF resins may be hot stacked to provide additional curing time. Secondary finishing steps include filling, painting, laminating, and edge finishing. The vast majority of manufacturers do not apply secondary finishes to their panels; panels are finished primarily by end users such as cabinet and furniture manufacturers. Panels are also finished by laminators who then sell the finished panels to furniture and cabinet manufacturers.

Oriented Strandboard ( OSB)

OSB is an engineered structural use panel manufactured from thin wood strands bonded together with waterproof resin under heat and pressure. OSB manufacturing begins with debarked logs usually heated in soaking ponds sliced into wood strands typically measuring 4.5 to 6 inches long ( 114 to 152mm). Green strands are stored in wet bins and then dried in a traditional triple pass dryer, a single pass dryer, a combination triple   pass/ single pass dryer, or a three section dryer. A recent advance in drying technology is a continuous chain dryer, in which strands are laid between two chain mats so the strands are held in place as they move through the dryer.

After drying, blending and mat formation take place, blending of strands with adhesive and wax takes place in separate rotating blenders for face and core strands. Different resin formulations are typically used for face and core layers. Face resins may be liquid or powdered phenolics, while core resins may be phenolics or isocyantes. Mat formers take on a number of configurations to align strands along the length and width of the panel. Oriented layers of strands are dropped sequentially ( face, core, face, for example), each by a different forming head. The mat is then transported by conveyer belt to the press. Hot pressing involves the compression of the loose layered mat of oriented strands under heat and pressure to cure the resin. Most plants utilize multi opening presses that can form as many as sixteen 12 by 24 ft ( 3.7 by 7.3m) panels simultaneously. Recent development of a continuous press for OSB can consolidate the oriented and layer mat in 3 to 5 minutes.

Fiber Composites Fiber composites include hardboard, medium density fiberboard ( MDF), fiberboard, and insulation board. In order to make fibers for these composites, bonds between the wood fibers must be broken. This is generally done through refining of the material, which involves grinding or shearing of the material into wood fibers as it is forced between rotating disks. Refining can be augmented by water soaking, steam cooking ( digesting), or chemical treatments as well.

Fiber composites are classified by density and can involve either a wet process or a dry process. High and medium density boards, such as hardboard and MDF, apply a dry process. Wet processes can be used for high density hardboard and low density insulation board ( fiberboard). Dry process involves adhesive coated fibers that are dried in a tube dryer and air laid into a mat for pressing.

Wet processes differ from the dry processes. This process involves the utilization of water as a distributing medium for fibers in a mat. Further differences lie in the lack of additional binding agents in 4The descriptions in this section rely primarily on Chapter 11 of the USDA's Forest Products Laboratory Wood Handbook ( Moody and Liu, 1999).

2 10 some wet processes. The technology is very much like paper manufacturing in this pulp based aspect. Natural bonding in the wood fibers occurs in this process. Refining in this process relies on developing material that can achieve this binding with a degree of " freeness" for removal from mats. The wet process involves a continuously moving mesh screen, onto which pulp flows. Water is drawn off through the screen and through a series of press rolls. The wet fiber mats are dried in a conveyor type dryer as they move to the press. Wet process hardboard is then pressed in multi open presses heated by steam. Fiberboard is not pressed.

Manufacturers use several treatments alone or together to increase dimensional stability and mechanical performance of both wet and dry process hardboards. Heat treatment exposes pressed fiberboard to dry heat, reducing water absorption and improving fiber bonding. Tempering is the heat treatment of pressed boards preceded by the addition of oil. Humidification is the addition of water to bring board moisture content into equilibrium with the air.

<IP_ADDRESS> Structural Wood Members4 Structural wood members, such as glue laminated timbers and structural composite timber, are manufactured using a number of methods. Glue laminated timber, or glulam, is an engineered product formed with two or more layers of lumber glued together in which the grain of all layers, called laminations, is oriented parallel to the length of the lumber. Glulam products also include lumber glued to panel products, such I joists and box beams. Structural composite lumber consists of small pieces of wood glued together into sizes common for solid sawn lumber.

Glue Laminated Timber ( Glulam)

Glulam is a material that is made from suitably selected and prepared pieces of wood, either straight or curved, with the grain of all pieces essentially parallel to the longitudinal axis of the member. The manufacturing process for glulam involves four major steps: ( 1) drying and grading, ( 2) end jointing, ( 3) face bonding, and ( 4) finishing and fabricating.

Structural Composite Lumber The are three major types of structural composite lumber: laminated veneer lumber, parallel strand lumber, and laminated strand lumber. Each is described in more detail below, however, the general manufacturing process for these composites is similar.

Laminated veneer lumber ( LVL) is manufactured by laminating veneer with all plies parallel to the length. This process utilizes veneer 1/ 8 to 1/ 10 inches. ( 3.2 to 2.5 mm) thick, which are hot pressed with phenol formaldehyde adhesive to form lumber of 8 to 60 feet ( 2.4 to 18.3 m) in length. The veneer used for LVL must be carefully selected to achieve the proper design characteristics. Ultrasonic testing is often used to sort veneer required for LVL. Once the veneer has been selected, end jointing occurs followed by adhesive application and continuous pressing. 2 11 Parallel strand lumber ( PSL) is a composite of wood strand elements with wood fibers primarily oriented along the length of the member. PSL is manufactured using veneer about 1/ 8 inch ( 3 mm) thick, which is then clipped into 3/ 4 inch ( 19 mm) wide strands. The process can utilize waste material from a plywood or LVL operation. Strands are coated with a waterproof structural adhesive, and oriented using special equipment to ensure proper placement and distribution. The pressing operation results in densification of the material. Adhesives are cured using microwave technology. As with LVL, the continuous pressing method is used.

Laminated strand lumber ( LSL) is produced using an extension of the technology used to produce oriented strandboard structural panels. LSL uses longer strands than those commonly used in OSB manufacturing. LSL is pressed into a billet several inches thick in a steam injection press, as opposed to an OSB panel pressed in a multi opening platen press. The product also requires a greater degree of alignment of the strands at higher pressures, which result in increased densification.

2.2.2 Products, By Products, and Co Products Exhibit 2 3 presents products, corresponding SIC and NAICS codes, and product examples of the plywood and composite wood products industry.

The plywood and composite wood products industries have unique manufacturing processes in their use of waste wood products as an input for additional products. Planer shavings, sawdust, edgings, and other wood by products are inputs to many wood composites. Structural wood members were developed in response to the increasing demand for high quality lumber when it became difficult to obtain this type of lumber from forest resources. Therefore, many of the by and co products from one process may be used in another. 2 12 Exhibit 2 3: SIC and NAICS Codes and Products Product Description SIC NAICS Example Products Softwood Veneer and Plywood 2436 321212 Panels, softwood plywood Plywood, softwood Softwood plywood composites Softwood veneer or plywood Veneer mills, softwood Reconstituted Wood Products 2493 321219 Board, bagasse Flakeboard Hardboard Insulating siding, broad mitse Insulation board, cellular fiber or hard pressed Lath, fiber Medium density fiberboard ( MDF) Particleboard Reconstituted wood panels Strandboard, oriented Wafer board Wall tile, fiberboard Wallboard, wood fiber Structural Wood Members, Not Elsewhere Classified 2439 321213 Arches, glue laminated or pre engineered wood Fabricated structural wood members Finger joint lumber manufacturing I joists, wood Laminated structural wood members Laminated veneer lumber Parallel strand lumber Structural wood members ( except trusses)

321214 Floor trusses, wood, glue laminated or pre engineered Roof trusses, wood, glue laminated or pre engineered Source: U. S. Department of Labor, OSHA ( no date).

Exhibit 2 4 provides ratios of specialization and coverage ( product mix) calculated by the U. S. Census Bureau for the last three Censuses of Manufacturers. The Census assigns a " primary" SIC code to each establishment which corresponds to the SIC code for the largest ( by value) single type of product shipped by the establishment. The products shipped from that establishment that are classified in the same industry as the establishment are considered " primary," and all other products shipped by the establishment are considered " secondary." The Census then calculates various measures to illustrate the product mix between primary and secondary products in each industry. The specialization ratio represents the ratio of total primary product shipments to total product shipments for all establishments classified in the industry. The coverage ratio represents the ratio of primary products shipped by the establishments classified in the industry to the total shipments of these products shipped by all establishments classified in all industries. 2 13 As Exhibit 2 4 illustrates, all three industries have specialization ratios well above 80 percent and coverage ratios above 90 percent. This implies that most establishments with these SIC codes are highly specialized, and that most product shipments of each type originate in establishments with these SIC codes. Therefore, the Census data on these SIC and NAICS industries provide information on the primary production of facilities engaged in plywood and composite wood products manufacturing. These ratios have been stable over time.

Exhibit 2 4: Specialization and Coverage Ratios, 1982  1997 SIC NAICS Description 1982 1987 1992 1997 2436 321212 Softwood Veneer and Plywood Primary products specialization ratio 87 87 84 88 Coverage ratio 96 95 94 95 2493 321219 Reconstituted Wood Products Primary products specialization ratio 96 97 96 97 Coverage ratio 97 95 95 97 2439 321213 Structural Wood Members, N. E. C./ Engineered Wood Members Primary products specialization ratio 96 97 96 95 Coverage ratio 95 97 97 96 2439 321214 Structural Wood Members, N. E. C./ Truss Manufacturing Primary products specialization ratio 96 97 96 96 Coverage ratio 95 97 97 94 Source: U. S. Department of Commerce ( 1999a and 1995b).

2.2.3 Costs of Production Exhibit 2 5 provides information on the overall value of shipments ( VOS) and production costs ( a component of operating expenses) by SIC code as reported by the Bureau of the Census. Typical of many intermediate goods, the cost of materials is the largest portion of production costs, with payroll constituting 15 20 percent of VOS. In particular, timber supply plays a large role in industry costs. In this decade, reductions in public timber supply, especially reductions in National Forest timber harvests, combined with the economy's continued demands for wood has led to substantial increases in the cost of timber ( Spelter, 1997). 2 14 Exhibit 2 5: Summary of Annual Costs and Shipments, 1992  1997 ( Thousands of 1997 Dollars)

1992 1993 1994 1995 1996 1997 % Change Softwood Veneer and Plywood ( SIC 2436, NAICS 321212)

Industry Shipments 7,321,641 6,400,683 6,755,571 7,725,037 6,525,702 5,748,047  21.5%

Cost of Materials 4,169,048 3,671,638 4,097,921 4,736,984 4,330,167 3,795,985  8.9%

Fuels & Electricity 220,039 178,592 178,601 183,507 176,759 161,239  26.7%

Payroll 1,112,158 897,839 883,819 1,047,092 1,006,792 912,613  17.9%

Ratio of Costs to Shipments 75% 74% 76% 77% 84% 85%

Reconstituted Wood Products ( SIC 2493, NAICS 321219)

Industry Shipments 5,350,565 4,951,902 5,517,234 5,827,821 5,561,099 5,278,809  1.3%

Cost of Materials 2,400,670 2,144,060 2,342,362 2,582,565 2,697,471 2,633,139 9.7%

Fuels & Electricity 327,706 250,814 268,934 316,876 321,390 350,950 7.1%

Payroll 825,718 699,627 707,179 810,753 855,237 798,767  3.3%

Ratio of Costs to Shipments 66% 62% 60% 64% 70% 72%

Structural wood members ( SIC 2439, NAICS 321213 and 321214)

Industry Shipments 3,367,525 3,281,578 4,295,002 4,739,339 5,096,809 5,112,873 51.8%

Cost of Materials 1,958,576 1,966,635 2,584,765 2,863,098 3,154,297 3,007,103 53.5%

Fuels & Electricity 35,486 33,406 34,585 39,595 42,621 42,090 18.6%

Payroll 692,377 604,180 740,318 867,510 947,403 954,694 37.9%

Ratio of Costs to Shipments 80% 79% 78% 80% 81% 78%

All dollars adjusted to 1997 using Producer Price Index for Lumber and Wood Products ( SIC 24). Source: U. S. Department of Census ( 1999a).

From these data, one can estimate the sector wide ratio of production costs to VOS. The ratio of costs ( materials, fuels and electricity, and payroll) to the VOS has been increasing over the 1992 to 1997 period for softwood plywood and veneer and reconstituted wood products. The data in Exhibit 2 5 show that 1997 cost to shipment ratios range between 72 percent ( reconstituted wood products) and 85 percent ( softwood veneer and plywood). This measure indicates the proportion of the revenues received for the goods produced that are associated with production expenses ( materials, fuel and electricity, and payroll). Figures 2 2 and 2 3 present cost and VOS data for the softwood plywood and reconstituted wood products industries, respectively. 2 15 Figure 2 2: Softwood Plywood and Veneer Value of Shipments and Production Costs, 1992  1997  2,000,000 4,000,000 6,000,000 8,000,000 Thousands of Dollars ( 1997)

1992 1993 1994 1995 1996 1997 Year VOS  Total Costs Payroll Fuels & Electricity Cost of Materials Source: U. S. Department of Commerce ( 1999a). Note: Total costs in this figure is the sum of payroll, fuels & electricity, and materials costs. 2 16 Figure 2 3: Reconstituted Wood Products Value of Shipments and Production Costs, 1992  1997  1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 Thousands of Dollars ( 1997)

1992 1993 1994 1995 1996 1997 Year VOS  Total Costs Payroll Fuels & Electricity Cost of Materials Source: U. S. Department of Commerce ( 1999a). Note: Total costs in this figure is the sum of payroll, fuels & electricity, and materials costs.

The cost to shipment ratio does not reflect other operating expenses such as non payroll employment expenses, taxes, interest, or depreciation. Nor does it indicate whether the expenses are of a variable or fixed nature. However, it does provide an approximate measure of how much cash, at a gross level, the industries are generating to cover all operating expenses, use for capital investment, and provide a return to owners. While this measure is somewhat crude, it indicates that the impacts of the rule may potentially be more significant for the softwood plywood and veneer industry than for reconstituted wood products.

Exhibit 2 6 and Exhibit 2 7 provide information on materials consumed by kind in 1997 for the three sectors. In softwood plywood and veneer manufacturing, 81.6 percent of material costs result from timber and veneer purchasing. Glues and adhesives represent 5.7 percent of the material costs in the softwood plywood and veneer industry. 2 17 Exhibit 2 6: Materials Consumed By Kind for Softwood Plywood and Veneer, 1997 Materials Consumed Delivered Cost ($ 1,000)* % of Total Materials Stumpage cost ( cost of timber, excluding land, cut and consumed at same establishment) 346,854 9.4%

Hardwood logs and bolts 64,617 1.7%

Softwood logs and bolts 2,218,800 60.0%

Hardwood veneer 27,355 0.7%

Softwood veneer 363,583 9.8%

Glues and adhesives 210,105 5.7%

All other materials 471,717 12.7%

TOTAL 3,703,031 100%

* Excludes costs of resales and contract work. Source: U. S. Department of Commerce ( 1999a).

Figure 2 4 shows the percentage materials consumed by kind by the softwood plywood and veneer industry in 1997.

Figure 2 4: Materials Consumed by Softwood Plywood and Veneer Products, 1997 Softwood veneer 9.8%

Glues & adhesives 5.7%

All other materials 12.7% Softwood logs & bolts 60.0% Hardwood veneer 0.7%

Hardwood logs & bolts 1.7%

Stumpage cost 9.4%

Source: U. S. Department of Commerce ( 1999a). 2 18 Exhibit 2 7: Materials Consumed by Kind for Reconstituted Wood Products, 1997 Material Consumed Delivered Cost ($ 1,000)* % of Total Materials Logs and bolts 80,891 3.2%

Pulpwood 400,579 15.7%

Chips, slabs, edgings, sawdust, and other wood waste, and planer shavings 399,446 15.7%

Hardboard, MDF, and particleboard 346,052 13.6%

Paints, varnishes, lacquers, stains, shellacs, enamels, and allied products 69,488 2.7%

Adhesives and resins 548,553 21.5%

Petroleum wax 61,173 2.4%

Vinyl and paper overlays 101,405 4.0%

All other materials, components parts, containers and supplies 538,183 21.2%

TOTAL 2,545,770 100%

* Excludes costs of resales and contract work. Source: U. S. Department of Commerce ( 1999a).

As with the plywood industry, timber products are the largest portion of costs for the reconstituted wood product industry. Logs, pulpwood, wood materials, and other wood products account for a combined 48.2 percent of material costs. Unlike plywood and veneer manufacturing, reconstituted wood products have higher material costs for adhesives and resins, compromising 21.5 percent of costs. Figure 2 5 shows the percentage of materials consumed by kind by the reconstituted wood products industry for 1997. 2 19 Figure 2 5: Materials Consumed by Reconstituted Wood Product Producers, 1997 Hardboard, MDF, & particleboard 13.6% Chips, slabs, edgings, sawdust, & other wood waste, & planner shavings 15.7%

Paints, varnishes, lacquers, stains, shellacs, enamels, & allied products 2.7% Adhesives & resins 21.5% All other materials, components' parts, containers & supplies 21.2% Pulpwood 15.7% Logs & bolts 3.2%

Vinyl & paper overlays 4.0%

Petroleum wax 2.4%

Source: U. S. Department of Commerce ( 1999a).

Wood costs for plywood and composite wood product manufacturing vary according to plant location, wood species, and facility efficiency. While there may be considerable variability in wood prices across regions, the last decade has seen substantial increase in wood prices across all regions. Wood use efficiency depends on wood species used, log temperature, speed of cutting, board compaction, and other process variables. Next to wood, adhesives and wax play an important role in industry costs, especially for the production of reconstituted wood products such as OSB, particleboard, and MDF ( Spelter et al, 1997).

In 1995, sixteen percent of the output from the adhesive and sealant industry, SIC 2891, went to the wood products market. As such, a MACT standard that greatly reduces the demand for adhesives and sealants ( or coatings) could potentially have a significant impact in the adhesive and sealant industry ( Abt Associates Inc., 1997). The response on the part of the softwood plywood and veneer and reconstituted wood products industries will depend on the final requirements of the MACT standard and the attractiveness of comparable resin, adhesive and sealant products that do not contribute to HAP emissions. There will be many constraints on the ability of the impacted industries to switch away from current adhesives, as their products generally must meet certain requirements related to building codes. These properties are discussed in the next section. 2 20 2.3 The Demand Side The following section contains information concerning the demand for plywood and veneer, reconstituted wood products, and structural wood members. The characteristics of plywood and wood composites are examined first, highlighting the numerous uses of these types of wood products. The consumers and users of plywood and composite wood products are then examined, specifically analyzing the distribution of consumption. Substitution possibilities are addressed, looking at both wood and nonwood options. Lastly, the elasticities of demand of the plywood and composite wood products industries are discussed.

2.3.1 Product Characteristics Plywood and composite wood products provide a more stable product over solid wood by reducing the variations between wood species, among trees of the same species, and even between wood from the same tree. Unlike solid wood which is evaluated at a cellular level, composite wood is evaluated at fiber, particle, flake, or veneer level. Properties of products can be changed by combining, reorganizing, or stratifying these different elements. Control of the size of particles used in producing composite wood products provides the chief means by which materials can be produced with predetermined properties ( Youngquist, 1999).

Strength is a crucial factor in determining the applicability of plywood and composite wood products to structural and other manufacturing uses. Stiffness and strength properties of a wood product depend primarily on the constituents from which these products are made. The basic wood elements can be made in a great variety of sizes and shapes, and may utilize any number of wood species. Plywood can be manufactured from over 70 species of wood. The choices available for composite wood products are almost unlimited. Types of adhesives and bonding agents also play an important role in the strength of a composite wood product.

Durability will also determine the market for composite wood products. Panels used for exterior applications will have a fully waterproof bond and are designed for permanent exposure to weather and moisture. Interior panels may lack the waterproof bond and be manufactured with glue products designed for interior use.

Depending on the composite wood product, a range of sizes and thicknesses are available. The range of structural applications for which these products are used requires production of several standardized sizes as well as custom made pieces. Sizes and thicknesses will depend on the type of wood composite product and the market for which it is primarily produced.

Wood panels and other composite wood structures are subject to performance type standards as outlined by various industry organizations. A number of organizations including American Plywood Association  The Engineered Wood Association, Composite Panel Association ( CPA), American Hardboard Association, and others monitor products produced by their member firms to assure highquality production and industry conformity with testing and performance standards. 2 21 2.3.2 Consumers and Uses Exhibit 2 8 shows industry output by SIC code. Output of plywood and veneer goes mainly to the construction sector, primarily to the residential housing and repair industries. Almost one third of plywood goes to the manufacturing sector, part of which is used as an input for other plywood production, and part of which goes for furniture and other durable goods manufacturing. The " Other" category is made up of foreign trade, inventory change, and wholesale trade. The outputs for reconstituted wood products, including particleboard, are more evenly split between construction and manufacturing, The " Other" category for reconstituted wood products is made up of sales to state and local government, foreign trade, and services ( Gale Business Resources, 1999).

Exhibit 2 8: Consumption of Industry Outputs, by SIC Code SIC SIC Description Construction Manufacturing Other 2436 Softwood veneer and plywood 63.5% 27.9% 8.6%

2493 Reconstituted wood products 45.7% 47.6% 6.7%

2439 Structural wood members 94.8% 0.6% 4.6%

Source: Gale Business Resources ( 1999).

The major use of structural panel products is for construction activities. Panel products include those products such as plywood, OSB, particleboard, and others formed as a panel. These products may be used for floor systems, exterior walls, roofing, and exterior siding. Figure 2 6 shows the industry outputs by percentage for the softwood plywood and veneer industry. 2 22 Figure 2 6 Industry Outputs of Softwood Plywood and Veneer Industry Manufacturing 27.9%

Other 8.6% Construction 63.5%

Source: Gale Business Resources ( 1999). 2 23 Figure 2 7 shows the industry outputs by percentage for the reconstituted wood products industry.

Figure 2 7: Industry Outputs of Reconstituted Wood Products Industry Manufacturing 47.6%

Other 6.7% Construction 45.7%

Source: Gale Business Resources ( 1999).

MDF and particleboard are two products of the reconstituted wood products industry. Exhibits 2 9 and 2 10 below show the downstream uses of MDF and particleboard in 1997. For each of the products, about 20 percent of the output is used for household furniture, and the remainder is used for construction, shelving, cabinetry and other customized applications.

Exhibit 2 9: MDF Shipments by Downstream Market, 1997 Downstream Use Million ft2 Percent Household Furniture 247.8 19%

Custom Laminators 208.6 16%

Stocking Distributors 286.9 22%

Kitchen and Bath 65.2 5%

Molding 130.4 10%

Millwork 65.2 5%

Partitions and fixtures 65.2 5%

All Other 182.6 14%

Other ( n. e. c.) 52.2 4%

Total 1,304.0 100%

Source: Composite Panel Association ( 1998). 2 24 Exhibit 2 10: Particleboard Shipments by Downstream Market, 1997 Downstream Use Million ft2 Percent Household Furniture 889.0 20%

Custom Laminators 711.2 16%

Stocking Distributors 755.7 17%

Kitchen and Bath 711.2 16%

Flooring Products 400.1 9%

Office Furniture 266.7 6%

Door Core 177.8 4%

All Other 400.1 9%

Other ( n. e. c.) 133.4 3%

Total 4,445.2 100%

Source: Composite Panel Association ( 1998).

Construction Activities Over sixty percent of the softwood plywood and veneer industry output and approximately 50 percent of the reconstituted wood products industry output goes to the construction sector, primarily to the construction, remodeling and repair of single and multiple family dwellings. The majority of the work performed by the construction sector is associated with single family dwellings, and the largest share of their costs is associated with materials such as wood based materials. As Exhibit 2 11 shows, housing starts have been quite strong since 1996 and are expected to continue through at least this year. Housing start activity is closely linked to general economic conditions, employment, income, and interest rates. Renovation and remodeling expenditures have declined in real terms, as would be expected. Generally, more renovation and remodeling takes place during periods when fewer new houses are being constructed ( U. S. Department of Commerce, 1995a). 2 25 Exhibit 2 11: Housing Market Indicators, 1988  1997 Year New Housing Units ( thousand) Renovation and Remodeling Expenditures ( million current $) Renovation and Remodeling Expenditures ( million 1992 $)

1988 1,706 101,117 110,874 1989 1,574 100,891 106,425 1990 1,381 106,773 109,175 1991 1,185 97,528 98,813 1992 1,411 103,734 103,734 1993 1,542 108,304 104,339 1994 1,761 115,030 106,411 1995 1,694 111,683 99,362 1996 1,838 114,919 99,756 1997 1,828 118,423 99,431 Source: Howard ( 1999).

Because economic conditions can vary between regions in the U. S., the impact of housing starts on demand for wood based construction materials can vary. This regional variation is further amplified by differing local preferences, housing codes, and availability of specific wood based products.

Wood Furniture Industry The wood furniture industry produces output for a high value added market. Exhibit 2 12 below shows the value of shipments from the household furniture sector. Wood household furniture is a portion of this sector. Domestic shipments and apparent consumption of household wood furniture have experienced modest growth since 1989, indicating that the shipments from the softwood plywood and veneer and reconstituted wood products industries to the furniture sector has had limited experience for growth.

Exhibit 2 12: Trade for Household Furniture ( SIC 251), 1989  1996 ( Millions of 1997 Dollars)*

1989 1990 1991 1992 1993 1994 1995 1996 % Change Value of product shipments 23,056 22,477 21,521 21,949 22,823 24,038 24,355 na 6 Value of imports 3,301 3,200 3,117 3,368 3,723 4,201 4,586 5,047 53 Value of exports 565 884 1,091 1,252 1,298 1,385 1,361 1,342 237 Apparent Consumption 25,792 24,793 23,547 24,065 25,248 26,854 27,580 na 7 * Values adjusted to 1997 dollars using PPI for Furniture and Household Durables Source: U. S. Department of Commerce ( 1999a).

Wood furniture manufacturers constitute a large portion of the demand, 20 to 30 percent, of the woodbased products other than structural panels and structural members. Much of the growth in retail demand is being met by imports. This translates into a large lost opportunity for domestic furniture manufacturers, 2 26 as well as for their suppliers, including the industries that are the subject of this profile. The potential causes for this increase in imports are lower material and labor costs in exporting countries, and declining availability of timber products to domestic producers ( CINTRAFOR, 1999 and Dirks, 1991).

The 1992 Census of Manufacturers showed that 21 percent of the delivered cost of materials in the manufacture of wood household furniture is associated with plywood and composite wood products. As a result, significant price changes in the cost of plywood and composite wood products have the potential to affect production costs of wood household furniture. As the demand for wood household furniture is highly elastic with respect to price ( see discussion in section 2.3.4), increased input costs could affect both the demand for wood household furniture and for plywood and composite wood products supplied to furniture manufacturers.

2.3.3 Substitution Possibilities The basic substitution in these industries is between different wood products, although non wood substitutes exist as well for some applications. Composite wood products were originally manufactured in response to the growing demand for wood products as the availability of larger sized timber declined. As new wood composites products were developed, they further replaced sawn lumber and other types of wood products. Plywood and veneer production lost market share during the late 1980s and early 1990s to new products that are categorized as reconstituted wood products, largely as a result of several challenges: legislation protecting federal timber lands; recession in the early 1990s; price increases and instability; and supply shortages. To provide an indication of the structural uses of wood panel products and substitutes, Exhibit 2 13 outlines the use of various products in new single family and multi family residential construction in the United States. 2 27 Exhibit 2 13: Use of Wood and Non wood Products in Residential Construction 1976  1995 Application Incidence of Use (%) Single family houses Multi family houses 1976 1988 1995 1976 1988 1995 Floor Sheathing Lumber 1 5  2 6

Structural Panels 51 56 55 51 52 54 Softwood Plywood 51 48 31 51 46 24 OSB 0 9 24 0 7 30 Nonstructural Panels 12 9 9 10 9 7 Lightweight Concrete 0 0 0 5 7 3 Concrete Slab 30 30 35 32 26 36 Exterior Wall Sheathing Lumber  2

Structural Panels 16 33 52 17 40 43 Softwood Plywood 16 26 19 17 28 10 OSB 0 7 33 0 12 33 Fiberboard 34 13 6 32 11 5 Foamed Plastic 7 22 29 2 18 34 Foil faced kraft  17 3 0 13 1 Gypsum, other 18 8 2 18 15 8 None 25 5 8 31 5 9 Roof Sheathing Lumber 14 6 1 11 2 1 Structural Panels 85 91 98 87 94 94 Softwood Plywood 84 70 37 87 78 19 OSB 1 21 61 1 16 75 Other 1 3 0 2 4 5 Exterior Siding Lumber 10 12 7 9 16 2 Structural Panels 22 23 9 32 15 4 Softwood Plywood 22 23 4 32 15 2 OSB   5 0  2 Hardboard 16 16 6 7 11 5 Non wood 52 49 77 49 58 89 Vinyl 14 15 29 12 14 41 Masonry, stucco 38 34 48 37 44 48 Other 0 0 1 3

Source: Spelter et al. ( 1997).

Structural wood panels hold the majority of the market share for floor, exterior wall, and roof sheathing in single and multi family housing construction. The major substitution effect in this market has occurred between OSB and softwood plywood, with OSB capturing much of the market from softwood plywood by 2 28 1995. Much of the trade off between softwood plywood and OSB is due to lower cost for OSB. However, questions of exterior durability with OSB have led many builders to continue plywood use despite higher initial costs.

Fiberboard has also seen reduction in market share for exterior wall systems due to increases in OSB use. Non wood products, mainly masonry, have captured 77 percent of the market for exterior siding, greatly reducing the market share of structural panels in this market. Other major substitutes include concrete slab for floor sheathing and foamed plastic, which gained major shares of the exterior wall sheathing market from wood based structural panels.

2.3.4 Demand Elasticities The price elasticity of demand is the percentage change in the quantity of product demanded by consumers divided by the percentage change in price. Demand curves slope downward, signifying a negative response ( less demand) to an increase in price. If demand is elastic ( an absolute value of greater than one) a small price increase will lead to a relatively large decrease in demand. Conversely, if demand is inelastic with respect to price, or an absolute value less than one, the quantity demanded will change very little relative to a change in price.

For the purposes of performing an economic analysis, short term price elasticities are relevant as impacts of the regulation fall directly on the entities owning facilities faced with compliance responsibilities. In appropriating compliance costs to facilities impacted by this rule, the economic analysis assumes that these facilities have a fixed capital stock in the short term. This method allows an evaluation of the severity of impacts using static measures of profit and loss. This short term analysis approach, which is described in more detail in Chapter 4, differs from other behavioral approaches that take into account adjustments made by producers, such as changing input mixes, that can generally affect the market environment in which they operate over the longer term.

In the case of plywood and reconstituted wood production that is going to the construction industry, the overall price elasticity of demand for these products is relatively inelastic. This is because the wood product component of construction is fixed once the decision to construct has been made. The other factors that contribute to the inelastic nature of demand for structural wood panels include local building codes, home buyer and home owner preferences, and building industry investment in the training and infrastructure required to construct with wood panels as opposed to a substitute.

The demand for each individual type of product may differ, depending on several factors, including the product's own price elasticity, the availability and price of other wood based and non wood products with comparable characteristics, and the availability and price of imported products. Cross price elasticities are often difficult to identify or estimate. However, if available, cross price elasticities of substitutes and imports might be considered when developing an approach to the economic analysis. For example, analysis of the softwood plywood market may incorporate the cross price elasticity of OSB, a major substitute for plywood. When analyzing the OSB market, the converse would also be true. Even if such cross price elasticities were available, other considerations would also determine whether the economic analysis incorporates the market substitution dynamic.

We examined several recent and historical studies of price elasticities of demand. Most of these studies were concerned with the softwood lumber sector, most likely due to the limited availability of 5The majority of studies reviewed estimated price elasticity of demand as being between  0.15 and  0.4.

2 29 relevant price and consumption information at a disaggregated product level. Our review focused on the 1996 study by Joseph Buongiorno, a forestry economist, who noted that previous econometric studies of the wood products sector have produced estimates of demand elasticities for softwood lumber, a product with similar demand drivers, inputs, input costs, and uses, between zero and  0.95. Buongiorno also reported that other studies have estimated the cross elasticity of lumber with respect to the price of plywood to be between 0.5 and zero. Buongiorno developed a model using a price endogenous linear programming system ( PELPS) that endeavored to address the entire wood products market using a system dynamics approach. The results of this model included short term price elasticities of demand for wood based products, as shown in Exhibit 2 14.

Exhibit 2 14: Demand Elasticities Product Price Elasticity of Demand Plywood  0.16 Fiberboard  0.10 Particleboard  0.27 Source: Buongiorno ( 1996).

Buongiorno's results provide the basis for imputing price elasticities for the other products that are the subject of this MACT standard. In addition, further review of identified studies may produce information useful in the final determination of appropriate elasticities for use in the economic analysis of the impacts of a MACT standard on the softwood plywood and reconstituted wood products industries.

In the case of softwood plywood and reconstituted wood production going to the furniture industry, the price elasticity of demand is highly elastic. This is because the price elasticity of demand for wood furniture is highly elastic itself and the softwood plywood and reconstituted wood component of production costs for wood furniture is also quite high, over twenty percent. The EPA's study of the economic impacts of alternative NESHAPS on the wood furniture industry estimated the price elasticity of demand for wood furniture as  3.477 ( U. S. EPA, 1992). This result forms the basis for a derived price elasticity of demand for use in the economic analysis of the impacts of the MACT standard.

2.4 Industry Organization The following section contains information pertaining to the organization of the plywood and veneer, composite wood , and structural wood members industries. This section will provide the basis for understanding the following.

° The industry structure ° The characteristics of the manufacturing facilities ° The characteristics of the firms that own the manufacturing facilities 2 30 A detailed examination of these three topics is essential, as it provides the basis for much of the approach to estimating economic impacts of the MACT standard. In addition, this section also provides detailed information about facilities and firms that are important inputs to the analysis itself as well as to analysis of how the MACT standard might affect firms of different sizes.

2.4.1 Industry Structure Exhibit 2 15 shows concentration ratios by SIC code for the three census years, 1982, 1987, and 1992. The m firm concentration ratios are equal to the sum of the market shares for the largest m number of firms in the industry. A market is generally considered highly concentrated if the 4 firm concentration ratio is greater than 50 percent. Exhibit 2 15 also shows the Herfindahl Hirschman ( HH) index, which is an alternative measure of concentration equal to the sum of the squares of the market shares for the 50 largest firms in the industry. The higher the index, the more concentrated the industry is at the top. The U. S. Justice Department uses 1,000 as a benchmark for the presence of market concentration, where any industry with a Herfindahl Hirschman index less than 1,000 is considered to be unconcentrated ( Arnold, 1989).

Exhibit 2 15: Concentration Ratios by SIC Code, 1982 1992*

Year Number of Companies in Industry Percent of value of industry shipments shipped by the largest ( in terms of shipment value) Herfindahl Hirschman Index** 4 Companies 8 Companies 20 Companies 50 Companies Softwood Veneer and Plywood ( SIC 2436)

1982 135 41 56 74 92 619 1987 131 38 56 74 93 571 1992 123 47 66 82 96 797 Reconstituted Wood Products ( SIC 2493)

1982 N/ A 1987 158 48 65 82 95 743 1992 193 50 66 81 94 765 Structural wood members ( SIC 2439)

1982 649 15 22 35 50 104 1987 831 13 18 30 44 92 1992 830 19 25 34 46 166 * The latest year for which data is currently available. ** The index is based on the 50 largest companies in each SIC code. Source: U. S. Department of Commerce ( 1992).

The concentration ratios presented in Exhibit 2 15 show very little evidence of market concentration in the plywood and composite wood products industries. Four firm concentration ratios for the three sectors are below 50 with the exception of reconstituted wood products ( classified as " General" in the ICR survey) which is 50. The HH indices for all SIC codes are well below the benchmark of 1000. While concentration appears to have increased in general between 1982 and 1992, there is no clear trend as all appear to have been less concentrated in 1987. 6 Map developed based on original survey database dated July 23, 1999.

2 31 2.4.2 Manufacturing Plants Through an ICR, the U. S. Environmental Protection Agency identified plants potentially affected by this rule. EPA categorized the surveyed facilities according to their production processes and developed estimates of compliance costs for each facility. Exhibit 2 16 below presents information on the number of potentially impacted facilities, and their corresponding primary SIC code. The exhibit also shows the percent of potentially impacted facilities as a percent of total facilities for each SIC.

Exhibit 2 16: Facilities with Compliance Cost Impacts Facilities SIC Code Description Impacted* Total in SIC % of Total 2436 Softwood Veneer and Plywood 66 155 42.6%

2493 Reconstituted Wood Products Total 97 317 30.6%

OSB 23 PB/ MDF 56 HB 18 2439 Structural Wood Members 3 53 5.7%

* Does not include number of facilities with MRR costs only. Note: Percentages represent survey facilities' share of total facilities in the category. Sources: U. S. Environmental Protection Agency ( 1998), U. S. Department of Commerce ( 1999a), MRI ( 1999).

<IP_ADDRESS> Location Nationally, facilities that produce softwood plywood and reconstituted wood products are clustered in distinct geographic regions of the South, Pacific Northwest, and the upper Mid West of the U. S. Based on the 1997 Census of Manufacturers, the softwood plywood and veneer facilities have the highest employment in Oregon, Washington and Louisiana. The Census showed that reconstituted wood product facilities had the highest employment in Oregon, California, North Carolina, Texas, and Michigan ( source: U. S. Department of Commerce, 1999a).

Figure 2 86 is a map of locations of impacted and total ICR facilities as identified by EPA ( MRI, 1999, EPA, 1998). For this figure, all types of facilities are combined. The map shows the state by state distribution of the potentially impacted facilities relative to the total ICR facilities in the state. The states with the greatest number of potentially impacted facilities are Oregon ( 36), Louisiana ( 16), Georgia ( 8), Mississippi ( 7), Virginia ( 10), Texas ( 8), and North Carolina ( 7). Major producing states where impacted facilities constitute a significant portion of all facilities in the state include Louisiana ( 66 percent), Oregon ( 57 percent), Washington ( 77 percent), Georgia ( 38 percent) and Texas ( 44 percent). 2 32 8 of 18 4 of 5 4 of 12 1 of 1 0 of 1 0 of 1 5 of 7 0 of 1 1 of 1 0 of 1 1 of 1 0 of 1 5 of 12 36 of 63 0 of 1 2 of 5 8 of 21 1 of 1 10 of 13 3 of 25 2 of 12 6 of 20 0 of 6 0 of 3 0 of 5 7 of 41 7 of 16 3 of 11 4 of 13 2 of 6 16 of 24 0 of 17 10 of 25 6 of 15 0 of 3 0 of 2 Impacted Facilities 0 1  9 10  18 19  27 28  36 States Figure 2 8: Plywood and Wood Composite Facility Locations ( Potentially Impacted Facilities and Total ICR Facilities by State)

Sources: U. S. Environmental Protection Agency ( 1998), MRI ( 1999) 2 33 <IP_ADDRESS> Production Capacity and Utilization Exhibit 2 17 shows the capacity utilization rates by SIC code and for all manufacturing industries for 1992 through 1997. The rates for softwood plywood and veneer, and reconstituted wood products are significantly higher than the average for all lumber and wood products and for all industries. Capacity utilization for structural wood members is below industry averages but has increased over the 1992  1997 period.

Exhibit 2 17: Full Production Capacity Utilization Rates, Fourth Quarters, 1992  1997 SIC SIC Description 1992 1993 1994 1995 1996 1997 Change 2436 Softwood Veneer and Plywood 87 92 95 95 86 84  3.4%

2493 Reconstituted Wood Products 87 92 92 88 86 82  5.7%

2439 Structural Wood Members 65 66 66 74 77 72 10.8%

24 All Lumber and Wood Products 80 81 80 77 78 75  6.3%

2000 3999 All Manufacturing Industries 77 78 80 76 76 75  2.3%

Source: U. S. Department of Commerce ( 1997).

Figure 2 9 presents the capacity utilization rates of softwood plywood and veneer and reconstituted wood products from 1992 1997.

Figure 2 9: Full Production Capacity Utilization, Fourth Quarters, 1992 1997 1992 1994 1996 74 76 78 80 82 84 86 88 90 92 94 96 Utilization Rate ( percent)

Year Softwood, plywood & veneer Reconstituted wood products Source: U. S. Department of Commerce ( 1997).

The capacity utilization for softwood plywood and veneer, and reconstituted wood peaked in 1994, consistent with utilization peaks for all manufacturing industries. Interestingly, utilization rates for 2 34 reconstituted wood product facilities declined, while softwood plywood and veneer was unchanged in 1995, the year that shows the highest value of shipments for all ( see Exhibit 2 17). This may be explained, in part, by capacity expansions driven by the increased capital expenditures by softwood plywood and veneer producers in 1994 and subsequent years.

The ICR provided further information on capacity utilization. A sample of general facilities responding to questions regarding their production processes reported production and capacity. From this data, capacity utilization for general facilities was 78 percent, slightly below the figures in Exhibit 2 17 <IP_ADDRESS> Employment Exhibit 2 18 provides information on employment at the softwood plywood veneer and reconstituted wood products facilities responding to the ICR in 1998.

Exhibit 2 18a: 1998 Employment at Facilities with Expected Compliance Cost Impacts Softwood Plywood and Veneer Oriented Strandboard Medium Density Fiberboard/ Particleboard Number of Employees Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Not reporting 2 3.0% 0 0.0% 0 0.0%

< 50 0 0.0% 0 0.0% 1 1.8%

50 to 99 0 0.0% 0 0.0% 12 21.4%

100 to 249 18 27.3% 21 91.3% 30 53.6%

250 to 499 34 51.5% 1 4.3% 2 3.6%

500 to 999 11 16.7% 1 4.3% 8 14.3%

1,000 to 1,499 1 1.5% 0 0.0% 2 3.6%

> 1,500 0 0.0% 0 0.0% 1 1.8%

TOTAL 66 100% 23 100% 56 100%

Sources: U. S. Environmental Protection Agency ( 1998), MRI ( 1999).

Exhibit 2 18b: 1998 Employment at Facilities with Expected Compliance Cost Impacts Hardboard Engineered Wood Products Total Facilities Number of Employees Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Not reporting 0 0.0% 0 0.0% 2 1.2%

< 50 0 0.0% 0 0.0% 1 0.6%

50 to 99 1 5.6% 0 0.0% 13 8.0%

100 to 249 8 44.4% 1 33.3% 77 47.2%

250 to 499 4 22.2% 2 66.7% 41 25.1%

500 to 999 5 27.8% 0 0.0% 25 15.3%

1,000 to 1,499 0 0.0% 0 0.0% 3 1.8%

> 1,500 0 0.0% 0 0.0% 1 0.6%

TOTAL 18 100% 3 100% 166 100% Exhibit 2 18b: 1998 Employment at Facilities with Expected Compliance Cost Impacts Hardboard Engineered Wood Products Total Facilities Number of Employees Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities 2 35 Sources: U. S. Environmental Protection Agency ( 1998), MRI ( 1999).

Potentially impacted facilities engaged in the production of plywood and composite wood products tend to be small to medium sized. Just over half of the facilities reported having less than 250 employees. Softwood plywood producers tend to have larger facilities, while facilities producing reconstituted wood products tend to be smaller.

<IP_ADDRESS> Facility Population Trends Plant age may be of particular significance to potential regulatory impacts. Older plants may be less efficient as compared with newer plants utilizing technological improvements in production efficiency. One example mentioned earlier is the development of the continuous press, enabling recently constructed plants to produce more panel products in less time than older manufacturers. Newer plants may utilize better volatile organic compound emission control technologies and have adapted their processes to meet indoor air quality requirements.

While specific age information for all facilities is not available, an analysis performed by Spelter et al. ( Spelter, 1997) provides insights into the changing nature of plywood and composite wood facilities over time. In their analysis, they traced the number of mills, average mill capacity, and capacity utilization over the course of 20 or more years. The analysis does not present information on specific plant closures and openings over time, but presents the total number of operating mills, which reflects the net change resulting from both closures and openings. Exhibit 2 19 provides information on the results of the analysis for selected years from 1977 to 1997, using census years to provide some comparison to overall industry figures presented elsewhere in this chapter. 2 36 Exhibit 2 19: Number of Mills, Average Capacity and Utilization, 1977  1997 1977 1982 1987 1992 1997 % Change Softwood Plywood Number of Mills 62 69 58 56 57  8%

Average Mill Capacity ( 1000 m3) 110 138 180 201 215 95%

Capacity Utilization 97 79 99 95 97 0%

Oriented Strandboard Number of Mills 8 21 39 44 66 725%

Average Mill Capacity ( 1000 m3) 88 115 148 187 259 194%

Capacity Utilization 44 90 99 84 91%

Particleboard Number of Mills 54 43 44 45 45  17%

Average Mill Capacity ( 1000 m3) 137 151 168 181 196 43%

Capacity Utilization 86 87 89 89 97 13%

Medium density Fiberboard Number of Mills 12 13 17 17 26 117%

Average Mill Capacity ( 1000 m3) 95 105 122 141 151 59%

Capacity Utilization 69 66 87 91 86 25%

Laminated Veneer Lumber Number of Mills 2 6 12 17 750%

Average Mill Capacity ( million m3) 0.078 0.075 0.063 0.085 9%

Capacity Utilization 73 60 75 93 27%

Engineered Joists Number of Mills 12 12 18 35 192%

Average Mill Capacity ( million meters) 3 4 5 9 200%

Capacity Utilization 69 73 90 58  16%

* Information not available for some years. For softwood plywood, particleboard, and MDF, 1997 figures are from 1996. For particleboard, 1984 figures are used for 1982. Source: Spelter et al. ( 1997).

Average facility capacity has shown substantial increases over the last twenty years for all product groups. While the number of softwood plywood facilities declined by 8 percent between 1977 and 1997, the average mill capacity increased substantially, nearly 100 percent. Particleboard has experienced some capacity growth while the number of plants has declined.

The OSB industry has shown the largest increase in per facility capacity, 194 percent, along with large net additions of facilities. Most notably, there were nine more OSB plants than softwood plywood plants in 1997, whereas in 1977 plywood plants outnumbered OSB plants nearly 8 to one. Recent facility additions for OSB and MDF show these sectors have newer facilities, while the softwood plywood and particleboard industries are generally composed of older facilities. 2 37 A review of recent capital investment trends provides some insights into the facility population trends of the softwood plywood and reconstituted wood products industries. Exhibit 2 20 shows capital expenditures by industry sector. Capital expenditures have seen substantial overall increases in the last five years for all three sectors, indicating increasing investment, particularly in the reconstituted wood product and structural wood members sectors. However, investment by the softwood plywood and veneer and reconstituted wood products sectors declined sharply from 1996 to 1997. This trend indicates the connection between declining capital expenditures and the sharp increase in products costs' share of the value of shipments ( as shown in Exhibit 2 5) that began after 1995. If such conditions in the baseline continue into the future, it is possible that certain firms may experience difficulty accessing capital to cover these costs in addition to compliance costs associated with the MACT standard.

Exhibit 2 20: Summary of Capital Expenditures, 1992  1997 ( Thousands of 1997 Dollars)

1992 1993 1994 1995 1996 1997 % Change Softwood Plywood & Veneer 110,125 128,490 159,685 192,090 212,277 168,142 52.7%

Reconstituted Wood Products 159,330 185,452 353,665 367,057 583,659 329,744 107.0%

Structural Wood Members* 47,420 70,659 220,523 143,523 108,889 138,880 192.9%

All dollars adjusted to 1997 using GDP Deflator. * 1997 figure is sum of capital expenditures for NAICS 321213 and 321214. Source: U. S. Department of Commerce ( 1999a).

For softwood plywood, the level of capital investment constitutes only 3 percent of the industry's total value of shipments. With the number of mills in decline and average mill capacity growing, it appears that the majority of capital expenditures made by the softwood plywood industry occur at existing plants. This conclusion is supported by U. S. Industry & Trade Outlook ` 99, which reported that only one new softwood plywood facility has opened in the last 10 years ( U. S. Department of Commerce, International Trade Administration, 1999).

Conversely, results of the growing capital investments made by the reconstituted wood products industry can be observed in the large increases in the number of OSB and MDF plants, and the rising average plant capacities of reconstituted wood products producers. As a group, these producers invested 6 percent of the value of shipments in 1997, twice the investment rate of the softwood plywood producers. For example, in September of 1999, Willamette Industries announced that it will build an $ 85 million particleboard plant in South Carolina. The plant will have a capacity of 210 million square feet per year and will be in operation in late 2001.

2.4.3 Firm Characteristics Several factors will likely be of importance in determining the distribution of impacts generated by the proposed MACT standard on companies. Size may play a role in a company's ability to absorb an increase in compliance costs. Ownership is a second factor that may play a role. Because firms have different legal and financial guidelines based on ownership, their approaches to complying with the MACT standard may vary. Vertical and horizontal integration, or lack there of, in plywood and composite wood product firms may affect the manner in which they absorb the potential costs of the MACT standard. Lastly, the overall financial condition of the plywood and composite wood industries is assessed, attempting to determine the industry's ability to withstand adverse conditions. 2 38 <IP_ADDRESS> Size Distribution Firm size is likely to be a factor in the distribution of the impacts of the proposed MACT on companies. Under the Regulatory Flexibility Act ( RFA) and its 1996 amendment, SBREFA, SBA definitions are used to designate which businesses are considered to be small. The SBA has set size standards under the NAICS system, using various thresholds for the number of employees or revenues. In determining the size of a company, the SBA treats a facility that has a substantial portion of its assets and/ or liabilities shared with a parent company as part of that company. In this analysis, the company's primary NAICS code is used to determine the appropriate SBA threshold.

Exhibit 2 21 provides information on firm size for plywood and wood composite firms owning facilities with expected compliance cost impacts. In the ICR, facilities were asked to provide information on employment size for domestic parent firms. Many facilities did not report information on the ultimate domestic parent. For this reason, information on ultimate domestic parent primary SIC and NAICS code and employment size were obtained from Dun and Bradstreet's DUNS Database. Exhibit 2 21 shows the number of firms and the facilities owned by the firms in the first two data columns. In the absence of Dun & Bradstreet information on the owner, the facility's primary SIC and NAICS code from Dun & Bradstreet was used to determine the appropriate SBA threshold. Based on this SIC code, facility employment information from the ICR was used to make a size determination. Exhibit 2 21 shows the number of firms and the facilities owned by the firms in the third and fourth data columns. In the absence of facility primary SIC code from DUNS, the standard for lumber and wood products ( all SIC 24 codes) of 500 employees was used as the threshold. A full list of the facilities and their size determination is provided in the economic impact analysis for this proposed rule.

Exhibit 2 21: Size Distribution of Firms Owning Facilities with Expected Compliance Cost Impacts Size SIC Based on DUNS SIC Based on ICR Other Sources Total Firms Facilities Owned by Firms* Firms Facilities Owned by Firms* Firms Facilities Owned by Firms* Firms % Facilities Owned by Firms* %

Small 8 10 5 5 6 7 19 35.2% 22 8.4%

Large 29 231 4 8 2 2 35 64.8% 241 91.6%

Total 37 241 9 13 8 9 54 100% 263 100%

* Includes all facilities reported, impacted and non impacted. Sources: U. S. Environmental Protection Agency ( 1998), MRI ( 1999). SBA Size Standards from SBA website: http:// www. sba. gov/ regulations/ siccodes/.

While over 35 percent of firms in the industry are considered small, 91 percent of facilities are owned by large firms. Given the concentration ratios presented in Exhibit 2 15, there does not appear to be any significant market power to these larger firms. However, the ability of larger firms to deal with compliance costs, as compared to smaller firms, may have impacts on the industry organization.

The larger parent firms have both impacted and non impacted facilities. Firms such as Georgia Pacific ( 43 ICR facilities), Louisiana Pacific ( 32 ICR facilities), Willamette Industries ( 23 ICR facilities), Columbia Forest Products ( 13 ICR facilities), Weyerhaeuser ( 19 ICR facilities), and Boise Cascade ( 12 ICR facilities) may be able to make trade offs between facilities and shift production to more efficient facilities in response to compliance costs associated with the MACT standard. 2 39 <IP_ADDRESS> Ownership The form of firm ownership has a set of legal and financial characteristics that may influence a firm's regulatory compliance alternatives. The legal form of ownership impacts the cost of capital, availability of capital, and effective tax rate faced by the firm. Debt equity issues for these firm types will play a role in financing capital intensive controls. Firm ownership may generally be one of three types.

° Sole proprietorships ( companies with a private single owner) ° Partnerships ( non corporate firms with more than one owner) ° Corporations ( publically or privately owned companies formed through incorporation)

Exhibit 2 22 provides information on ownership type for the lumber and wood products industry. While specific information by 4 digit SIC or 5 digit NAICS is not available, the table provides a general sense of ownership types in the industry, assuming that ownership structure for the three industries profiled is similar to that of the overall lumber and wood products industry.

Exhibit 2 22: Types of Firm Ownership for Lumber and Wood Products ( SIC 24/ NAICS 321), 1992 Corporation Sole Proprietorship Partnerships Other/ Unknown Single Facility Firms 1,291 14,909 Multi Facility Firms 17,617 61 All Firms 18,908 10,447 2,336 2,187 Source: U. S. Dept. of Commerce ( 1992).

Over ninety percent of single facility wood and lumber products firms are owned by sole proprietorships, partnerships, or some other/ unknown entity. Nearly all multi facility firms are owned by corporations. Just over half of all lumber and wood products firms are a corporation, while the remainder are sole proprietorships ( 30 percent), partnerships ( 7 percent), or other ( 6 percent). These data support the conclusion that single facility firms owned by sole proprietors are more likely to be classified as small businesses, while multi facility firms owned by corporations are more likely to be classified as large businesses.

<IP_ADDRESS> Vertical and Horizontal Integration The data presented in Section 2.2 on concentration and specialization ratios for the plywood and composite wood industries, combined with the information on establishment size and ownership type demonstrate that the majority of firms in the three industries examined in this profile are predominantly not, or minimally, vertically or horizontally integrated. However, there are several exceptions to this conclusion. The six largest firms that own multiple facilities are for the most part both vertically and horizontally integrated. These firms, described in more detail below, are large multi billion dollar concerns that are vertically integrated through their ownership of timberland, their production facilities, and their involvement in product distribution. Their horizontal integration is attributed to their other product lines, generally pulp and paper.

Georgia Pacific, a large, horizontally and vertically integrated firm, manufactures and distributes building products, pulp and paper, and resins. The company's wood product line includes wood panels, plywood, and hardboard. It also produces lumber, gypsum products, chemicals, and packaging. Georgia Pacific grows and sells timber, and participates in several other activities related to forestry management. 2 40 Its 1998 net sales revenues exceeded $ 13 billion, and it has 45,000 employees at 400 locations. Its building products division reported record profits during the second quarter of 1999. It currently has plans to build an OSB plant in Arkansas and recently merged with Unisource, a major distributor of imaging paper and supply systems ( Financial Times, 1999b; PR NewsWire, 1999b).

Louisiana Pacific is principally a manufacturer of building products, but also produces pulp and building insulation, and owns almost one million acres of timberland. Its sales of structural lumber, industrial panels, and exterior building products made up nearly 75 percent of the company's revenues, which reached $ 2.3 billion in 1998. The company manufactures OSB, I joists, LVL, MDF, fiberboard, particleboard, hardboard, softwood plywood and hardwood veneer. Louisiana Pacific has been involved in a series of mergers and acquisitions that include Le Goupe Forex of Canada, Evans Forest Products, and ABT Building Products ( Louisiana Pacific, 1999; Financial Times, 1999c).

Willamette Industries, a forest products manufacturing company, has three main lines of business: brown paper, white paper, and building products. The building products division manufactures plywood, lumber, particleboard, MDF, OSB, LVL and I joists, among others. Approximately one third of the company's $ 3.7 billion in total revenue is from its building materials segment. Most of Willamette's recent merger and acquisition activity has been with firms in France and Mexico. It also owns plants in Ireland and 1.8 million acres of timberland in the U. S. ( Financial Times, 1999d; PR NewsWire, 1999c, 1998, 1997).