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METALS DIVISION To (Name) Mr. J. T. Kelly Division UCC-Metals Division Location 38 th FI 001" 270 Park Avenue P. 0. 30X 579 -4625 ROYAL AVE., NIAGARA FALLS, LEW YORK : '1C? Qafce Originating Dept, February 25, 1980 "Calidria" Asbestos Strategic Planning Asbestos This is in response to the questions you asked on 2/13/80 relative to an update of the Subject. I am sorry to advise that I have been unable to get very explicit answers to most of your questions, as noted below. My prime source of information is Bob C-lifton of the USBM. 1. How much of world production is short fiber? Clifton recommends using 42% based on Canadian exports. 2. What is world consumption by country? a. Canada exports 95% of production b. USSR & China consume most of production c. Japan consumed about 330,000 tons in 1977 - 40% from Canada, 27% from S. Africa, 24% from USSR, 3% from U.S., Australia and Other. 3. What are major world-wide applications? About 70% used in asbestos-cement products, remaining 30% in myriad other applications. 4. Value of world-wide asbestos sales? Clifton suggests using Canada as example: 1977 - C$548,925,000. 5. Estimated reserves of Coalinga deposit? of "our shore11? Per Bill DeAtley, total reserves have never been estimated because ore depth has not been determined. We use 100 years as an estimate of our reserves - at 30,000 TPY that would be 3,000,000 tons. " 6. Short Fiber capacities of Competitors? Atlas - 25,000 TPY (all short) Carey - 230,000 TPY (Grades S&7) J-M - 800,000 TPY (all grades) UCC 008114 To: Mr. J. T. Kelly n February 25, 1980 7. Breakdown of .1975-1979 sales quantities? Domestic & Export, Short Tons Asbestos Industry Viscosity Control 1975 1976 1977 1978 1979 28,502 22,490 22,782 32,883 26,513 1,579 2,067 2,110 2,376 2,157 Total 30,081 24,557 24,892 35,259 28,670 I apologize for the incomplete information, but perhaps some of it will be helpful. Enclosed are the following publications which may provide you with additional data and information. (Please return them to me): "ASBESTOS", December 1979 USBM Report, July 1979 Market Analysis, April 1974 Bob Clifton is sending me some other information he has but I don't think it wi be pertinent for our study. I will send you copies of anything of interest. n L. Myers JLMrdal Enclosures UCC 008115 INTERNAL CORRESPONDENCE METALS IV1SI0N MAR 3 1980 270 PARK AVENUE, NEW YORK, NEW YORK 10017 To fNomej Division Location Floor Number G. R. Bailey , R. L. Folkman / R. W. Rebholz * F. J. Shortsleeve Copy to W. G. Alesio Dare March 3, 1980 Originating Dept. Floor Number Answering fetter date Sublet Asbestos Strategy Attached is a rough draft version of the asbestos strategic plan, which will be reviewed at our March 28 meeting. JTK:tb Attachment J. T. Kelly/ UCC 008116 INDUSTRY DEFINITION Those enterprises engaged in the worldwide production and marketing of short fiber asbestos and/or viscosity control agents. BUSINESS DEFINITION The mining, milling, chemical treatment and world wide marketing of high quality short fiber asbestos. UCC 008117 ASBESTOS - GENERAL TOTAL WORLDWIDE ASBESTOS SUPPLY/DEMAND l'/A/i-TJ? " 5 4a! 71 USSR Canada USA Europe Japan S. Africa Rhodesia Others TOTAL PRODUCTION 2.7 1.7 0.1 0.2 - 0.4 0.2 0.6 5.9 CONSUMPTION SHORT FIBER ASBESTOS PRODUCTION . -- APPROXIMATELY 30% of TOTAL ASBESTOS PRODUCTION IS SHORT FIBER GRADES -- MOST SHORT FIBER ASBESTOS IS OBTAINED AS A BY-PROD UCT IN LONG FIBER OPERATIONS- NOT ALL IS CURRENTLY RECOVERED. MAJOR APPLICATIONS - 7* -- CEMENT-P-R0BUCTS j-TILE r PAPER, FRICTION MATBRTAfift-- --^ ^ l~Orj V t r t T. T ~ ^ ** ^ UCC 008118 UCC OPERATION KING CITY, CALIFORNIA "CALIDRIA" ASBESTOS MINING SITE AT COALINGA DEPOSIT, DISCOVERED IN 1957. TOTAL COALINGA RESERVES -- 3MM + TONS (100+ YEARS OPERATION) SHORT FIBER ASBESTOS ONLY. HIGH QUALITY (PURITY, FIBER CONTENT) MILLING OPERATIONS BEGAN IN 1964. CURRENTLY OPERATING AT 85%c OF CAPACITY. PRODUCT SOLD IN U.S.A., JAPAN, EUROPE UCC 008119 UCC COMPETITORS SHORT FIBER ASBESTOS -- CAREY (Quebec, Canada) -- JOHNS--MANVILLE (Quebec) -- ATLAS (California) CAPACITY, M TONS/YR 230 800 25 KING CITY 33 VISCOSITY CONTROL AGENTS DE GUSSA CABOT NATIONAL LEAD BAKER PRODUCT *' CURRENT OPERATING RATE '% CAPACITY KING CITY UCC 008120 UCC MARKETS SHORT FIBER ASBESTOS USA TONS % SHARE CAREY JOHNS-MANVILLE ATLAS UCC 61,000 30,000 15,000 25,000 47 23 11 19 131,000 100 JAPAN TONS % SHARE TOTAL TONS % SHARE 33,000 5,000 - 7,000 73 11 16 94,000 35,000 15,000 33,000 53 20 9 18 45,000 100 176,000 100 UCC 008121 VISCOSITY CONTROL MARKETS MAJOR APPLICATIONS -- ADHESIVES, SEALANTS, COATINGS MARKET SHARE DE GUSSA CABOT NATIONAL LEAD BAKER UCC USA 25 49 10 5 11 SHARES % JAPAN EUROPE 70 70 25 23 13 25 19 TOTAL 40 40 3 2 15 UCC SUPPLYING THE ONLY ASBESTOS BASE PRODUCT. UCC 008122 PROSPECTS FOR INDUSTRY GROWTH & PROFITABILITY - SHORT FIBER ASBESTOS -- low to moderate The question of health hazards and associated governmental regulatory action and potential third party liability are expected to result in a zerovolume growth rate for this industry. Limited num ber of competitors and favorable pricing history are positive factors. . VISCOSITY CONTROL AGENTS -- high The unfavorable asbestos publicity and restric tive government regulations have been less of a negative factor in customer consideration. Aplications for asbestos remain despite considerable effort to develop substitutes. Requirements for technical competence and capital investment in this area are high. Viscosity control products represent only 8% of the tonnage at King City, but account for 60% of the plant margin. UCC 008123 INDUSTRY PROFILE SHORT FIBER ASBESTOS CRITICAL ITEMS VOLUME GROWTH . VULNERABILITY TO SUBSTITUTION COMPETITION PRICING RESPONSE CUSTOMERS GOVERNMENT INTERVENTION ACTIVIST INFLUENCE THIRD PARTY LIABILITY INDUSTRY PROSPECTS HIGH" " MODERATE LOW X X X X X X X X VOLUME GROWTH EARNINGS QUALITY OVERALL ASSESSMENT UCC 008124 INDUSTRY PROFILE VISCOSITY CONTROL AGENTS CRITICAL ITEMS VOLUME GROWTH SUBSTITUTION COMPETITION BASIS OF PRODUCT COMPETITION CUSTOMERS INDUSTRY PROSPECTS HIGH MODERATE LOW X X X X X VOLUME GROWTH EARNINGS QUALITY OVERALL ASSESSMENT X X X UCC 008125 HEALTH QUgggggN FOUR DISEASES CONNECTED WITH ASBESTOS EXPOSURE: ASBESTOSIS LUNG CANCER MESOTHELIOMA LATENT PERIOD VARIES FROMjlS TO 50 YEARS. MESOTHELIOMA IS THE MOST CRITICAL CONCERN. CAN APPARENTLY BE CAUSED BY SHORT, RELATIVELY LOW EXPOSURES AND IS NOT SMOKING RELATED. REASON FOR SCHOOL CEILING & HAIR DRYER INCIDENTS. DEFINITIVE SCIENTIFIC ANSWER TO QUESTION OF CANCER RISK AT VERY LOW EXPOSURES WILL PROBABLY NOT BE FORTHCOMING IN THE NEAR FUTURE. UCC 008126 ESTIMATE OF FURTHER REGULATORY IMPACTS ON UCC ASBESTOS BUSINESS 1. WORKPLACE EXPOSURE LIMITS WILL BE REDUCED BY OSHA FROM 2.0 FIBERS/CC TO 0.5-1.0 RANGE. 2. LITTLE CHANGE IN OTHER REGULATIONS. 3. NO MANDATORY SUBSTITUTION. EXISTS AT PRESENT.) (NO STATUTORY AUTHORITY 4. "AFTER THE FACT" LEGISLATION WILL NOT SIGNIFICANTLY AFFECT UCC. UCC 008127 UCC PRODUCT DIRECTIONS EMPHASIZE DUST CONTROLLED "CALIDRIA" ASBESTOS PRODUCTS. IMPROVE PACKAGING CONCENTRATE ON END USES WHERE FREE FIBER GENERATION IS MINIMIZED OR ELIMINATED. UCC 008128 FINANCIAL SUMMARY "CALIDRIA" ASBESTOS SALES ($MM) NET INCOME {$MM) (C/SHARE) ROS % ROA % CASH GENERATED ($MM) 1975 1976 1977 1978 1979 4.3 0.1 0.2 2.3 1.6 0.2 4.9 0.5 0.8 10.2 10.5 0.1 5.3 0.6 1.0 11.3 12.9 1.1 7.2 1.2 1.9 16.7 25.4 1.0 6.4 1.0 1.5 16.4 19.8 1.2 UCC 008129 SPU COMPETITIVE POSITION SHORT FIBER ASBESTOS -- STRONG/LEADING High level of product quality and service to a diverse customer base overcome the disadvantage on costs of competing against a by-product situation. VISCOSITY CONTROL AGENTS -- STRONG A strong technical service effort, the most varied product line, and superior cost position have helped to offset the health factor, which has limited market share and remains a threat to future participation in these markets. UCC 008130 SPU COMPETITIVE PROFILE SHORT FIBER ASBESTOS CRITICAL ITEMS LEADING STRONG FAIR WEAK MARKET SHARE PRODUCT LINE BREADTH BREADTH/CUSTOMER BASE COST POSITION TECHNOLOGY POSITION PRODUCT QUALITY SERVICE/RELIABILITY * OVERALL UCC 008131 Assessment of Principal Competitors Relative to Key Competitive Factors Asbestos Category Market Share Product line Breadth Breadth Customer Base Total Cost Position Technical Position Product Quality Customer Service/Dependable Supplier t Overall Rank TJCC Carey Strong Strong Strong Strong/ Fair Strong Fair Strong Strong Leading Leading Weak Strong/ Fair Weak Leading/ Strong 1 Strong/ Fair 3 Johns - Manville Strong Strong Strong Leading/ Strong Strong Fair Strong Strong Z Atlas --Strong Weak Weak Fair Weak Strong Weak Fair/ Weak 4 UCC 008132 SPU COMPETITIVE PROFILE VISCOSITY CONTROL AGENTS CRITICAL ITEMS LEADING STRONG FAIR WEAK PRODUCT LINE BREADTH BREADTH/CUSTOMER BASE COST POSITION TECHNOLOGY POSITION PRODUCT QUALITY HEALTH FACTOR .* OVERALL UCC 008133 Assessment of Principal Competitors Relative to Key Competitive Factors Non-Asbestos Category Product line Breadth Breadth of Customer Base Total Cost Position * ' Technical Position Produet Quality Health Factor Overall Rank UCC Strong Leading Natl. Lead Fair/ Weak Fair Cabot DeGussa Fair Fair Strong Strong Baker Fair/ Weak Fair Leading . Strong Leading/ Strong Strong Leading Strong Weak Strong Fair Strang Strong/ Fair Strong Strong Strong Strong Strong Strong Strong Strong Strong Strong/ Fair Strong Fair Strong Strong Strong/ Fair 22 12 2 (l)lhe health factor was weighted at 4 to l against other factors in the overall rating for UCC. UCC 008134 Ul > fc s Su Op Off O z g UJ o 2 UCC 008135 PROSPECTS FOR LONG TERM INDUSTRY GROWTH AND EARNINGS Q U ALITY NON-ASBESTOS CATEGORY * <Ul S >* oi O o w <H o 8 H w Id KEY EXTERNAL ASSUMPTIONS VOLUME GROWTH: . VISCOSITY CONTROL -- 8% PER YEAR . SHORT FIBER ASBESTOS -- 0% PER YEAR GOVERNMENT: . CLEAR POSITION TAKEN ON HEALTH QUESTION WITHIN 2-3 YEARS. . NO WIDESPREAD BANS OR MANDATORY SUBSTITUTION . OSHA TLV NO MORE RESTRICTIVE THAN IBER/CC COMPETITION: . NO NEW MAJOR EXPLOITATION OF COALINGA DEPOSIT . RUSSIANS DO NOT ENTER SHORT FIBER MARKET . VISCOSITY CONTROL COMPETITORS DO NOT REDUCE PRICES . MARKETING POLICY OF SHORT FIBER PRODUCERS UNCHANGED . ATLAS OPERATES THROUGH AT LEAST 1981* ' CUSTOMERS: .. HEALTH FACTOR HAS NO SIGNIFICANT ADDITIONAL IMPACT ON SHORT FIBER ASBESTOS MARKET . APPREHENSION OF CUSTOMERS IN THE VISCOSITY CONTROL AREA WILL SUBSIDE IN 2-3 YEARS UCC 008136 CURRENT DIRECTION THE ASBESTOS BUSINESS HAS BEEN OPERATED TO MAXIMIZE EARNINGS AND CASH FLOW. AGGRESSIVE MARKETING AND PRODUCT DEVELOPMENT PROGRAMS HAVE BEEN MAINTAINED. CAPITAL INVEST MENT HAS BEEN LIMITED TO DUST CONTROL IMPROVEMENTS AND OTHER MINOR REQUIREMENTS. -- MAINTAIN POSITION WHILE MINIMIZING RISK IN VIEW OF MARKET UNCERTAINTIES. UCC 008137 SALES HISTORY SHORT FIBER VISCOSITY CONTROL TOTAL 1975 28.5 1.6 30.1 1976 M TONS 1977 22.5 22.8 2.1 2.1 24.6 24.9 1978 32.9 2.4 35.3 1979 26.5 2.2 28.7 CONSTRUCTION EXPENDITURES 1975 1976 1977 19781979 $M 542 197 47 77 57 UCC 008138 STRATEGY SELECTION STRATEGY: STRATEGIC DIRECTION SHORT FIBER VISCOSITY CONTROL CONSTANT CAPACITY (BASE CASE) SHORT FIBER EXPANSION VISCOSITY CONTROL EXPANSION UNIT ABANDONMENT Maintain Position Improve Position Maintain Position _ Concede Position Concede Position Maintain Position _ UCC 008139 STRATEGY ASSUMPTIONS CONSTANT CAPACITY (BASE CASE): . SHORT FIBER ASBESTOS --MARKET SHARE 18-20% OVER PLAN PERIOD -- TOTAL VOLUME RELATIVELY CONSTANT . VISCOSITY CONTROL -- MARKET SHARE 15% THROUGH 1982, DROPS TO 12% BY 1988 DUE TO CAPACITY LIMITATION OF CHEMICAL CURCUIT SHORT FIBER EXPANSION: . SHORT FIBER ASBESTOS -- INCREASE CAPACITY BY 25,000 TPY (75%) IN 1981, AT CAPITAL COST OF $6.3 MM -- MARKET SHARE EXPANDED FROM 18% TO 32% BY 1982 (OBTAIN 12,000 TPY CONTRACT WITH GAF) . VISCOSITY CONTROL -- SAME AS BASE CASE VISCOSITY CONTROL EXPANSION: . SHORT FIBER ASBESTOS -- SAME AS BASE CASE . VISCOSITY CONTROL -- EXPAND CHEMICAL CURCUIT 1800 TPY (100%) BY 1983, AT CAPITAL COST OF $5.8 MM -- MAINTAIN MARKET SHARE AT 15% TRHOUGH THE PLAN PERIOD UCC 008140 STRATEGY ASSUMPTIONS j UNIT ABANDONMENT A - SHUT DOWN OPERATION . CLOSE KING CITY PLANT IN 1980 -- DECOMMISSION COST $1.2 MM NET BOOK VALUE $2.6 MM B - SELL OPERATION . 1980 SALE AT $7 MM (7X EARNINGS) UCC 008141 RISK ADJUSTMENTS DEPLETION ALLOWANCE . ASSIGNED 25% PROBABILITY TO THE LOSS OF DEPLETION BY 1983 SALES . SHORT FIBER ASBESTOS VOLUME REDUCED BY 7-10% STARTING IN 1984 . VISCOSITY CONTROL PRODUCTS GROWTH RATE LOWERED FROM 8% TO 6% FOR THE ENTIRE PLAN PERIOD PLANT COSTS . INCREASED 3% ABOVE ANNUAL INFLATION RATE DUE TO TIGHTENING REGULATIONS CAPITAL COSTS . INCREASED 12.5% ABOVE PLAN UCC 008142 UCC 008143 03 <o Eh 00 ft D 03 a 03 Ed U 30 Z< c H 03 Z 03 x Dz ' O E-t a < QO <\ Ed ft 03 00 2X 00 xss CT\ ft 03 O < ft I U Em - 00 Dx ft <H u zH Eh o Em f<t a Ed 2 H E-t X 00 O 00 >o-3 ft < 1 CEOd o\ H 00 OA ft eh 2 M ft V> < u Ed <2 <o Ed QO > < 03 Ed O ft 2< ft X Z 03 ft ft v> xss to O 2 rtj i-4 a &4 <* UJ rr fO H e* iH r- ro fH r-i Oo ft CM O 00 r--1 f--1 CM * CM C0 in r- PO m ** --1 00 r- o o CO O CM --1 m r--1 1| CM CO TT r* o in CM H in tH rH H O o * o CM 00 r- O - * CM CO C" <*> 00 (H M x SH z ft Eh H f<t o ft Eh Z u >5 Eh ft z <ft ft Z o 23 ZO < a az oa >H oft u Eh z < ft 03 H ft >* oH EMh 0Z3 X <C a Z Eh <C D 0<3 X X ft ft ft X E<h Eh Eh O ft 03 ft U X Eh i 1 ft Z o X ft ft l 1 Eh oXH z 03 u 03 > D UCC 008144 THIRD PARTY LIABILITY CLASSES OF POSSIBLE PLAINTIFFS . INSULATION WORKERS -- UCC HAS NO EXPOSURE . END USERS -- LOW RISK TO UCC SINCE ASBESTOS IS "ENCAPSULATED" IN MOST CUSTOMER PRODUCTS -- POSSIBLE EXCEPTION IS TAPE JOINT COMPOUNDS. CALIDRIA USED IN THIS APPLICATION FOR APPROX. 10 YRS . CUSTOMER EMPLOYEES -- DISSATISFACTION WITH LOW WORKERS' COMPENSATION AWARDS MAY LEAD TO LITIGATION AGAINST ASBESTOS SUPPLIERS UCC 008145 THIRD PARTY LIABILITY WARNINGS TO UCC CUSTOMERS -- NO WARNING ON UCC PACKAGE FROM LATE 1965 TO JUNE 1978 -- "WEAK" WARNING LABEL USED ON UCC PACKAGING BEGINNING JUNE 1968 -- OSHA WARNING LABEL PRESCRIBED IN JUNE 1972. NOT AN ABSOLUTE BAR TO LIABILITY, BUT HAS NOT BEEN TESTED IN COURTS -- MASSIVE GOVERNMENT EDUCATION CAMPAIGN IN 1978 A FURTHER BASIS FOR CLAIMING PUBLIC HAS BEEN ADEQUATELY WARNED UCC 008146 THIRD PARTY LIABILITY ANALYSIS OF UCC EXPOSURE . 1963 - 1977 -- EXPECT 2-3 SETTLEMENTS PER YEAR @ $60,000 EACH -- WITH 20 YEAR INCUBATION PERIOD, CLAIMS WOULD BEGIN IN 1983 . POST 1977 -- ASSUME CLAIMS DROP TO $40,000 PER YEAR TOTAL - RISK FACTOR -- FIGURE LIABILITY 50% HIGHER THAN ABOVE ESTIMATES . ESTIMATE OF UCC EXPOSURE -- CONTINUED OPERATION CASES -- $4 MM -- ABANDONMENT CASE -- $3.5 MM . UCC 008147 THIRD PARTY LIABILITY ANALYSIS OF UCC EXPOSURE . IMPACT ON STRATEGY RESULTS 1979-1988 IMPACT (ZERO LIABILITY) CASH FLOW $ MM EARNINGS $/SHARE AVERAGE ROA CONSTANT CAPACITY SHORT FIBER EXPANSION VISCOSITY CONTROL EXPANSION UNIT ABANDONMENT - SHUT DOWN - SELL 12.0 8.2 7.8 3.7 8.0 .152 .128 .144 (.017) .050 23 10 13 -- 1979-1988 IMPACT (ACCRUE FOR LIABILITY) CASH FLOW EARNINGS AVERAGE "... $ MM $/SHARE ROA CONSTANT CAPACITY SHORT FIBER EXPANSION VISCOSITY CONTROL EXPANSION UNIT ABAN. DONMENT - SHUT DOWN" * - SELL 9.9 6.1 5.7 1.9 6.2 .120 .096 .112 (.045) .022 18 8 10 -L UCC 008148 RECOMMENDED STRATEGY CONSTANT CAPACITY . HIGHEST EARNINGS QUALITY . LIMITED CAPITAL INVESTMENT . LOW RISK (POTENTIAL THIRD PARTY LIABILITY LARGELY RELATED TO PRE-'77 OPERATION) UCC 008149 ANNUAL CHECK POINTS GOVERNMENT REGULATORY ACTION. STATUS OF ASBESTOS LITIGATION. MARKET DEMAND. ACTION PLANS MAINTAIN STRONG TECHNICAL SERVICE IN VISCOSITY CONTROL AREAS. CONTINUE TO WORK WITH GOVERNMENT AGENCIES ON ASBESTOS REGULATORY MATTERS. SPONSOR RESEARCH ON UCC CALIDRIA. UCC 008150