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FILE NAME: Georgia Pacific (GP) DATE: 1977 Nov DOC#: GP155 DOCUMENT DESCRIPTION: CPSC Consultant Report - Economic Impact of the Ban of Certain Products Containing Free Asbestos j I ! .. I ECONOMIC IMPACT OP THE BAN OF CERTAIN PRODUCTS CONTAINING FREE ASBESTOS ' i Dale R. Ray Economic Program Analysis Division November 1977 I { V TABLE OF CONTENTS Introduction . . Summary of Major Economic Impacts 1 4 Patching Compounds 4 Policy Issues .. .. ' Scope and Coverage _ 5 Asbestos Contamination '7 11 Effective Date . # 12 Market/Industry Characteristics ' Impacts of the Ban on the Patching Compound ^ 15 Industry 15 Cost Effects __ , 18; Effects on Competition ` 19 Other Effects . . ' Impacts of the Ban on the Construction Industry 19 ( 19 . .... Cpst Effects 20 ' Utility Effects 21 Health Benefits to Drywall Contractors . 21 Other Effects 22 Impacts of the Ban on Small Businesses 22 Impacts.of the Ban on Consumers- . 22 Price Effects 24 Health Benefits to Consumers ' 24 ' ` Other Effects ' 25 Artificial Emberizing Materials > 25 Market/Industry Characteristics 28 Impacts of the Ban on Industry 28 Cost Effects 30 Other Effects 31 Impacts of the Ban on Small Business 32 Impacts of the Ban on Consumers 32 Price Effects 32 Other Effects Appendix Is Section III, A.T. Kearney Research Report Appendix II: Section V, A.T. Kearney Research Report INTRODUCTION' In response to petitions filed in 1976 and 1977, the Consumer Product Safety Commission (CPSC) proposed to ban the manufacture and sale of consumer patching compounds and artificial fireplace emberizing materials containing respirable free asbestos. This proposal was published in the Federal Register on July 29, 1977. The purpose of this report is to provide information to the Commission regarding the probable economic impacts of the proposed ban and of alternative available to the Commission on certain issues. Study was initiated by Hl/Economics to examine the impacts.of a potential ban in mid-1976. In the course of this study, a preliminary assessment of the ban on patching compounds was provided by A.T. Kearney, Inc. Sections III and V of that-report are attached as Appendices to this document. . This report is divided into two parts: the first deals with the proposed ban on patching compounds, the second with the proposed ban on artificial emberizing materials. SUMMARY OP MAJOR ECONOMIC TMPAnTg Patching Compounds If the ban is promulgated so as to cover only intentional addition of asbestos or asbestos-containing tremolitic (i.e., fibrous) talc or ' other raw materials to the product, thereby permitting inadvertent asbestos contamination to be present, patching compound production by many firms will be continued. Most products now on the market would have to be reformulated to comply with the ban and significant disruption of inventoried products m distribution would occur; the production and sale of some compounds would be continued without reformulation and without disruption of distribution channel'inventories. Other principal alternatives such as setting a minimal contamination level (e.g., one fiber per thousand particles) or prohibiting the pressure of asbestos altogether (in the rule as proposed) would have substantially greater adverse effects. ' Many manufacturers who do not have extensive technical reformualtion capabilities may discontinue patching compound production temporarily or permanently. Some manufacturers have claimed that they may go out of business if the ban is promulgated. There may be particularly seriouseffects on the cost structures and competitive posture of small businesses' Costs associated with reformulation, raw materials procurement, production processes, inventory obsolescence and repurchase, and product testing may increase the average cost of producing patching compounds. The average prices to consumers and professional contractors may also rise. The total price effect.of the ban may be -about $10-60 million, depending on the extent of reformulation necessary and the ability of producers to pass on cost increases. - -2- In professional uses of patching compounds, the aggregate labor ^ cost of drywall finishing may increase for the first year by as much' as $50-125 million. The effective date chosen and the way in which professional use of the product is treated will have a significant impact on the magnitude of these costs and on the degree of disruption in the construction industry. In the short run, near maximum adverse effects would accompany the proposed 30-day effective date and prohibition of the use of asbestos-containing compounds by professionals. The utility derived from the product by consumers and drywall contractors may be adversely affected; many substitute formulations are expected to have poorer performance qualities than those containing asbestos. This is likely to be noticed more by professsional applicators; most consumers, who are typically infrequent and.unskilled users of the product, will probably.perceive no significant difference in performance* To the extent that contractors and their employees and consumers are no longer exposed to free asbestos in patching compounds, the ban may have beneficial effects on the public health. The extent of these benefits is not known, but is expected to be fairly small. Artificial Kmberizing Material . ' The cost to manufacturers of producing some emberizing material mixtures may increase as a result of the use of substitutes for asbestos. This may lead to slight increases in the average price of separatelysold emberizing kits. This price effect is expected to total less than $25,000 in the year following the promulgation of the ban. No effect on the overall price level of gas logs is expected, whether they are frosted, unfrosted, or packaged with emberizing kits. Some manufacturers,- distributors, and retailers have incurred and will for a period of time continue to incur costs-associated with the voluntary recall of potentially banned products. up to $20,000 for some firms. ' These costs may total I ! -3- utility derived from the product may be adversely affected'! available substitutes for asbestos are said to be generally inferior in simulating the effect of glowing embers. No effect on the heating ability or efficiency of gas logs will occur as a result of the proposed ban. Some health benefits may accrue to consumers and workers engaged in emberizing material production.. The extent of these benefits is not known, but it is expected to be slight. . '' / -4iiV. PART I PATCHING COMPOUNDS Patching compounds are mixtures of casein, clays, marble,' mica, and other substances which are used to cover, seal, or mask cracks, joints, and holes in interior gypsum drywall structures, including ceilings. These may be packaged in "dry" form to be mixed with water, or in premixed ("wet") form; The Commission's proposed definition in the Federal Register notice of July 29, 1977, which discusses the hazard associated with . sanding, ^is interpreted to cover such products as spackling compounds (including the industry term "patching plaster") and tape joint compounds (commonly referred to as "joint cement" or "tape joint mud"). ' t4 i Many of these products now use or have used asbestos as an ingredient in their formulations. Under the ban, addition of asbestos to the product would become a "prohibited act under Section 19 of the Consumer Product Safety Act. It appears that the use of constituent materials (e.g., talcs) known to contain significant levels of asbestos contamination, would also be prohibited. Further, the ban may prohibit use of these products if they are inadvertently contaminated with asbestos above a certain minimum level. Significant amounts of naturally occurring tremolite asbestos and anthophyllite asbestos may be present in talc or other substances used in the manufacture of some patching compounds. Policy Issues This section is presented in the context of three basic issues on which the Commission has available to it policy alternatives, choices among which will have a direct bearing on the economic impact of the ban. These three sets of alternatives relate to the scope and coverage of the ban, levels of asbestos contamination in the.product addressed by the ban, and the effective date of the ban. ` ` -5- . ... ''V, Scope and Coverage ` As proposed the ban will cover virtually all patching compounds on the market today. It will have a potential effect on products used in the consumer environment by professional contractors as well as on products actually purchased or available for purchase by consumers for their own use. This will probably lead to overall cost and price increases m the commercial market for patching compounds, and adverse effects on the direct labor cost of drywall finishing and on the utility of. the product to drywall contractors and consumers, as discussed below in the Construction Industry section. Further, it may affect patching compounds used in non--consumer, i.e., industrial, environments to the extent that those same products may enter the consumer environment. Formulation changes that may be required for regulated products;may be made to some industrial products as well. . Uncertainty currently exists as to whether contractors will be legally able to perform jobs with asbestos-containing compounds that they have on hand as of the effective date of the ban. If contractors are considered to be "selling" consumers the materials used in the renovation of a room, for example, then the patching compounds in contractors1 inventories may be unusable. The Commission could promulgate the ban so as to allow continued asbestos-containing compound use by professional contractors. If the ban is limited to patching compounds marketed to, or available for sale to, consumers,the adverse effects of the ban on small manufacturers and on the construction industry, as discussed below, would be greatly reduced. The potential health benefits of the ban to contractors would not be as great, however. The trend in formulation research away from ' -6- the use of asbestos would be petted to continue; however, the eotus! e iminatiou of asbestos as an ingtsdisut fro. all patching compound fonaulattous would probably not occur iu the foreseeable future. Aebe.tos- free: f o r m a t i o n s smke up the vast majority ,,f sale, to consumer,. The ban s effect on consumers would be minimised to the extent that those formulations now on the market are still available as currently produced after the effective date of the ban. Other issue, 1 s t concerning the scope and coverage of the ban. ere are Irkely to be substantial problems associated with the identification of asbestos-containing formulatiods, both for enforcement purposes and or consumer information. .Since manufacturer, generally have not ingredient- abeled e t c h i n g compounds containing asbestos, ascert.ining which products are banned may be difficult st first. Thl. may lead to a general unwillingness to buy on the part of consumers and some retailer, for a period of time, and may Increase manufacturers' costs associated with the recall of banned products from the msrketpl.ee, if product, are returned a. a result of mistaken identity. ` Regardless of the scope and coverage of the ban, there may be some adverse spillover effects on sales of product, which are similar to patching compounds, but which are not covered by the proposed ban These include concrete and roofing patch, driveway coatings, putty, caulking compounds, and other sealants. Ihese may contain asbestos, Ut are not typically sanded, and, therefore, would probably not emit respirable asbestos fiber, under reasonably foreseeable use. g,,,,e producers f these products have indicated that the proposal has bad sn adverse L d ' r e V " , ? " " Ie' " " 8merally U d " aattainty among wholesale . 11 buyers and consumers concerning the safety of the products. .,,d I T " Ptd" " 0I; hy tl,a * ld> T " "'sin asbestos and Which may rele.ee fibers if sanded i, tortured coatings, including H a n g and wall decorative and soundproofing slurries and paints. Those product, are typically sanded only as a means of removal, which occurs infrequently (e.g., during demolition or as interior decorating -7- * es ns.); thus, the hazard pra.antad ia different froa> and p;obak lesser than, that presented by patching cenpcmnd. It appear, that SO. Of these products have asbestos-containing formulation. identical to those of sene patching expounds; thna, product. ^ , . not be s,,W as patching e p e u n d . nay be telabeied and sold as centered coatings after the effective date of the ban, subject to the crc.st.,,ce. discussed below. Asbestos Contamination The ban a. proposed in the federal Eegister. if interpreted literally noold prohibit the nanufacture and ..1. of all patching confounds mithin its scop, end coverage, H i s is because all patching ,,pounds probably contain at least trace levels of asbestos through inadvertent contamination of raw materials, particularly talcs, used in the production o f some compounds (talc nay constitute from 0.5 to 20 percent, by eight, of these compounds), is noted in the Environmental Assessment of the proposed an . asbestos is a ubiquitous substance that occurs naturally in the earth's crust. It may also be found in voter used in the manufacture of net patching compound, or used to mi* dry patching compounds, hich hen sanded, mould present the hazard associated ith fiber inhalation Iremolite asbestos and anthophyllite asbestos are likely to be especially ' present in and around some talc and other mineral deposits. In addressing the issue of contamination, the Commission may choose to promulgate the ban as proposed, i.e., with no allowance for asbestos ' contamination it may prohibit the presence of asbsestos contamination a ove a set level (as determined in part by some type of screening procedure) or it may prohibit the intentional use of asbestos or fibrous talc, known to contain significant amounts of asbestos. _ nvironmental Assessment of a Ban on Consumer Patching Compounds an_ Artlflcial Emberising Material Containing Free Asbestos," July 18 1977, Which is on file at the Office of the Secretary. ' * 'W n * ii^ iWsbVA, -8- Om* study indicates that due to the ubiquity of asbestos in raw- ^ v U l s , it would be technically infeasible to produce a totally asbestos .,a etching compound. In the absence of these drywall finishing com- consumers would not have products available to perform minor t r a n c e on their homes. Alternative methods of interior finishing also have to be employed or developed. These might include the .. at unedged drywall with unfinished Joints; the use of ".redecorated" .<.1.1 ; .the use of veneer plaster on drywall; the use of p o s t e r or _ paneling; and the use of substitute products for patching compounds, ...` as the textured coatings mentidned above. All but the last of " * alter atives would e ^ a i l serious potential disruptions of the ..jtries involved, with total potential impacts of over $1 billion --17, and may result in unsatisfactory construction techniques from r.ormance and aesthetic standpoint.* ^ \ i H t e l y interim screening Ptotednre .mists enforcement pllrposes. -.rotedure .Id, with readily-nvailable optica! phasa-eohtrest datect fibers is pr.pared product samples. Sample, which ^ l e s a than a certain number of fibers per thouseud particles *-ial Quid be considered to cootain negligible amounts of asbestos " d would not ba subject to further scrutiny. Samples found more than that numbsr of fibara per thousand particles wonid ted for furthar, more quantitative analysis, such a, * - ,, y on or election microscopy, for positive identification and -tton of asbestos fibers. A levei of one fiber per thouseud one been suggested as a minimm. practical lavei of cout.min.tiou detected by this method (see ESHS so, J. Thompson and * B< Pitkin, November 7, 1977). ^ do not believe it is the Commission's intent to ban all pounds, this report does not go into great detail Qn the zero-asbestos-content rule. For a more detailed treatment, 'hed A.T. Kearney research report.excerpt in Appendix ir. ' : of this paper will focus on the impacts of the ban under m that some asbestos contamination will be allowed. The. criterion of. one asbestos fiber per thousand particles is pot based on any conclusions as to the lowest level of asbestos contamination the patching compound industry could reasonably attain. It is based on the Commission's best information on the feasibility, from a testing standpoint, of using a fiber-counting procedure as a compliance screening tool. . The overall effect of the inclusion of the procedure in the ban may be to ban or bring into question most, if not all, existing patching compounds, 'and to cause confusion in the producing industry in the process Virtually all patching compounds contain fibrous material, be it asbestos or some other Substance. Most patching compound producers have never tested their products for asbestos contamination, although for quality control purposes, they do measure their own intentional addition of asbestos or asbestos-containing (i.e.,1 labeled) talc. Inten tionally-added asbestos is generally quantified in term# of percent content by weight; this method is not directly applicable to the detec tion and measurement of end-product contamination. It has been suggested that the lowes feasible level of contamination that manufacturers could achieve is on the order of 0.5 to 1.0 percent by weight; this would probably still allow detection of more than one true asbestos fiber per thousand particles in a sample. Even those firms with products that are labeled "asbestos-free" may have to change their formulations to reduce and compensate for unintentionally-added asbestos.* Some manufacturers are probably unaware of the possibility of truly inadvertent (i.e., raw materials) asbestos contamination. *The- terms "unintentionally-added" and "contamination" imply a certain ignorance on the part of manufacturers concerning what goes into their products. This is not always the case; as mentioned previously, some talcs may contain fairly high levels of asbestos, and OSHA requires all asbestos-containing talc mined and sold to patching compound producers (or anyone else) to be labeled. Talc suppliers are thus certifying to manufacturers that they know certain kinds of talc contain asbestos. Truly inadvertent contamination of talcs or other constituent substances which are not supposed to contian fibrous material may also occur. This is likely to appear, however, at substantially lower levels than are present in compounds to which asbestos is currently added intentionally. I ' -10- - There exists considerable uncertainty- in the industry over the accuracy and reliability of the screening procedure: some industry experts believe, for example, that fibrous materials other than asbestos would be counted as asbestos under the procedure. To the extent that this is shown to be the case from actual sampling, Some compounds which may contain less than one true asbestos fibesr per thousand particles may unnecessarily be banned, or manufacturers may be obliged to perform the more sophisticated forms of analysis to determine whether their products should or-should not be banned. Uncertainty also exists concerning the definitions of fibers, asbestos fibers, samples, and other technical aspects of the testing procedures which manufacturers might use. This uncertainty may lead to measurement mistakes, resulting in the inadvertent marketing of a banned product. This would involve additional testing-related coses to manufacturers or raw materials suppliers. Few firms in-these industries own x-ray diffraction equipment or electron microscopes (which may cost.over $50,000 and $100,000, .respectively, and require one or more trained employees to operate); the only course of action for most firms would be independent laboratory certification. While there are hundreds of laboratories across the country with optical microscopy capabilities, there appear to be only a few offering x-ray diffraction and electron microscopy services. The magnitude of these testing costs may also be significant. Manufacturers may submit an unknown, but potentially large, number of samples for testing at an estimated $5.0 per sample for phase-contrast optical scanning and up to $300 per sample for the full complement of analytical procedures. Manufacturers would set up their own sampling plans according to good business practice, their perceived need for safety from prosecution, etc. Some compounds or production lots may be destroyed or diverted to other uses- as a- resultj some small manufacturers have stated that they would, drop patching compounds from their product lines if significant formulation testing-were required. 11- Some compounds, such os those containing no tele, may he found after testing to be below the one-fiber-per-thousand-particles level s o TM firms may still decide to stop production rather then incur testing costs, or because they perceive that their products w o l d be banned Thus, the very existence.of the screening procedure may cause significant _t a r p o n s to the producing industry to the extent that business decisions xnvolvrng cost, or the financial and market statu, of firms ,,ay he made on the basts of perceptions about the Commission's enforcement policy. . Th`S commission could ban intentionally-added asbestos, defining intentional addition to encompass the k n o w asbestos content of fibrous . talc, This would eliminate the sources of significant asbestos content 1 patching compounds while permitting some low leVel of truly inadvertent contamination, which may be greater or leas than one f i * r per thousand particles. The remaining discussion of the economic effects of the ban is based primarily on this alternative. * 4 _ Effective Date . The Commission has proposed a 30-day effective date for the ban on patching compounds, Several comaent. were received requesting more time, typically 180 days. Ihe costs associated with reformulation tend to be Inversely related o time A, mentioned above, the major portions of virtually all patching compounds formulations are ,uite similar; small changes in ingredient combinations and substitutions, however, are critical to arriving ,t a satisfactory result. Though the basic research on asbestos-free formulations has been performed by the large producers, many companies claim that considerable amount of time is required for .research and development and testing new formulation,. This is especially true for some of the smaller firms whose compounds are sold only in one or two regions of the country in which specific climatic requirements are , prime formulation consideration. The range of .estimated ,, f ,, m u l ,, r t o ,, time requirements is 6-18 months. Sona manufacturers who may not be able to reformulate their products by the effective date may have to stop production until products are reformulated satisfactorily -12- Soie disruption of this sort may occur even if th.aff.etiv. date of ' an is set at 180 days. This drsruption m o l d , however, be enasiderabl " r` "ldeSprei"1' Particularly among snail nanufacturers, under a 30- ' day effective date. A short effective date nay ,1s. aggravate an, potential asbestos-sub. titut. supply Shortage problems for snail nanufacturers. I ' . . SeCnd "aJr effecC o > baa which m o l d vary ioosiderehly " f the date " th* affect on nanufacturers', wholesalers', and retarders' ruventorics. As stated below, the proposed 30-da, effective date m , have substantial affect, on certain firms' products, depending upon the treatment of the scope and coverage and contamination issues. Generally, a 30-day effective date will have greater adverse effects than a 180-day effective date, A 180-day effective date alone would allow f * the clearance of m e t inventories, even if all patching compounds were banned. The adverse effects of a 30-day effective date would be substantially mitigated b, allowing professional use of asbestos-contain ing patching compounds since the major market for the product 'would not be disrupted by the ban. Th. impact on inventories of an, effective date will be strongly affected b, decisions concerning professional uses of patching compounds and contamination levels. Market/Industry Characterist ICS . A BUmnaCy f thS characteristics of the patching compound-producing industry and the markets for the product is outlined below:* The value of shipments of patching compounds n 1976 was between $90 million and $250 million. Total 1977 shipments may be slightly higher in value. Total annual sales to end-users, including retail sales to consumers, are estimated to be roughly $200-400 million in 1976 and in 1977. For a more eompreheusive profile, see Section III of the A.T Keeruey report ,,titled, "gcoeomic Impact Assessment of the Proposed Be. of.Asbestos-Containing 'Patching compounds'," attached as Appcndi* I. -13- These products are used in new residential construction, residential remodeling, and in other commercial "consumer environments" described ' m Section 3(a)(1) of the Consumer Product Safety Act. About half of all patching compound shipments are used by professional contractors in- new residential construction. Some 20 percent is used in residential renovation performed by professionals. Only about 5-8 percent of the total is sold to and used by consumers for repairs and renovation. Most of the remainder is used by professionals in institutional or other commercial construction and renovation. Less than.10 percent of all unit sales is believed to be marketed to, and used only by, industrial contractors; these products would not be subject to the ban. Most brands of patching compounds on the market, though intended primarily for sale to building contractors, are packaged or distributed such that consumers could purchase them from retail stores or from sqme building supply wholesalers. ' /' i ' Consumer-market" packages are usually one gallon or less (wet) and five pounds or less (dry). Commercial packages'are usually four gallon (50 pound) boxes or five gallon (62.5 pound) pails (wet) and 25 pounds or more (dry). The unit retail price range of products packaged . for, and usually sold to, consumers is about $1.00-$4.00. Some patching compounds sold to. professional users are shipped direct from local manufacture to job- sites. Over 90 percent of all patching compounds are used by professional contractors. There are some 12,000 drywall finishing contractors in the' D.S. (including family businesses, sole proprietorships, etc.), virtually all of which are small. The estimated value of direct labor contributed by all drywall finishers in 1976 is about $1 billion. About 50 patching compound manufacturers are known to the Commission, most of which are relatively small, single-plant operations with fev;er than 100 employees, total company sales of $1-2 million, and limited -14- technical research capabilities. Most of their product lines are relatively homogenous: most patching compound formulas are quite similar to each other, with slight variations to accommodate special user needs or climatic conditions. Six producers are major corporations which produce wallboard and other related products. Three of these account for about 50 percent of the total patching compound market. . .. ** estimated 1.00 of asbestos was used in patching compounds in 1976. Asbestos is added to some patching compounds to aid shrink- and crack-resistance. Patching compound manufacturers generally purchase asbestos (i.e.f chrysotile) for addition to patching compound formulations from local wholesale suppliers rather than directly from the asbestos industry. Chrysotile in patching compounds constitutes a relatively ' insignificant percentage of all asbestos use ' Z* Certain asbestos (amphibole) contaminants are.present in some talcs used in the formulations of many compounds. They may also be found, to a much lesser extent, in other raw materials. There are approximately 10-12 talc mining firms in the U.S., the largest five of which account for over 95 percent of sales. Most talc suppliers, are diversified: only one or two firms are reported to mine only talc. Some of these firms sell talc directly to patching compound manufacturers; others sell through local and regional industrial distributors. Some of these companies also supply other raw materials, such as wollastonite, for . patching compound manufacturers whose products are formulated without talc. Sales of talc and other materials for use in patching compounds typically represents a very small percentage of the supply industry's annual sales. t Industrial.grade talc, in contrast to cosmetic grade talc Cwhich is used in baby powder and other cosmetic products)', may be fibrous or non-fibrous. Mineral (non-fibrous) talc may contain some asbestos contamination, but this variety of talc may often be virtually asbestos- free. Typical prices for this kind of.talc range from about $50-100 . pet ton.. Fibrous talc, on the.other hand, generally contains much greater amounts of naturally-occurring asbestos (perhaps up to 50 percent by weight), and must be labeled under OSHA's 1974 asbestos regulation. Both fibrous and non-fibrous talc are used in natrhiTM ---- -- . 15- ,*"7 ** - -- Varl'ty " ft" Pre," tedi-iC* Pli" i per ton as of November, 1977. Though mineral talc * Id c L T f" aT * ' ** -- - * * . ! substitutt levels substantl 11 7 7 7 "ndS " t0 " We knew ef only o,,e major supplier of fibrous talc whxch contains high levels of asbestos. . Efforts to reformulate patching oompouud. with redueed asbestos uomteut mere iuiti.ted in the early 1970'. of * _ Ib, . ille largest manufacturers . tape yotut compound. have no ce.sed formulating mith asbestos altogether It x. conceivable that some asbestos-formulated produets predated by these firms ,, y still be fouud i,, retailers' and ^ o l e s a l e r . inventories -- . - - to . 7 r 7 7 r e " " " " ss a u T ' T ^ 1" 8 C"P"nd orm"lal:1" currently de pot include asbestos g" dl" ,:1 "" 7 " * TM tave bee. formulated with asbestos. They Z : : r SSie`tOS - * - . 4 -- .. however, account fur a minor portion of all patching compound sales and inventories. U psets of the Ben on the Patching Co.eo.uri Ied,,,^, Cost Effects . eeteWUL. 11iJ. CUC -- aoiQ m iy// (mainly tape joint Wiil h s t " b a'T d t0 b8 m "Uted -- P * . Assessment " b ' ^ mUlated WLthout asbestos- As noted in the Environmental Asscasmeut, asbeates i. replaced in these compounds by not one, bnt combination of mineral and organio substances h i d control viscosity .-16- ' . .* \k. 4 ' and lend desirable properties to the product. Since the.three largest producers in'the industry (Georgia-Pacific, National Gypsum, and United States Gypsum) already appear to have eliminated asbestos from their formulations, the costs associated with reformulation necessitated by the ban will be incurred primarily by the other producers. Some of the largest of the remaining firms now have asbestos-free formulations on the market. Most of the other firms in the industry, however, are small businesses which do not have asbestos-free compounds, and which lack the technical research capability that the industry leaders have used to develop asbestos-free formulations. Manufacturers will probably not need new physical plant or equipment- to produce asbestos--free patching compounds. The cbsts of reformulation are thus primarily those of technical research and development, field testing, and pilot production. The largest producer reportedly spent ovr $1 million over a period of a few years to' develop its asbestos-- free formula. Ocher companies -with non--asbestos formulations, or in the process of developing them, report reformulation expenditures of . $10,000-100,000. Some of the large manufacturers have stated that they may be able to license their asbestos--free formulations (or parts of them) to smaller firms that wish t.o avoid or cannot afford the expense of reformulation, if those non--asbestos formulations do not contain S1,f*cient contamination to be banned. The projected cost of such licensing agreements to the licensees has not yet been made available to us. All manufacturers may have to assess the amount of asbestos contamina tion in their products, and incur some testing costs, either by their own technical staffs or by outside testing laboratories. Alternatively, talc suppliers may be asked to certify that their shipments contain less than a pertain percentage by weight of asbestos, as determined by the amount of talc in the final product. Testing by manufacurers may be limited if careful raw materials selections are made. Talc--containing formulations may be altered, or discontinued m some casca, to the extent that manufacturers perceive that existing formulations would be banned. -17- ln addition to reformulation costs, most firms will have to undergo other kinds of changes in their total cost structures associated with actual production,, including change-over and start-up costs, and the cost of- raw materials procurement. Some substitutes for asbestos as an ingredient are reportedly significantly more costly than asbestos. For formulations which switch from fibrous to non-fibrous talc in complying with the ban, some savings in raw materials costs may occur since, non fibrous talc is, on the average, about half the price of fibrous talc. . We estimate the total percentage increase in the cost of patching compound production at 5-15 percent, depending on the extent of the changes necessary the ability of firms to effect those changes, and the sales base across . which su^h costs can be allocated. . Producers, distributors, and retailers of patching compounds may also have to incur costs associated with thk disposal or recall of products m inventory, and, to a lesser extent, the recall of some merchandise in the hands of consumers and professional contractors. . Though repurchase is not require* under a Section 8 ban, this will probably occur to the extent that banned products can be identified and either returned physically for refund or credit, or disposed of after credit is claimed. It can be expected that a certain amount of the product in distribution as of the effective date will be mistakenly returned or destroyed, even ' if it is not banned; this tends to occur when uncertainty exists among . consumers and in the chain of distribution. We estimate manufacturers' current finished goods inventories at about $10 million, or about one month's worth of production. Raw materials inventories are reported to be negligible. This relatively low level of inventory, possible in general because the narrow product line permits tight production scheduling, is particularly low because of the active construction industry market for the product in mid-1977. Distributors' inventories are estimated at about $5 million, or, again, about one month s worth of sales. Some or all of these inventories may be affected by the ban. Retail inventories of products chat would be banned are unknown; the wholesale value of these inventories is probably several . million dollars. This includes non-talc-containing and other asbestosfree formulations that may not be banned. I - . -18- It is likely chit, since average retail turn(Jver rates cl s (><*. turn over in approximately t to si* months for moat .tor) t o TM tanned Product, may remain in inventory ,,tether the effeotive date to , e U a -r dayS' P" d" " S " d iistrit"t~ = 7 Still be able rad t- " Vmt0liea ' `Is,trial naers, mith some delay or some nation in prise to industrial buyer, to the extent. that short-run finished goods supplies exceed short-run demand. I,, gnral rh u the effective date, the greater the ,a ' the shotler ill bo. - " * ad',e" e effect " " tail inventories Bffcctg on Competition * or oe! a V p " o d ft" "! ** " * * * * - - * - tusi.es, ' the h 10" te"PO,:a,:U7 r Ptrasoently as a result of the ban the producing industry ,,ill become more concentrated. * n . ovdrall and regional ,, s k a t .hares of producer, ,,ay increase. Xbi W ase in concentration ay be alight nationrnide; h o o v e r fo rogionel e v e n t r a t i o n may occur, s i n the significant -- -- - -- - the e.'.10" ? "" 0" f " * *" "*y alS affe" - -- time after tive date, the competitive po.ture of a c e of the smaller fin.. T i l ' T ? " the i their - l7- ^ l . t s d compounds a 1 ti ely ess desirable from a coat or p e r f o r c e standpoint and if thexr sales are adversely affected as a x Ar^>- . ;odld be afforded tho.e firm. ,,lth tha X o TM r : " t d : r ase heid * - - a- - -- ^ fori, r disappear or be reversed until such time as all formulates, can. develop satisfactory products that are not banned Other Effects . -19 - Some industry sources have indicated that substitute raw materials, particularly- attapulgite clay, may be in short supply in 1977 and 1978, and that current supplies may be insufficient to meet the increased ' demand generated by patching compound manufacturers formulating with attapulgite for the first time. some of these firms may lose sales and profits for a period of time until supplies are sufficient to continue production. If the major manufacturers continue' production of current reformulations and can raise their prices^as a result of the ban (see sections on the ' Construction Industry and Consumers, below), those firms or their patching compound-producing divisions may enjoy slightly higher profits, at least ' until other firms' products are perceived by purcf^ers/to be equivalent or better in terms of price and performance. , Impacts of the .Proposed Ban on the Construction Industry Cost Effects . dryWall finishin8 industry is generally sensitive to two major factors when purchasing and using patching compounds: price and performance. Both of these factors are likely to be adversely affected by the reformulation or discontinuation of compounds in order to comply with the ban. It appears that, because 0 competitive pressure from asbestoscontaining formulations in recent years, producers of asbestos-free formulations have not yet passed on to purchasers their increased costs of production and rsearch. If the increased costs of making asbestosfree formulations can be passed on as a result of the ban by virtue of the fact that all producers will have to market'asbestos-free formulations, ? i -20- then the average price charged to professional contractors will tend to rise. This price rise may not be immediate in some cases, since . contractors often order patching compounds up to a few months in advance . of the anticipated need for the product on job-sites. Drywall "mechanics are often paid by the foot of wallboard joint they finish. As mentioned in the Utility Effects section below, some asbestos-free patching compounds may require significantly more time to apply. This would tend to increase the direct labor costs of residential and other construction and renovation. The expected increase associated with use^of most non-asbestos reformulations is between 10 and 25 percent. The estimated annual labor cost of drywall finishing, exclusive of wallboard hanging, in consumer environments is on the- order of $1 billion. The use of non-asbestos patching compound formulations in A l such- appli cations may increase this cost by $50-125 million for the year following the promulgation of the ban, assuming that roughly half the current labor costs (i\e., that portion now associated with the use of asbestoscontaining formulations) are affected by the 10-25 percent increase. Some of the latest non-asbestos formulations are reported to be as efficient as older asbestos-containing ones; thus, the construction labor cost effect of the ban may be expected to lessen in successive years. Utility Effects . Asbestos is used in patching compounds to aid workability," or the ability of the material to be pliable and to be smooth upon application and troweling, and to help prevent shrinking and cracking of joints and other'places that have been patched. Experience with past and some existing non-asbestos formulations indicates that most asbestos-containing compounds generally have better workability, and are significantly more shrink-and crack-resistant, especially under extreme temperature conditions. ' Thus, even though widespread knowledge of asbestos, hazards exists, and favorable price arrangements may be available for non-asbestos formulated patching compounds, many drywall mechanics still prefer asbestos-containing compounds. This performance gap is said to be closing over time as -21- refinements are made in asbestos-free formulations; however, the widespread use of non?-asbestos-containing compounds can be expected to result in less efficient drywall finishing and use of the product in terms of more material needed, more sanding required, and more time spent in actually applying the compounds and waiting for them to dry. ,Some contractor may be prompted to add their own asbestos to the product, if the improvement in the products' performance is perceived to be substantial. This practice, would present a hazard which may be greater than the one the Commission intends to reduce. may also be an adverse effect on aesthetics, since premature shrinkage and cracking can occur. This reported inferiority of asbestos- free products may also be expected to diminish in' subsequent years as more mature reformulations are offered which cover joints, cracks, and nailheads more satisfactorily. Until such time as drywall finishers become more accustomed to using asbestos-free products, some jobs may have to be done over. Health Benefits to Drywall Contractors Though the proposed ban is intended to protect consumers, the main health benefit will probably accrue to drywall contractors, if the use of asbestos-containing compounds by this industry is prohibited. Drywall mechanics are the heaviest (i.a., almost daily) users of the product. Some benefits, in the form of longer life and reduced illness, may. accrue to these-workers. The possible continued practice of adding raw asbestos to patching compounds in the field may offset this benefit somewhat. Other Effects ' To the extent that contractors' inventories are banned and to the extent that the availability of new asbestos-free compounds is delayed on a local basis, housing construction and renovation projects may be delayed up to several months, resulting in an inefficient allocation of construction industry resources. ' Impacts of the Proposed Ban on Sinall Business As noted above, most of the manufacturers and professional users . of patching compounds are small businesses. Small manufacturers may be disproportionately affected by the ban. They are the firms without extensive reformulation capabilities. Their products, which may often . be sold in specialized geographical regions under specialized climatic conditions, are most likely to be affected adversely by the- use of substitutes for asbestos when reformulation is achieved. Small producers may not have comparable access to supplies of substitute raw materials, particularly attapulgite, which may be in short supply in 1977 and 1978. Small producers may also e in a less favorable position than larger firms to pass on cost increases to contractors because of long-term contractual price agreements. These factors may afford a competitive advantage to the larger firms in the markets for the product affected by*the bar. Since virtually all drywall finishing contractors are small, the impacts of .the ban on this industry would be relatively uniform. The ban may have adverse effects on contractors, including possible temporary reductions in employment, if drywall finishing cannot be completed due to regional materials shortages; this could lead to overall construction delays. Impacts on Consumers Price Effects The average price of patching compounds- may rise as a result of the ban. We estimate that price increases will occur to reflect, at the minimum, t h e -5-15 percent production cost increases. Thus, for example, a 1-gallon container of wet material, which typically retails at about $4.00, may increase in price by about $.20-.60; a 5-gallon . container that most commonly used by drywall contractors -- which i * . : ./ . .. -23 - . typically sells in retail stores for $7.00 - 10.00, may increase in' price by about $.35-1.50. Similarly, a 5-pound container of dry material, which typically retails at about $2.50, may increase in price by about $.i2-.38. . i t Some prices- of consumer-market patching compounds may inirease disporportionately to compensate for cost increases which cannot be passed, on to the primary market of professional contractor because of contractual arrangements, etc. Prices.of other paint and drywall-related products (such as textured coatings, wallboard, plaster, etc.) may also rise slightly to cover cost increases or other losses associated with ' patching (-compounds. If the total increase in patching compound production costs can be passed on to`end-purchasers as a result of the ban, the total annual . price effect for the year following the issuance of the ban may be $1060.million. The magnitude of this effect may be reduced significantly in successive years as producers' development costs are amortized, as substitute raw materials and asbsestos-free formulation technology become more widely available, and as price competitio.n is increased because . of market pressure and economies associated with full-scale production. To the extent that new construction and renovation labor costs are increased, there may be effects on the prices of new housing and renovation projects. As noted previously, the total annual direct labor cost associated with drywall finishing is around $1 billion, and the promulgation of the ban may lead to a $50-125 million increase in this cost. This would amount to an average of about $28-70 per new residential housing start in 1978, assuming a housing start rate of about 1.8 million in that year, far a 10 x 15* room, the increase may be about $5 to $10. The burden of the increased cost is expected to be spread across owners of existing homes who may engage in some renovation, and on purchasers of newly-renovated or newly-constructed homes, though indirect long term price effects may accrue to users of.affected facilities such as schools, stores, and other public buildings.  .JL ' - Consumers : . v..i is intended to protect consumers from the long -*l,d deatl1 associated with respirable asbestos, fibers . Some benefit in the form of longer life may *** are heavy user of the product. For very infrequent . is expected to accrue. As noted above, the primary . .w proposed ban would accrue to drywall contractors. " ` . \ ` j I fc. . ` ' > ;v of some patching compounds and professional drywall ) . consumers may be indirectly affectkd bjr the inability I formulate their products and by the potential shortage .: ,;te raw materials. Some regional patching compound ,r*- This would amount mainly to some inconvenience of new home construction delays or the need for 3 some drywall finishing jobs. - ^ * ' T - reformulation on the utility derived- from the product ! <-:ruc mainly to professional contractors, who use patching 1-..ely large scale on a continual basis. Consumers, ?roduct infrequently and in relatively small amounts. . -rceive any significant changes in the performance ' - i of those products that are reformulated to comply