equilibrium would be established at a lower price. The higher cost domestic producers which were unable to compete at the equilibrium price would withdraw from the market. Cement exporters in the OECD countries affected by the proposed energy price increases would behave in a similar way, withdrawing from the U.S. market when it ceased to be profitable. Taking the relative price difference of 11.03% under scenario I in 2005 as an example, then, with an elasticity of 7.5, a change of 82.73% (7.5 x 11.03) in relative quantities can be expected. Starting with the base case import share of 17.76% in 2005, the elasticity acting on the percentage price difference would increase the market share of non-OECD imports as follows for scenario 1. The projected import market share for both scenarios are shown in the bar chart below. Converting the percentage market share into quantities allows a direct comparison of domestic production and imports in scenarios 1 and 2 cement with domestic production and imports in the base case. The initial impact of higher energy prices would be to increase energy costs by as much as 151% by 2010 in scenario 1. The rise in manufacturing costs would result in sharply increased prices for domestic cement. A large gap would open between the price of U.S. produced cement and that manufactured in non-OECD countries where no energy price increases are imposed. The availability of lower priced imports would not serve to increase cement consumption because cement demand is relatively price inelastic. These imports will displace domestic production. Assuming an elasticity of substitution of 7.5, imports, under scenario I conditions, are estimated to displace 26.4 million metric tons of domestic cement manufacturing capacity by 2010 compared to the base case projection. Under scenario 2 conditions 16.9 million metric tons would be displaced. The result of lost market share would be closure of cement plants and foregone capital investment in new capacity which would have been made to take advantage of growth in demand. Investment in new capacity would have resulted in improved energy efficiency. Approximately 26 million metric tons of cement capacity would be shut down by 2010 in scenario 1 and 17 million metric tons in scenario 2. The plant closures would cause job losses: 5,800 and 3,700 in scenarios 1 and 2 respectively by 2010. These losses are significant because cement plants are often located in small communities where the plant is one of the major employers. Energy efficiency is not expected to improve significantly over the base case. As indicated earlier, under current conditions investment in new plant cannot be justified on the basis of energy cost savings alone but must be linked to a capacity expansion. The imposed cost increases do not change these conditions enough to make investment solely for the purpose of energy cost reduction more than marginally profitable. Take, for example, replacement of wet process capacity having a fuel efficiency of 6.0 mmBtu per metric ton by a precalciner with a fuel efficiency of 3.2 mmBtu. Assuming that the new unit will use about the same amount of electricity as the old one, only the reduction in fuel cost is relevant. Then, given that fuel cost per mmBtu is $3.98 in scenario 1 in 2015, the cost saving per metric ton 2.8 x 3.98 $11.14. Approximately 110 per metric ton of annual capacity required to install a precalciner kiln in an existing plant. A modern greenfield plant is estimated to cost $187 per metric ton of annual capacity. As far as fuel switching is concerned, there is no incentive to alter the fuel mix in scenario 2. In scenario 1, switching from coal to natural gas could reduce energy cost by an average of $3.54 per metric ton of cement in 2010. This would reduce the price gap between imports and domestic product and potentially reduce import penetration to 40% compared to 46% in scenario 1. The cost reduction gained by switching to gas would not change the import trend but it would dampen the degree of penetration. The table summarizing changes in indicators shows the increases in energy cost, U.S. cement prices and import market share and the consequent decline in production, capacity and employment. The most likely outcome of the proposed energy price increases would be the development of new cement production capacity in countries not subject to the price increases. The purpose of these plants would be to supply the U.S. market. These plants would use the same technology and emit the same amount of carbon dioxide as new capacity installed in the U.S. |