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The Corporation of the
City of Sault Ste. Marie
Regional Harbour ExpansionMarket and Business Analysis
FINAL REPORT
January 3, 2013
kpmg.ca
Funding for this report was provided by
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Table of Contents
Executive Summary 1
I Introduction to the Study ................................................................................... 71.1 Overview of the Sault Ste. Marie harbour complex ................................... 7
1.2 Key deliverables ............................................................................................. 8
1.3 Our approach ................................................................................................ 11
1.4 Restrictions ................................................................................................... 15
1.5 Independence and objectivity ..................................................................... 15
1.6 Presentation of confidential information ................................................... 15
II Overview of the Sault Ste. Marie Harbour Complex ...................................... 16
2.1 ESAI harbour facilities ................................................................................. 16
2.2 PML harbour facilities .................................................................................. 22
2.3 Implications for the initiative ...................................................................... 23
III Overview of Great Lakes Marine Movements ................................................. 243.1 Canadian Great Lakes marine movements ............................................... 24
3.2 U.S. Great Lakes marine movements ........................................................ 27
3.3 Marine movements through the Soo Locks .............................................. 28
3.4 Implications for the initiative ...................................................................... 29
IV Overview of Northern Ontario Freight Movements ........................................ 31
4.1 Road transportation ..................................................................................... 31
4.2 Rail transportation ....................................................................................... 33
4.3 Implications for the initiative ...................................................................... 34
V Demand Assessment ......................................................................................... 35
5.1 Basis of Analysis .......................................................................................... 35
5.2 Identification of potential harbour users ................................................... 355.3 Existing harbour users ................................................................................ 36
5.4 Potential harbour users based on consistent commodities .................... 39
5.5 Other potential harbour users .................................................................... 40
5.6 Summary of potential marine movement volumes ................................. 42
5.7 Comparison of volume scenarios with previous studies ......................... 43
VI Overview of Harbour Expansion Project.......................................................... 44
6.1 The One Port Project concept ................................................................... 44
6.2 Required capital investment ....................................................................... 44
6.3 Infrastructure costs ...................................................................................... 45
6.4 Infrastructure funding .................................................................................. 46
VII Financial Model for the Public Access Port ..................................................... 47
7.1 Basis of analysis ........................................................................................... 47
7.2 Transportation model .................................................................................. 48
7.3 Operating volumes ...................................................................................... 48
7.4 Operating costs ............................................................................................ 50
7.5 Overall financial viability ............................................................................. 50
7.6 Implications of the initiative ........................................................................ 51
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Table of Contents (contd)
VIII Anticipated Benefits ........................................................................................... 528.1 Potential economic benefits ........................................................................ 52
8.2 Potential environmental benefits ............................................................... 54
8.3 Implications for other transportation infrastructure ................................. 54
IX Governance ........................................................................................................ 56
9.1 Basis of Analysis .......................................................................................... 56
9.2 Institutional Arrangements for Ports in Canada ....................................... 56
9.3 Governance alternatives for the public access port ................................. 61
X Other Considerations ......................................................................................... 63
10.1 Federal funding of public infrastructure .................................................. 63
10.2 Provincial funding ...................................................................................... 66
10.3 Canadian Environmental Assessment Act requirements....................... 6710.4 Aboriginal consultation requirements ..................................................... 69
XI Implementation Priorities and Framework ...................................................... 73
XII Concluding Comments ...................................................................................... 75
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Executive SummaryFor major steel producing centres such as Sault Ste. Marie, marine transportation often representsa critical component of supply chain management given the inherent cost advantages to marinemovements over other transportation modes such as rail or truck. The bulk of marine
transportation activity in Sault Ste. Marie occurs at the harbour complex owned and operated byEssar Steel Algoma Inc. (ESAI), located adjacent to ESAIs steel production facilities.
During 2011, the harbour complex handled atotal of 5.5 million tonnes of commodities,making it the fourth largest port on the CanadianGreat Lakes by volume. Of this amount, 4.8
million tonnes related to ESAI shipments, withother regional industries accounting for theremaining volume. While markedly smaller thanthe volumes handled by ESAI for its own needs,the ability to transport products by vesselsbenefits a number of local companies, withTenaris Algoma Tubes Inc. (Tenaris) being thesecond largest user of the harbour complex.
The expansion of the Sault Ste. Marie harbour complex has been a topic of interest within thecommunity of Sault Ste. Marie and an important part of its Multi-Modal Transportation Initiative.Over the past ten years, ESAI, the City of Sault Ste. Marie (the City) and other stakeholders have
undertaken various analysis of expanding marine transportation infrastructure, including thedevelopment of a public access port that would meet the needs of multiple regional users. Thisstudy, commissioned by the Citys Transportation Infrastructure Steering Committee (theCommittee), involves the development of a market assessment leading to a business case for aregional harbour capable of handling current and future commercial transportation movements inthe region.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2009 2010 2011
Third party ESAI
ESAI harbour movements (millions on tonnes)
ESAI harbour facilities
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Through the competitive procurement process, the Committee selected KPMG LLP (KPMG) asmaster consultant, with RGF Consultants, Todhunter Associates Inc. and Mike Barker ConsultingLtd. acting as subcontractors. This report outlines the results of the study.
Key findings
The evaluation of the potential expansion of the harbour facility considered both current and future
potential marine movements by existing and potential users of the harbour complex, with the viewof determining what, if any, infrastructure requirements are associated with meeting this demand.The results of the analysis have identified a number of key findings.
1.
The ESAI harbour facility requires improvements to meet the existing level of demand
for marine transportation infrastructure
The current state of the harbour complex has been described as less than ideal. The ability ofthe harbour complex to accommodate existing marine movements is challenged by acombination of deteriorating dock facilities, limited storage areas and insufficient water depthsto accommodate larger vessels. As a result, ESAI is limited in its ability to reduce its per unitshipping costs (which would decrease if larger vessels were used) and is challenged toeconomically receive ocean-going vessels.
Challenged to meet its existing transportation needs, ESAI has been required to implementstrategies that, while providing a temporary expansion in capacity, are neither efficient norrepresentative of a longer-term solution. For example, ESAI has been required to establishtemporary commodity stockpiles in areas removed from the main docking facilities in order toaccommodate inbound marine movements.
Additionally, because the harbour complex is owned and controlled by ESAI, the capacitypressures faced by ESAI have a direct impact on other users of the facility. In certain cases(e.g. slag movements), access to the docking facilities falls below what is actually required,while in other cases (e.g. salt movements), third party users have actually been displaced fromthe harbour facility and required to find alternative harbour facilities in other communities.
2.
The volume of marine movements through the harbour facility has the potential tosignificantly increase
Estimating potential future demand for the harbour facility represented a major element of thestudy as it ultimately forms the basis of determining whether a harbour expansion iswarranted. The assessment of potential future demand for marine infrastructure in Sault Ste.Marie considered the needs of:
Existing harbour customers, including ESAI and third party users
Potential customers who, while not using the port at the present time, are involved with
commodities that are moved elsewhere on the Great Lakes
Other potential customers with significant industrial operations in or planned for Northern
Ontario.
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The results of the market assessmentreflect the potential for significant increasesin marine movements, potentially risingfrom the current levels of 5.5 million tonnesto as much as 12.1 million tonnes annually(the analysis considers low, moderate and
high volume scenarios). While a significantportion of this increase is directlyattributable to ESAIs planned capacityexpansions and a shift from rail to marinefor iron ore pellet shipments), third partyshipments through the port alsodemonstrate the potential for strong growth as much as 200% above current levels.
To a large extent, the interest expressed by third party users reflects the cost competitivenessof marine transportation and the perceived advantages of placing goods on the water assoon as possible.
While the exact timing of these increases in marine movements is difficult to preciselyforecast, we note that there is an expectation of significant increases within the short-term.Specifically, we note that ESAI will be moving towards marine transportation for 100% of itsiron ore pellet shipments (as opposed to the current mix of rail and marine movements) withinfive years.
3.
Without improvements to the harbour infrastructure, there is the potential for
significant adverse economic impacts to the community
While the results of the demand assessment are positive, they also demonstrate the risks forthird party users of the ESAI harbour facility increased marine shipments by both ESAI andthird party users will eventually overwhelm the capacity of the existing infrastructure. In the
absence of long-term expansion of port capacity, ESAIs likely course of action will be tomaximize the use of the existing infrastructure, with the potential for displacement of thirdparty users from the harbour complex, including the complete displacement of all third partyusers in order to meet the long-term marine movement forecasts for ESAI. Cut-off from theESAI harbour facilities, third party users would be faced with the prospect of:
Attempting to find alternative harbour facilities, either in Sault Ste. Marie or other
communities;
Establishing greenfield facilities; and/or
Utilizing alternative transportation modes such as road or rail.
Each of these alternatives, while representing potential solutions, are expected to result in
increased transportation costs and other supply chain implications for third party users (e.g.longer shipping times, less flexibility in delivery schedules). Accordingly, the risk of an adverseeconomic impact to the community exists higher transportation costs and other logisticsfactors will impact the overall competitiveness of Sault Ste. Marie for users of marinetransportation, potentially resulting in the loss of future investment or the curtailment ofexisting business and industrial activity.
Projected marine movements low, moderate and
high scenarios (millions on tonnes)
0.0
4.0
8.0
12.0
16.0
Current Low Moderate High
Thirdparty ESAI
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4. Resolving the current and future capacity constraints requires private and public sector
co-operation, collaboration and funding
A comprehensive approach to planning, designing and funding for marine transportationinfrastructure is needed for Sault Ste. Marie, including securing a public access port for thirdparty users. To accomplish this, ESAI will be required to relinquish a portion of its existing
harbour facility while expanding its facilities elsewhere on the complex, effectively linking therequirements of third party users with those of ESAI.
The demand analysis indicates the need for an investment in marine transportationinfrastructure of approximately $116 million to support the needs of both ESAI and third partyusers, including the establishment of a new public access port. In support of this investment,it is suggested that the City, ESAI and other stakeholders pursue funding from the Federal andProvincial levels of government to finance a portion of the costs, recognizing that contributionsfrom private sector participants will necessarily be required.
We understand that short-sea marine transportation projects are eligible for funding from theFederal Government through programs such as the Gateways and Border Crossings Fund,with other port expansion projects receiving funding equal to as much as 40% of total project
costs. In the case of the Sault Ste. Marie harbour expansion, this level of funding wouldtranslate into $47 million if the entire amount of the project costs were considered eligible forfunding.
Additionally, the Building Canada Fund, which cost shares projects with the Provincialgovernment, specifically mentions short-sea shipping as one of six priorities under the themeof a stronger economy. A review of the criteria for the Building Canada Fund indicates thatthe proposed harbour expansion, with its focus on increasing marine transportation anddiverting shipments from other modes to marine movements, appears to satisfy the short-seashipping eligibility criteria of the fund. Additionally, while the Building Canada Fund hashistorically focused primarily on public sector projects, it does allow for funding of privatesector and non-profit organizations, although at a lower cost sharing percentage. With the
expiration of the Building Canada Fund in 2014, the Federal Government has announced itscommitment to deliver a new long-term plan for public infrastructure, the details of which haveyet to be announced.
In addition to funding for infrastructure investments, implementation-related activities could befunded through organizations such as the Northern Ontario Heritage Fund Corporation andIndustry Canada FedNor.
It is important to recognize that securing senior government funding for the harbour expansionwill likely be influenced by the senior government decision-making process based on programguidelines as well as political considerations. Notwithstanding the consistency of the harbourexpansion project with the eligibility criteria of both the Gateways and Border Crossings Fundand the Building Canada Fund, consideration could be given to early dialogue intended to
create political support for the project as well as provide input into the formulation of newprograms and criteria so that they can be support this initiative.
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5. The economic and other benefits of the proposed harbour expansion are expected to be
significant
The current situation faced by ESAI and other harbour users in Sault Ste. Marie increasingdemand for marine shipments combined with capacity limitations validates the communitysinterest in an expanded public access port. Previous studies have resulted in demand
assessments that are consistent with the findings of this report, providing further evidence ofthe need for an expanded harbour facility in the community.
The case for an expanded harbour facility is further supported by the economic andemployment benefits that would be generated by the project - $262 million in economicactivity generated by the infrastructure investment in the harbour, supporting just under 1,400person-years of employment. The operations of the public access port are also expected togenerate $5 million of economic activity under the moderate volume scenario, supporting atotal of 17 direct, indirect and induced employment positions. Added to this economiccontribution is the secondary benefit that results from supporting existing and new industrialactivity in Sault Ste. Marie and the surrounding region. Expanded harbour facilities will supportpotential future production capacity increases at Tenaris and ESAI, which would represent amajor contribution to the economy of Northern Ontario. For example, we understand that ESAIcurrently generates approximately $1 billion in revenues from its Sault Ste. Marie operationsand is considering increasing production from the current level of 2.7 million tons annually toas much as 4 million tons per year. This capacity expansion could result in as much as $300million in incremental revenues for ESAI, which would in turn:
Add as much as $228 million to Canadas gross domestic product; and
Support 1,800 employment positions as a result of the direct, indirect and induced
economic impacts.
6.
Consideration should be given to moving from studying to implementing
This report represents the third study since 2004 that examined the concept of an expanded
harbour complex and the establishment of a public access port. The results of all studiesshow that significant potential demand exists for new marine transportation infrastructure byESAI and other users. Given that time now appears to be of the essence as the existingcapacity constraints and potential for displacement of harbour users is a challenge for theplanning for future marine transportation requirements. Accordingly, consideration should begiven to redirecting the communitys efforts away from feasibility-type exercises to actualimplementation activities.
Implementation will involve a number of key steps to be achieved, including defining theharbour complex partnership framework, securing government and private sector funding,securing property for the public access port component of the project, undertaking necessaryenvironmental and First Nation consultation activities and developing an operating model forthe design, construction, operation and financing of the harbour complex. An implementationtimeframe of as much as two years, with an associated cost of as much as $5.3 million hasbeen suggested and is summarized on the following page.
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Concluding comments
An analysis of the potential demand from industrial users, the economic and other benefits of asuccessful implementation and consideration of the implications of not proceeding supports theCommittees interest in pursuing an expanded harbour complex in Sault Ste. Marie.
It is important to emphasize, however, that the harbour expansion project represents a significantundertaking from a risk perspective. In addition to challenges associated with infrastructure costs,there are a number of non-financial issues will likely have a major impact on the expansion of theharbour complex. Notwithstanding these risks, however, it is evident that the status quo will notcontinue over the mid to long term and as such, the community faces two potential scenarios expand the harbour facility and support existing and expanded industrial activity in Sault Ste. Marie;
or allow the displacement of third party users from the existing harbour while at the same timepotentially constraining ESAIs ability to expand its operations and maximize its use of marinetransportation.
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I Introduction to the Study
1.1 Overview of the Sault Ste. Marie harbour complex
The City of Sault Ste. Marie (the City) marks its centennial as a city in 2012, although thecommunitys origins date back to the late 1880s. For most of its history, steelmaking has beenthe major economic activity in the City, with Essar Steel Algoma Inc. (ESAI) representing thelargest employer in the community.
Steel production is a commodity-intensive activity requiring large inputs of raw materials such asiron ore, coal and coke. The supply chain for ESAI relies significantly on marine movements forimporting raw materials and, to a lesser extent, shipping finished products and by-products tocustomers and as such, the area adjacent to ESAIs production facilities (see Figure 1) includes anumber of docks and storage areas for inbound and outbound marine movements. During 2011,approximately 4.2 million tonnes of commodities were brought into Sault Ste. Marie throughESAIs harbour facilities, with 0.6 million tonnes of by-products and finished steel exported byvessel from the facilities.
While the ESAI accounts for the majority of marine movements through its harbour facilities, otherlocal businesses will util ize the harbour for both inbound and outbound movements, with third-party (i.e. non-ESAI) inbound and outbound freight movements during 2011 each amounting to 0.6million tonnes.
In addition to ESAIs harbour facilities, a second commercial harbour (see Figure 1) is also inoperation in the City. Purvis Marine Limited (PML) currently operates the former governmentdock, which was divested by Transport Canada to PML in the late 1990s. The PML harbour isprimarily used for inbound fuel shipments, with approximately 0.30 million tonnes of fuel importedannually.
Figure 1 Sault Ste. Marie harbour facilities
ESAI harbour facilities
PML harbour facilities
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For a number of years, the prospect of expanding harbour facilities in Sault Ste. Marie has beendiscussed by both ESAI, previous owners of the steel-making facility and community groups. Asdiscussed later in this report, ESAIs interest in expanding the current harbour facilities ismotivated by the expectation of increased inbound and outbound volumes as a result ofproduction increases, changes in sourcing iron ore as well as targeted shifts from other modes.From the community perspective, increased harbour capacity is seen as providing additional
opportunities for local and regional businesses thereby enhancing the competitiveness of SaultSte. Marie as an investment destination and providing for economic growth and diversification. Insupport of a proposed harbour expansion, two studies were commissioned:
A pre-feasibility study was completed in June 2004 that considered a transfer of a portion of
ESAIs harbour facilities to a port authority, with capital improvements made to various parts ofthe existing facilities.
A port expansion study was completed in January 2009 that identified enhancements to theexisting ESAI harbour facilities and associated capital costs.
The January 2009 port expansion study formed the basis for a funding application by ESAI to PPPCanada in June 2011 for infrastructure funding under the P3 Canada Fund, a $1.2 billion Federal
program that provides financial assistance for public-private partnerships. We were advised byPPP Canada that this funding application lacked a public sector component and did not propose astrong competitive procurement process, which ultimately lead to the application not beingapproved by PPP Canada.
In response to the decision by PPP Canada, the City and ESAI have commissioned an additionalstudy to develop a business analysis for the proposed harbour expansion that will support futureapplications for senior government assistance.
1.2 Key deliverables
In October 2011, the City issued a request for proposal document for the development of amarket assessment leading to a business case for a regional harbour. Through the proposal
process, the City selected KPMG LLP (KPMG) as master consultant, with RGF Consultants,Todhunter Associates Inc. and For Evergreen Innovative Strategies Inc. acting as subcontractors.The terms of reference for the study were established in our engagement letter dated January 13,2012 and are summarized in Table 1 (see next page), along with the corresponding sections of ourreport where they are addressed.
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Table 1 - Study terms of reference
Phase Key Outcomes
Demonstrate the current and future
demand for an expanded harbour
facility, based on the needs of local
and regional users
Summary of potential users of the harbour, including existing marine users and
potential diversion opportunities (both in-bound and out-bound). The analysis of
potential users will reflect a strategic focus for the development of Northern Ontario a
a whole, incorporating both new and traditional economic initiatives.
Assessment of interest levels on the part of existing and potential users of marine
transportation in Northeastern Ontario, Michigan and other regions that may be serve
by the harbour
Identification of key decision making considerations for marine movements through th
proposed harbour
Development of potential demand scenarios that consider different levels of freight
movements as well as differing commodity types that could influence the design of th
harbour including type of products, volumes, and inbound and outbound services. Th
scenarios will demonstrate the ultimate sustainability of the harbour, based on
anticipated freight movements and associated financial results (i.e. revenues and
expenditures)
Assess interconnection and linkages
with other transportation assets in
Northeastern Ontario and the level
of support that would be provided
by the expanded harbour
Identification of complementary transportation infrastructure (roads, rail, laydown and
warehouse facilities) linking the harbour to customers
Assessment of the impact of the harbour on interconnecting infrastructure, including
financial support for private-sector networks
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Table 1 - Study terms of reference (continued)
Phase Key Outcomes
Identify the potential benefits arising
from a harbour expansion or
conversely, the costs of not
proceeding. These benefits will
encompass economic, employment,
competitiveness and environmental
considerations
Quantification of the expected direct economic activity to be generated by the harbourfor both the short term (three to five years) and long-term potential.
Assessment of direct, indirect and induced economic and employment benefits
generated by the harbour, both during construction and operation
Assessment of potential environmental impacts (positive and negative) associated wit
increased marine movements and differing freight routings
Quantification of potential impacts on the economic competitiveness of Northeastern
Ontario, including reduced transportation costs and support for new business activities
Commentary on the congruence of the harbour project with other government
initiatives focused on transportation and economic development for Northeastern
Ontario
Commentary on the potential opportunity costs associated with not proceeding with
the harbour project
Identify and develop strategies for
potential Aboriginal interests, assess
environmental management needs,
and port management options
Assessment of potential interests from an Aboriginal perspective and development of
strategy for proceeding with First Nation consultation
Assessment of site improvement requirements both land and water. Identify
environmental screening process and development of a framework for obtaining the
necessary environmental approvals
Assessment of port management governance options and implementation
requirements and development of a framework for future development of the harbour
Identifying issues arising from the preliminary application to PPP Canada and
developing courses of action to address these areas
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1.3 Our approach
Our approach to the study can be divided into four components, as follows:
i. Demonstrate the current and future demand for an expanded harbour facility, based on the needs of l
ii. Assess interconnection and linkages with other transportation assets in Northeastern Ontario and theprovided by the expanded harbour;
iii. Identify the potential benefits arising from a harbour expansion or conversely, the costs of not procee
iv. Identify and develop strategies for potential Aboriginal interests, assess environmental management
The detailed worksteps associated with each of these components as well as the corresponding section of this re
our research are summarized in Table 2 below.
Table 2 - Study workplan
Phase Worksteps
Demonstrate the current and
future demand for an
expanded harbour facility,
based on the needs of local
and regional users
1. Review and summarize available data concerning freight movements to and fromNortheastern Ontario, including volumes, mode of transportation, commodity and orig
and destination.
2. Review and summarize data relating to existing freight movements through GreatLakes ports to identify types of commodities, service area and potential opportunities
for diversion
3. Review and summarize data relating to existing freight movements through the currenSault Ste. Marie harbour
4. Review and summarize previously commissioned reports relating to harbourdevelopment in Sault Ste. Marie
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Table 2 - Study workplan (continued)
Phase Worksteps
Demonstrate the current and
future demand for an
expanded harbour facility,
based on the needs of local
and regional users (continued)
5. Conduct interviews with existing users of the harbour to ascertain (i) historical freightmovements, including commodity type, volumes, origin and destination and mode of
transportation; (ii) key determinants in the selection of transportation modes and
routes; (iii) perceptions on the current harbour facility, including constraints or obstacle
to utilization; (iv) key requirements for future marine movements, including the
potential for differing harbour infrastructure (available area, ancillary facilities, water
depth) or differing ship types; (v) anticipated marine movements (including potential
diversions from other modes of transportation) under differing scenarios
6. Develop an inventory of potential users of the harbour by examining major industrialand commercial activities in Northeastern Ontario, including potential activities not
currently present in the region but under consideration. For identified potential users,
conduct interviews to ascertain (i) key determinants in the selection of transportationmodes and routes; (ii) potential interest in the use of the proposed harbour facility,
including specific requirements (ship type, capacity, service levels, cargo handling
equipment; (iii) potential obstacles to the utilization of the harbour; (iv) the overall
probability of the customer utilizing the harbour and the associated anticipated freight
volumes
7. Development of freight movement forecast scenarios that consider differing freightvolumes, commodity types, ship types, cargo handling equipment and other variables
as identified during the course of our review.
8. Identification of the infrastructure and other requirements associated with the forecastscenarios, including the impact of varying water depths, materials handling equipment
and ship types.
9. Undertake an in-person site inspection of the existing harbour facilities and waterfrontareas that could support the proposed harbour development
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Table 2 - Study workplan (continued)
Phase Worksteps
Assess interconnection and
linkages with other
transportation assets in
Northeastern Ontario and the
level of support that would be
provided by the expanded
harbour
10.For each freight movement forecast scenario, assess the potential utilization of othertransportation infrastructure and comment on potential constraints and benefits.
Identify the potential benefits
arising from a harbour
expansion or conversely, the
costs of not proceeding.
These benefits will
encompass economic,
employment,
competitiveness and
environmental considerations
11.Develop financial forecasts for each freight movement forecast scenario that considerscapital expenditures as well as operating costs.
12.Quantify the direct, indirect and induced economic and employment impactsassociated with the financial forecasts based on input-output multipliers provided by
Statistics Canada.
13.Assess the anticipated environmental benefits associated with the harbour for eachfreight movement forecast scenario through a comparison of the difference in
emissions associated with (i) the use of marine transportation; and (ii) the use of an
alternative mode of transportation.
14.Conduct interviews with senior government representatives to ascertain the degree ofcongruence with government programs and priorities.
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Table 2 - Study workplan (continued)
Phase Worksteps
Identify and develop
strategies for potential
Aboriginal interests, assess
environmental management
needs, and port management
15. Identify traditional Native land use in the Sault Ste. Marie area and First Nations thatcould potentially be impacted by the harbour project.
16.Review and summarize First Nation and Aboriginal consultation requirements based onboth minimum standards and best practices.
17.Meet with affected First Nations (as identified) to ascertain their initial perspectives onthe harbour development. Included in these meetings will be discussions concerning
their potential interest in actively participating in the harbour development, both as a
partner in implementation and as a customer.
18.Review and summarize CEAA requirements, including filings and approvals. Identifyany environmental issues or concerns
19. Identify and evaluate potential governance models for the proposed harbour facility.
20.Develop an overall project implementation framework that outlines implementationrequirements and timing and aligns with the requirements of potential funding
agencies.
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1.4 Restrictions
This report is based on information and documentation that was made available to KPMG at thedate of this report. KPMG has not audited nor otherwise attempted to independently verify theinformation provided unless otherwise indicated. Should additional information be provided toKPMG after the issuance of this report, KPMG reserves the right (but will be under no obligation) to
review this information and adjust its comments accordingly.Pursuant to the terms of our engagement, it is understood and agreed that all decisions inconnection with the implementation of advice and recommendations as provided by KPMG duringthe course of this engagement shall be the responsibility of, and made by, the City, ESAI or otherparties.
This report includes or makes reference to future oriented financial information. Readers arecautioned that since these financial projections are based on assumptions regarding future events,actual results will vary from the information presented even if the hypotheses occur, and thevariations may be material.
KPMGs role in this engagement has been to estimate future events based on information availableto it at the time of our report. As a result, the comments in this report should be viewed in thecontext of being estimates based on available information, which may or may not be influenced byunforeseen or uncontrollable events. KPMG cautions the reader that the financial performance of anexpanded harbour complex can vary significantly from the projections outlined in this report due toeconomic, technological or regulatory changes, variances in capital costs and funding levels andfuture decisions by customers, transportation companies, local municipalities and other governmentagencies. Accordingly, KPMG will assume no responsibility or liability for any losses, damages orexpenses incurred by any party as a result of their reliance on our report.
Comments in this report are not intended, nor should they be interpreted, to be legal advice oropinion.
1.5 Independence and objectivity
KPMG has no present or contemplated interest in the City or ESAI nor are we an insider orassociate of the City, ESAI or their management teams.
Our fees for this engagement are not contingent upon our findings or any other event.
In light of the above, we believe we are independent of the City and ESAI and are acting objectively.
1.6 Presentation of confidential information
In connection with this engagement, KPMG has been provided with information that has beendeemed by the provider to be non-public, confidential, commercially sensitive and/or proprietary innature. In light of these factors, we have limited the disclosure of information in this report to alevel that is considered appropriate. In addition, we have provided excerpts of our report to theselected parties to confirm the appropriateness of the level of disclosure.
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II Overview of the Sault Ste. Marie HarbourComplex
2.1
ESAI harbour facilities
ESAIs harbour facility is located adjacent to its main production complex and is situated on thewestern end of the Soo Locks. The Essar harbour facility is comprised of nine different docks thatare used for specific commodities (see Figure 2), as well as storage areas for inbound and outboundcommodities.
Figure 2 Overview of the ESAI harbour facility
Dock Commodity (infrequent/secondary commodities in italics)Inbound Outbound
1. Steel dock None Steel coils, steel slabs2. Bonehead dock None Tar, steel coils3. Iron ore dock Iron ore pellets None
4.
Iron-making stone dock Limestone None5. Coal dock Coal None6. Commercial dock Limestone, scrap steel Scrap steel7.
Southwest slip Coke, manganese ore None8. Sawmill Bay Scrap steel None9. Export dock Tube blanks Braize, millscale, pellet fines, slag, steel coils
12
3
4
5
6
7
8
9
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The physical condition of individual docks varies considerably, with some docks in good to verygood condition while others are in need of significant repair and rehabilitation (see Table 3). Waterdepths also vary by dock, ranging from 19 ft (5.8 m) at Sawmill Bay (No. 8) to 30 ft (9.1 m) at theSteel dock (No. 1), Bonehead dock (No. 2) and Export dock (No. 9).
Table 3 Physical condition and water depths of the ESAI harbour facility
Dock Physical Condition Water DepthFrom To
1. Steel dock Good 25 ft(7.6 m)
30 ft(9.1 m)2.
Bonehead dock3.
Iron ore dock Good but minor settlement and movement aswell as undermining of foundations noted
22 ft(6.7 m)
27 ft(8.2 m)4. Iron-making stone dock
5. Coal dock6. Commercial dock Extensive deterioration, including partial collapse
due to pile failure, leading to load restrictions.Significant rehabilitation required.
23 ft(7.0 m)
25 ft(7.6 m)7. Southwest slip
8. Sawmill Bay Extensive deterioration, including collapse of dockstructure. Significant rehabilitation required.
19 ft(5.8 m)
24 ft(7.4 m)
9.
Export dock Very good 28 ft(8.5 m)
30 ft(9.1 m)
2.1.1 Commodity movements by type and volume
During 2011, ESAI moved approximately 4.2 million tonnes of commodities into Sault Ste. Mariethrough its harbour facilities, with an additional 0.6 million tonnes of outbound commodities movedthrough its harbour facility (see Table 4). Inbound freight movements were 11% higher than 2010levels, which we understand reflects the continuing improvement in the overall performance of thesteel industry.
Table 4 Inbound and outbound ESAI marine movements (in tonnes)
Commodity 2009 2010 2011 Three Year Average
Volume PercentageInbound
Iron ore pellets 1,795,265 2,024,214 2,504,612 2,108,030 48.5%Coal 1,197,912 1,453,723 1,228,891 1,293,509 29.8%Limestone 332,155 275,457 298,784 302,132 7.0%Coke 123,198 18,198 134,126 91,841 2.1%Scrap steel 26,762 28,123 44,452 33,112 0.8%Total ESAI inbound 3,475,292 3,799,715 4,210,865 3,828,624 88.2%
Outbound
Steel coil and slabs 288,044 308,976 251,476 282,832 6.5%Tar 42,904 42,073 42,552 42,510 1.0%Other by-products 124,403 191,338 252,058 189,266 4.3%Total ESAI outbound 455,351 542,387 546,086 514,608 11.8%
Total ESAI movements 3,930,643 4,342,102 4,756,951 4,343,232 100.0%
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The majority of ESAIs marine movements involve iron ore pellets and coal, which accounted for49% and 30% of all marine movements (inbound and outbound), respectively. The significance ofthese two commodities reflects the difference in modes for inputs and outputs to ESAI.Specifically, while ESAI utilized marine transportation for 100% of its coal shipments and 63% of itsiron ore shipments from 2009 to 2011, only 13% of its finished product was transported by ship(see Figure 3).
Figure 3 Marine movements as a percentage of total ESAI movements (average of 2009 to 2011)
In addition to marine movements undertaken by ESAI, a limited number of third party users havealso moved commodities through the Export dock, specifically tube rounds for Tenaris (inbound) andslag shipments by Superior Slag and Great Lakes Slag (outbound). As noted in Table 5, while thirdparty shipments represent a small percentage of the total activity at the ESAI harbour facility (12.6%of total commodity movements by volume during 2009 to 2011), they do account for approximatelyhalf of all outbound movements from the ESAI harbour facilities.
Table 5 ESAI and third party marine movements (in tonnes)Commodity 2009 2010 2011 Three Year Average
Volume PercentageInbound
ESAI 3,475,292 3,799,715 4,210,865 3,828,624 76.7%Third party users 162,619 184,231 115,617 2.3%Total inbound 3,475,292 3,962,334 4,395,096 3,944,241 79.0%
Outbound
ESAI 456,216 543,438 598,347 532,667 10.7%Third party users 455,351 542,387 546,086 514,608 10.3%Total outbound 1,037,150 1,161,117 999,903 1,032,724 21.0%
Total movements 4,386,859 5,048,159 5,539,529 4,991,516 100.0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Other byproducts
Tar
Steel coil and slab
Scrap steel
Coke
Limestone
Coal
Iron ore
Inbound movements
Outbound movements
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2.1.2 Vessels calls and port days
During 2010, a total of 484 vessels called at the ESAI harbour facility, with an average duration(arrival to departure) of 30 hours per call (see Table 6). However, the length of time required to loadand unload vessels varies significantly, with duration times for scrap steel, coke, by-products (fines,millscale, braize) and third party shipments considerably higher than the overall average.
Table 6 Vessel calls and duration
Dock Commodity Vessel Calls Vessel Days AverageLength of Call
1. Steel dock Steel coil and slab 40 30 18 hours2. Bonehead dock Tar 12 12 24 hours3. Iron ore dock Iron ore pellets 152 40 6 hours4. Iron-making stone dock Limestone 9 2 5 hours5. Coal dock Coal 93 47 12 hours6. Commercial dock Limestone 22 5 5 hours
Scrap steel 18 72 96 hours7. Southwest slip Coke 34 85 60 hours
Manganese ore 1 1 24 hours8.
Sawmill Bay None n.a. n.a. n.a.9.
Export dock By-products and thirdparty
103 302 70 hours
Total 484 596 30 hours
The size and draft of vessels using the ESAI harbour facility will vary based on the type ofcommodity involved, with:
self-unloading bulk carriers used for iron ore, coal, coke, limestone, by-products and slag (thirdparty) shipments;
barges used for steel coil and scrap steel shipments;
heated barges for tar shipments; and
ocean-going vessels capable of transiting the St. Lawrence Seaway (salties) used primarily forthe movement of steel products into Sault Ste. Marie (third party). In some cases, thesevessels have also been used by ESAI to transport coke and finished steel.
ESAI formerly used Seaway Marine Transport, which provided bulk carriers with capacities of22,000 to 24,000 tons (20,000 to 21,800 tonnes) but has recently changed to Lower Lakes Towingwhich uses smaller vessels with capacities of 15,000 to 17,000 tons (13,600 to 15,500 tonnes).Third party users of the harbour facility use larger vessels with capacities in excess of 20,000tonnes.
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2.1.3 Current issues and challenges
Through discussions with representatives of ESAI and a review of information obtained during thecourse of the study, we understand that there are a number of challenges and constraintsassociated with the current ESAI harbour facility.
1. The maximum vessel draft that can be accommodated by all ESAI docks, except for the Export
dock (No. 9), is constrained by the Vidal Shoals, which is located in the approach to the ESAIharbour facility (see Figure 4). With a maximum depth of 23 6 (7.2 m), ESAI is unable to utilizelarger vessels, including ships with drafts equal to the maximum seaway depth of 26 6 (8.1m). As a result, ESAI is limited in its ability to reduce its per unit shipping costs (which woulddecrease if larger vessels were used) and is challenged to economically receive ocean-goingvessels.
Figure 4 - Vidal Shoals location and maximum water depths
2. The existing dockside storage space is limited, requiring ESAI to move inventory of certaincommodities (coke, limestone) to other areas, particularly during the inventory build-up prior to
the closure of the Soo Locks in the winter. While the limited amount of dockside storage spacehas an immediate impact on ESAIs supply chain management processes (and related costs),we understand that the potential does exist to expand the amount of land available to serviceharbour users, both through the rearrangement of the existing site and the use of vacant landlocated adjacent to the harbour area.
Vidal Shoals23 6
Vessels entering and exiting thelocks are not permitted to cut the
corner due to navigational concerns
Vessels destined for ESAI docks (other than export docks) are requiredto proceed past the harbour facility and approach from the west
30
27
30
24
25
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3. The Export dock (No. 9) is currently approaching its maximum capacity, with vessels present atdock 302 days per year. The capacity pressures associated with the Export dock reflect laycancommitments made by ESAI to third parties that commit 20 days of each month to third parties.The requirement to commit a significant portion of capacity reflects the relatively low loadingand unloading rates associated with those commodities moved through the Export dock (seeFigure 5).
Figure 5 Loading and unloading rates (tonnes per hour) for selected commodities
To the extent that production increases materialize for ESAI, it is likely that the volume offreight movements of by-products would increase as well, with the potential for displacementof third party harbour users if ESAI requires a greater proportion of the Export docks capacity.
4. The ESAI harbour facilities are located to the west of the Soo Locks and as such, marinemovements originating from or destined to ports east of the Soo Locks are subject to seasonalclosure in winter months. Historically, the Soo Locks cease operations on January 15, with thelocks reopening March 25, resulting in an operating season of 297 days. However, the 2010operating season was slightly longer (305 days), with both an earlier opening (March 21, 2010)and a later closing (January 19, 2011).
The closure of the Soo Locks has the potential to be problematic for customers that requireconsistent deliveries of commodities. ESAI has compensated for the seasonal nature of itsmarine shipments through a combination of (i) stockpiling commodities in advance of thecessation of the shipping season (which is problematic due to limited storage space); and (ii)arranging for alternative modes of transportation during the winter season, although weunderstand this results in a high per unit transportation cost due to the short-term nature of thearrangement.
- 1,000 2,000 3,000 4,000 5,000
Slag (loading)
Byproducts (loading)
Tube rounds (unloading)
Coke (unloading)
Limestone (unloading)
Coal (unloading)
Iron ore (unloading)
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2.2 PML harbour facilities
The PML harbour facility is a former public dock that was administered by Transport Canada butdivested to PML in May 1998. Located to the east of the Soo locks, the PML harbour consists of a150 m (485 foot) pier with a perpendicular 95 m (310 foot) dock and undeveloped land adjacent tothe facility that is available to material storage (see Figure 6). Water depth along the dock is 20 feet
(6.1 m).Figure 6 Overview of the PML harbour facility
2.2.1 Commodity and vessel movements
The PML facility is primarily involved in the inbound movement of petrochemical products, whichare offloaded at the facility and transported by underground pipeline to tank farms located
approximately 3.5 kilometers from the PML harbour facility. On an annual basis, approximately 300million litres of petrochemical projects are received from Sarnia, Ontario, with 15 to 20 vessel callsper year. We understand that both the historical and anticipated future petrochemical shipmentsare consistent with this level.
In addition to petrochemical movements, the PML facility will occasionally receive equipment andother shipments that are too large to cross the International Bridge and are loaded on barge inMichigan. We understand that these shipments have typically been sporadic and do not constitutesignificant volumes.
In the past, the PML facility was used to ship steel coils from ESAI during the winter season (i.e.when the Soo locks were closed and marine movements could not be made from the ESAI harbourfacility). Coils were loaded on trucks and moved to the PML harbour facility for loading onto barges.
Shipments of steel coils from the PML facility have not occurred for a number of years.
PML harbour facility
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2.3 Implications for the initiative
Based on our analysis of the existing harbour facilities in Sault Ste. Marie, we make the followingcomments and observations:
1. The current capacity constraints experienced at the Export Dock reflect the potential risk ofESAI displacing third party harbour users in the immediate short term, particularly if the level of
marine activity increases. This would appear to validate the communitys emphasis onexpanding the Sault Ste. Marie harbour complex to the benefit of ESAI and other regional users.
2. Significant components of ESAIs harbour facility appear to be in need of enhancements, with
the current limiting factors deteriorating infrastructure, limited storage capacity and theinability to utilize larger vessels due to the water depth limitations imposed by the Vidal Shoals likely impacting on ESAIs existing operations and transportation costs. To the extent that ESAI-related marine movements increase, it is reasonable to assume that the impacts of thesecurrent deficiencies will become more pronounced from an operational and financialperspective.
3. While two separate harbour facilities are present in Sault Ste. Marie, it is reasonable to consider
the ESAI harbour facility as the preferred candidate for expansion due to the type and volume ofexisting freight movements, capacity for additional expansion and proximity to ESAI and othercustomers. While the PML harbour facility is involved in freight movements, certain factors,most notably the limited available footprint for ancillary services, mitigate the potentialexpansion opportunities for the PML harbour facil ity.
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III Overview of Great Lakes MarineMovements
On an annual basis, more than 200 million tonnes of freight is transported by vessel to and from
ports on the Great Lakes, two-thirds of which is moved through U.S. ports. While there are morethan 40 Canadian ports on the Great Lakes, the ten largest ports account for more than 80% ofmarine transportation on the Great Lakes to and from Canada (see Figure 7). In terms of averageannual volume, Sault Ste. Marie ranks as the fourth largest Canadian Great Lakes port.
Figure 7 Ten largest Canadian Great Lakes ports by average annual volume
3.1 Canadian Great Lakes marine movements
During the period 2005 to 2009, a total of 349 million tonnes of freight was transported by vesselsto and from Canadian ports located on the Great Lakes, an average of 70 million tonnes per year.While freight movements have ranged from 70 million to 77 million tonnes annually during 2005 to2008, total freight movements in 2009 decreased to just over 55 million tonnes due to economicconditions. During 2010, freight movements increased to approximately 62 million tonnes.
While 40 individual Canadian Great Lakes ports reported freight movements during the period 2005
to 2009, marine shipments tend to be concentrated within a relatively small number of ports.Overall, the five largest Canadian ports accounted for 57% of all marine movements during 2005 to2009, with the ten largest Canadian ports accounting for 82% of all marine movements (see Table7).
Thunder Bay
Sault Ste. Marie
Meldrum Bay
Goderich
Sarnia
Windsor
Nanticoke
Hamilton
Clarkson
Courtright
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Table 7 Summary of Great Lakes marine movements by Canadian port (in thousands of tonnes)
Port 2005 2006 2007 2008 2009 Five Year AverageVolume Percent
Nanticoke 14,139.4 13,863.8 13,038.2 14,147.7 5,777.5 12,193.3 16.8%Hamilton 12,195.3 12,642.6 11,531.1 10,824.7 8,215.7 11,081.8 15.3%Thunder Bay 8,125.0 8,331.2 8,484.6 7,901.7 7,216.3 8,011.8 11.0%
Sault Ste. Marie 5,781.2 5,748.1 5,002.8 5,829.5 4,515.5 5,375.4 7.4%Windsor 5,151.3 5,517.8 4,850.2 4,619.8 4,705.6 4,968.9 6.8%Five largest ports 45,392.2 46,103.5 42,906.9 43,323.4 30,430.6 41,631.2 57.3%Goderich 4,695.9 4,455.7 3,967.4 4,995.8 5,563.8 4,735.7 6.5%Meldrum Bay 4,546.1 4,593.7 3,440.8 3,923.0 2,648.4 3,830.4 5.3%Sarnia 3,271.9 4,046.6 3,920.4 3,598.9 3,442.2 3,656.0 5.0%Clarkson 2,869.7 3,072.4 2,963.3 3,175.6 2,564.1 2,929.0 4.0%Courtright 3,089.2 3,221.0 2,534.1 2,633.0 1,484.9 2,592.4 3.6%Ten largest ports 63,865.0 65,492.9 59,732.9 61,649.7 46,134.0 59,374.7 81.7%Remaining ports 14,454.3 14,329.7 13,919.4 12,512.7 10,633.8 13,170.1 18.3%Total 78,319.3 79,822.6 73,652.3 74,162.4 56,767.8 72,544.8 100.0%
Outbound freight movements have tended to be slightly higher than inbound movements,accounting for approximately 60% of total Canadian Great Lakes marine shipments by volume (seeFigure 8). However, significant variations exist at the individual port level, with some Canadianports heavily involved with outbound movements while others are predominantly involved withinbound movements. For example, outbound shipments represent 100% of freight movements forMeldrum Bay and 92% of freight movements for Thunder Bay while inbound shipments account for100% of freight movements for Courtright and 99% of freight movements for Toronto.
Figure 8 Outbound and inbound Canadian Great Lakes marine movements, in millions of tonnes
(2005 to 2009)
-
10
20
30
40
50
60
70
80
90
2005 2006 2007 2008 2009
Outbound Inbound Total
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In addition to being heavily concentrated from a port perspective, Canadian Great Lake marinemovements are also dominated in terms of commodities. During the period 2005 to 2009, sevenindividual commodities accounted for 82% of all marine movements to and from Canadian GreatLake ports (see Figure 9).
Figure 9 Average annual marine movements by commodity (2005 to 2009)
Freight movements to and from Canadian Great Lakes ports are highly localized, with 78% of
marine movements remaining within the Great Lakes system (see Table 8). The majority of freightmovements, however, are international in nature, with 52% of shipments involving a U.S. GreatLakes port and 6% of shipments involving a port located in another international region. Inboundfreight movements to Canadian ports tend to have a higher percentage of international port pairingsthan outbound freight movements, with 67% of inbound movements and 45% of outboundmovements involving an international port.
Table 8 Average annual Canadian Great Lakes marine movements by origin and destination, in
thousands of tonnes (2005 to 2009)
Port pairings Inbound Outbound Percentage of TotalInbound Outbound Total
Other Canadian Great Lakes ports 44,004 44,038 21.3% 31.0% 25.2%Other Canadian ports 23,839 33,616 11.5% 23.7% 16.5%
Total domestic movements 67,843 77,654 32.8% 54.7% 41.7%
U.S. Great Lakes ports 129,358 53,483 62.5% 37.7% 52.4%Other international ports 9,753 10,818 4.7% 7.6% 5.9%Total international movements 139,111 64,301 67.2% 45.3% 58.3%
Total movements 206,954 141,955 100.0% 100.0% 100.0%
Coal15.8 million tonnes
22.7%
Cement3.4 million tonnes
4.9%
Wheat5.4 million tonnes
7.7%
Limestone7.0 million tonnes
10.0%
Aggregates7.2 million tonnes
10.3%
Salt8.6 million tonnes
12.3%
Iron ore9.9 million tonnes
14.2%
Other commodities12.5 million tonnes
17.9%
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3.2 U.S. Great Lakes marine movements
During the period 2005 to 2009, a total of 693 million tonnes of freight was moved through U.S.ports on the Great Lakes, an annual average of approximately 140 million tonnes per year (twicethat moved through Canadian Great Lakes ports). Consistent with the trend in Canadian marinemovements, shipments in 2009 decreased in comparison to prior years, amounting to 98.9 million
tonnes compared to 138.2 million tonnes in 2008.U.S. Great Lake marine movements are highly concentrated within a small number of ports, withthe ten largest ports (out of 72 that reported freight movements from 2007 to 2009) accounting for91% of marine movements through U.S. Great Lakes ports (see Figure 10).
Figure 10 Volume of marine movements by U.S. Great Lakes port (2007 to 2009 annual average)
In addition to being heavily concentrated from a port perspective, marine movements to and fromU.S. Great Lakes ports are focused on a small number of bulk commodities. As noted in Table 9,the degree of commodity concentration for U.S. shipments is actually greater than Canadianshipments, with six commodities accounting for 91% of U.S. Great Lakes marine movements (ascompared to 77% for Canadian marine movements).
Table 9 U.S. Great Lakes marine movements by commodity (2005 to 2009 average)
Commodity Percentage of U.S. GreatLakes Marine Movements
Percentage of Cdn. GreatLakes Marine Movements
Iron ore 34.2% 14.2%Coal 24.9% 22.7%Limestone 18.3% 10.0%Aggregates 8.0% 10.3%Cement 4.2% 4.9%Wheat 1.2% 7.7%Salt 0.2% 12.3%Subtotal 91.0% 82.1%All other commodities 9.0% 17.9%Total 100.0% 100.0%
Duluth-Superior36.9 million tonnes
(24.4%)
Chicago20.0 million tonnes
(13.3%)
Ashtabula13.3 million tonnes
(8.8%)
Indiana Harbor11.7 million tonnes
(7.7%)
Detroit11.1 million tonnes
(7.3%)
Next fivelargest ports
43.8 million tonnes(29.0%)
Remaining ports14.3 million tonnes
(9.5%)
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The majority of shipments to and from U.S. Great Lakes ports involve another U.S. port (either onthe Great Lakes or elsewhere in the U.S.). While international freight movements accounted forapproximately 35% of U.S. Great Lakes marine movements, the majority of these shipments wereto Canadian ports (see Table 10).
Table 10 U.S. Great Lakes marine movements by port pairing, in thousands of tonnes (2005 to
2009 average)Port pairings Average
(2005 to 2009)Percentage
of Total
Other U.S. ports 98,534.4 64.4%Total domestic movements 98,534.4 64.4%
Canadian ports 49,876.6 32.7%Other international ports 4,479.6 2.9%Total international movements 54,356.2 35.6%
Total movements 152,890.6 100.0%
3.3
Marine movements through the Soo Locks
Connecting Lake Superior with the lower Great Lakes via the St. Marys River, the Soo Locks arecomprised of five locks (four U.S., one Canadian), although only two locks are used for most, if notall, commercial vessel movements through the locks (see Table 11).
Table 11 Overview of the Soo Locks
Lock Jurisdiction ConstructionDate
Passages(2010)
Current Status
MacArthur U.S. 1943 5,685 ActivePoe U.S. 1968 4,322 ActiveDavis U.S. 1914 8 Occasional use onlySabin U.S. 1919 None Permanently closed in 2010
Sault Ste. Marie canal Canada 1895 n.a. Recreational use only
The Soo Locks operate on a seasonal basis, with the shipping season typically ending on January 15and reopening on March 25, resulting in a 297 day season. However, the 2010 operating seasonwas slightly longer (305 days), with both an earlier opening (March 21, 2010) and a later closing(January 19, 2011). When in operation, the volume of shipments through the Soo Locks is relativelyconsistent on a monthly basis, ranging from 7.5 million to 8.5 million tonnes per month (see Figure11).
Figure 11 Monthly cargo movements through Soo Locks, in millions of tonnes (2005 to 2010
shipping seasons)
-
2.0
4.0
6.0
8.0
10.0
Feb Apr Jun Aug Oct DecFeb Apr Jun Aug Oct DecFeb Apr Jun Aug Oct DecFeb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec
2005 2006 2007 2008 2009 2010
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Consistent with the trend in Great Lakes marine movements, commodity movements through theSoo Locks decreased significantly during the 2009 shipping season, with total shipments amountingto 48.4 million tonnes in 2009 compared to 71.2 million tonnes in 2008 and 67.6 million tonnes in2010. Excluding 2009, an average of 72.4 million tonnes passes through the Soo Locks on anannual basis.
From a commodities perspective, shipments passing through the Soo Locks reflect the Great Lakesmarine movements in general in that a small number of commodities account for a significantpercentage of all shipments. As noted in Table 12, four commodities (iron ore, coal, wheat andlimestone) represent 91% of all shipments through the Soo Locks. A sizeable percentage of thesecommodities originate from Lake Superior ports (Duluth, Thunder Bay and Two Harbors) and assuch, eastbound movements represent the majority of shipments (90%) through the Soo Locks.
Table 12 Cargo movements through the Soo Locks by commodity and direction, in thousands of
tonnes (2005 to 2010 average)
Commodity Westbound Eastbound Total Percentageof Total
Iron ore 33.4 35,405.6 35,439.0 51.8%Coal 1,951.1 16,107.4 18,058.5 26.4%Wheat 8.6 5,174.6 5,183.2 7.6%Limestone 3,701.0 3,701.0 5.4%Subtotal 5,694.1 56,687.6 62,381.7 91.2%Remaining commodities 1,509.6 4,483.1 5,992.7 8.8%Total 7,203.7 61,170.7 68,374.4 100.0%Percentage of total 10.5% 89.5% 100.0%
3.4 Implications for the initiative
1. To the extent that demand exists for a public access port in Sault Ste. Marie, potentialcustomers will likely be limited to those involved in the movement of bulk commodities. Asnoted in our analysis, the vast majority of marine movements through Great Lakes ports (bothCanadian and U.S.) involve iron ore, coal, limestone and aggregates. We also note thatcommodities such as forest products, machinery and vehicles represent a very smallpercentage of Great Lakes marine shipments (see Table 13) and as such, will likely not bereflected in the potential demand for a public access port in Sault Ste. Marie.
Table 13 Great Lakes marine movements of selected commodities, in thousands of tonnes (2009)
Commodity Canadian PortMovements
U.S. PortMovements
Total
Logs and wood in the rough Wood chips Lumber 73.5 73.5Newsprint
Paper and paperboard
Wood pulp Machinery 12.8 25.4 38.2Vehicles and parts 0.5 0.9 1.4Other manufactured goods 6.0 72.6 78.6
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2. Given the dominance of eastbound shipments through the Soo Locks, there appears to belimited potential to divert marine movements from other ports (both originating and destinationports) to a public access port located in Sault Ste. Marie. Specifically, the majority of shipmentsthat pass by Sault Ste. Marie appear to originate from Lake Superior and terminate elsewhere inthe Great Lakes system. Diverting these movements to a public access port in Sault Ste. Mariewould either require that:
commodities be moved to Sault Ste. Marie from the point of origin by land (i.e. rail or truck)and then loaded onto vessels at the public access port for shipment to their destination; or
commodities be moved to Sault Ste. Marie from the point of origin by vessel and thentransported by rail or truck to their destination.
We do not consider these to represent financially viable options and as such, consider thelikelihood of diversion to be low.
3. Our analysis indicates that ports on the Great Lakes generally serve users that are located inclose proximity to the port facility. Accordingly, it is likely that demand for a public access portin Sault Ste. Marie will be limited to local users, unless a major regional initiative can be locatedthat requires access to marine facilities on the Great Lakes.
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IV Overview of Northern Ontario FreightMovements
4.1 Road transportation
It is estimated that approximately 1.56 million truck trips occur annually that either begin or end inNortheastern Ontario, transporting a total of 13.8 million tonnes of freight (see Table 14). Themajority of both commercial truck trips (85%) and associated freight volumes (90%) involve eitherorigins or destinations that are outside the individual district.
Table 14 Annual commercial truck movements by Northeastern Ontario district
District Commercial Truck Trips Freight Volume (Thousands of Tonnes)WithinDistrict
OutsideDistrict
TotalTrips
WithinDistrict
OutsideDistrict
TotalFreight
Algoma 93,002 281,262 374,264 631.4 2,988.7 3,620.1Cochrane 74,350 210,117 284,467 364.6 2,329.4 2,694.0Sudbury 2,215 93,158 95,373 10.7 931.2 941.9Greater Sudbury n.a. 359,012 359,012 n.a. 3,308.1 3,308.1Nipissing 30,540 241,790 272,330 222.2 2,254.9 2,477.1Timiskaming 57,597 128,115 185,712 276.3 1,834.2 2,110.5Parry Sound 21,535 237,526 259,061 65.7 1,375.8 1,441.5Total 279,239 1,550,980 1,830,219 1,570.9 15,022.3 16,5932Percentage of total 15.3% 84.7% 100.0% 9.7% 90.3% 100.0%
Overall, less than 30% of Northeastern Ontario commercial truck movements start and stop withinNortheastern Ontario. In comparison, almost half of truck movements originating from orterminating in Northeastern Ontario are paired with other parts of Ontario (see Table 15). TheAlgoma District has the highest volume of truck freight originating in or destined for the U.S.,Mexico and Western Canada, which we attribute to Sault Ste. Maries role as a border crossing.
Table 15 Origin-destination pairing for Northeastern Ontario truck movements
District Freight Going to or Coming From (Thousands of Tonnes)WithinDistrict
NorthernOntario
Remainderof Ontario
EasternCanada
WesternCanada
U.S. andMexico
Algoma 631.4 966.1 962.5 234.9 118.8 706.4Cochrane 364.6 239.8 1,170.2 712.3 28.4 178.7Sudbury 10.7 498.9 365.8 24.2 1.6 40.7Greater Sudbury n.a. 571.0 2,421.6 180.1 14.0 121.4Nipissing 222.2 621.5 1,138.4 342.3 12.2 140.5Timiskaming 276.3 140.2 849.9 263.7 9.3 294.8Parry Sound 65.7 143.1 1,060.7 78.9 4.3 23.1Total 1,348.7 2,559.1 6,830.7 1,494.1 176.4 1,365.1Percentage of total 9.7% 19.6% 49.0% 11.3% 1.2% 9.2%
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Truck movements in Northern Ontario are characterized by a high percentage of empty movements,with 47% of all truck movements involving empty vehicles (see Table 16). For loaded truckmovements, the most significant commodities are forest products, agricultural and food productsand manufactured goods, which collectively account for 75% of loaded truck movements (26% ofall truck movements) (see Table 17). To a large extent, truck movements reflect the traditionaleconomic profile of Northeastern Ontario:
forest products represent the largest export commodity, both in terms of truck movements(Table 16) and total freight volumes (Table 17), which is consistent with the presence of majorforestry operations in Northeastern Ontario; and
agricultural and manufactured products represent large import commodities, which is indicative
of the general need to import agricultural and consumer products into Northeastern Ontario.
Table 16 Northeastern Ontario truck movements by commodity (number of trips)
Commodity Origin and Destination PairingOriginating inNortheasternOntario and
EndingElsewhere
OriginatingElsewhere
and Ending in
NortheasternOntario
Originatingand Ending inNortheastern
Ontario
Total(all pairings)
Forest products (lumber, pulp, paper, other) 16.5% 9.5% 8.4% 10.9%Agricultural and food products 4.8% 13.5% 7.7% 7.9%Manufactured and miscellaneous goods 5.0% 10.1% 6.0% 6.8%Base metals and articles of base metal 3.3% 3.2% 2.6% 3.1%Cement and non-metallic mineral products 2.1% 2.7% 4.0% 3.1%Fuel oil, gasoline and aviation fuel 0.7% 5.9% 2.6% 3.0%Minerals, ores and concentrates 2.3% 2.2% 3.2% 2.7%Machinery 2.6% 3.6% 1.6% 2.4%Subtotal 37.3% 50.7% 36.1% 39.9%Remaining commodities 12.1% 17.6% 9.8% 13.1%Total loaded truck movements 49.4% 68.3% 45.9% 53.0%Empty truck movements 50.6% 31.7% 54.1% 47.0%
Total truck movements 100.0% 100.0% 100.0% 100.0%
Table 17 Northeastern Ontario truck movements by commodity (number of trips)
Commodity Origin and Destination PairingOriginating inNortheasternOntario and
EndingElsewhere
OriginatingElsewhere
and Ending inNortheastern
Ontario
Originatingand Ending inNortheastern
Ontario
Total(all pairings)
Forest products (lumber, pulp, paper, other) 45.7% 17.7% 38.6% 32.9%Fuel oil, gasoline and aviation fuel 2.1% 18.6% 6.6% 9.8%Agricultural and food products 3.5% 14.0% 7.0% 8.6%Manufactured and miscellaneous goods 4.8% 6.4% 6.2% 5.8%
Base metals and articles of base metal 8.5% 4.4% 4.7% 5.9%Cement and non-metallic mineral products 4.5% 4.2% 8.8% 5.6%Minerals, ores and concentrates 7.4% 5.2% 9.6% 7.2%Machinery 4.2% 4.5% 3.3% 4.1%Subtotal 80.7% 75.0% 84.8% 79.9%Remaining commodities 19.3% 25.0% 15.2% 20.2%Total loaded truck movements 100.0% 100.0% 100.0% 100.0%
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4.2 Rail transportation
During 2009, a total of 49.4 million tonnes of freight was moved along Ontario railways, the majorityof which (92%) involved an origin or destination that was outside of the Province (see Table 18). Aswith marine movements, rail shipments experienced a significant decrease during 2009, decliningby 22% from 2008 levels.
Table 18 Ontario rail movements by origin and destination (in thousands of tonnes)
2005 2006 2007 2008 2009 Five YearAverage
Shipments to Ontario from:Eastern Canada 7,050.2 6,967.5 6,710.2 6,053.5 5,098.0 9.7%Western Canada 18,840.8 18,418.5 18,001.0 16,436.6 14,720.6 26.4%U.S. and Mexico 8,703.9 8,840.3 7,809.5 7,293.8 5,535.7 11.7%Total inbound shipments 34,594.9 34,226.3 32,520.7 29,783.9 25,354.3 47.8%
Shipments from Ontario to:Eastern Canada 6,804.0 6,811.6 7,194.5 6,893.4 6,233.0 10.4%Western Canada 7,894.6 7,800.6 7,451.7 8,026.2 6,917.3 11.6%U.S. and Mexico 17,341.8 17,501.4 15,256.5 13,281.2 8,368.3 21.9%Total outbound shipments 32,040.4 32,113.6 29,902.7 28,200.8 21,518.6 43.9%
Shipments within Ontario 7,821.4 5,753.5 5,717.3 5,094.7 2,572.9 8.3%
Total 74,456.7 72,093.4 68,140.7 63,079.4 49,445.8 100.0%
Rail movements demonstrate a certain degree of concentration in that a small number ofcommodities account for the majority of rail movements, with the 15 largest commoditiesaccounting for 72% of total rail movements (see Table 19). While certain of the largestcommodities moved by rail are also moved by ship (e.g. wheat, coal), a number of the commoditiesmoved by rail are not moved in significant numbers by vessels on the Great Lakes (e.g. mixedloads, wood pulp, lumber).
Table 19 Ontario rail movements by commodity
Commodity Percentage of Rail MovementsInbound Outbound Intra-Ontario Total
Mixed loads 20.1% 21.4% 0.1% 19.0%Wheat 19.1% 5.1% 4.8% 11.8%Vehicles and vehicle parts and accessories 3.0% 10.2% 0.9% 6.0%Iron and steel, primary or semi-finished 2.6% 5.8% 21.3% 5.6%Coal 8.4% 0.0% 0.0% 4.0%Other basic chemicals 5.5% 2.2% 2.2% 3.8%Plastic and rubber 3.5% 2.7% 5.5% 3.3%Wood pulp 1.2% 4.2% 3.1% 2.7%Gaseous hydrocarbons 0.8% 4.1% 6.1% 2.7%Nickel ores and concentrates 0.4% 0.0% 28.0% 2.5%
Lumber 1.9% 3.1% 1.6% 2.4%Sulphuric acid 0.2% 4.4% 3.4% 2.3%Metallic waste and scrap 0.5% 4.1% 0.7% 2.1%Fuel oils and crude petroleum 3.3% 0.6% 2.3% 2.0%Other refined petroleum and coal products 1.3% 2.2% 4.3% 1.9%Fifteen largest commodities 71.8% 70.1% 84.3% 72.1%Other commodities 28.2% 29.9% 15.7% 27.9%Total 100.0% 100.0% 100.0% 100.0%
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4.3 Implications for the initiative
1. Based on our review of commercial truck movements in Northeastern Ontario, it would appearthat there are minimal opportunities for the diversion of freight shipments that currently moveby truck to marine. Specifically, we note that a significant percentage of the truck movementsto and from the Algoma District involve routings that are not conducive for marine shipments.
For example, truck shipments within the Algoma District or between the Algoma District andthe remainder of Northeastern Ontario, which account for 41% of all truck movements (seeTable 15), cannot reasonably be expected to be diverted to marine movements. Similarly,movements to Western Canada, Eastern Ontario and portions of the United States that are notimmediately located on the Great Lakes are also not likely candidates for diversion to marineshipments. Furthermore, the types of commodities moved by truck to and from Great Lakesports are generally not consistent with marine transportation. While potential diversionopportunities from truck to marine may exist, we anticipate these would involve relatively smallvolumes at best.
2. We understand (through consultation with rail industry representatives) that the majority of railmovements in Northeastern Ontario consist of shipments along the transcontinental main linesfor CP and CN, with lesser volumes transported along secondary lines including the AlgomaCentral Railway, the Huron Central Railway and the Ontario Northland Railway. Given thenature of these rail movements, the location of secondary rail lines in Northeastern Ontario andthe tendency for CP and CN to maximize rail volumes along their major routes, the current andpotential diversion opportunities from rail to marine would likely be small.
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V Demand Assessment5.1 Basis of analysis
The assessment of potential demand for harbour facil ities in Sault Ste. Marie considers threescenarios:
Low volume Representing the most conservative scenario, the low volume scenario is basedon the existing users of the ESAI harbour facility at current shipping volumes, adjusted forannounced changes in marine shipping volumes due to modal shift or production increases.The low demand scenario does not consider any potential changes to marine shipments thatcan be attributed to (i) contemplated production increases; (ii) potential modal shifts; (iii) newport users; or (iv) increases in marine shipments that are contingent upon changes to theexisting harbour facilities, including expansions to docking, storage and materials handlingcapacities or increases in water depths.
Moderate volume Representing an intermediate scenario, the moderate volume scenarioincludes existing and new users of the ESAI harbour facility at volumes that are between thelow and high demand scenarios. The moderate demand scenario includes increases in marineshipments that are contingent upon infrastructure improvements, the extent of which is lessthan that required under the high demand scenario.
High volume Representing the most aggressive scenario, the high volume scenario reflectsall potential users for the ESAI harbour facility as identified during the consultation stage of thestudy, with the highest potential level of marine shipments contemplated. The high demandscenario inherently assumes that necessary improvements to the existing ESAI harbourfacilities materialize so as to facilitate their use by potential customers. Additionally, the highdemand scenario assumes optimal economic conditions and pricing for a marine routing throughthe ESAI harbour facilities.
The three scenarios are intended to demonstrate the range of sustained marine shipments that
could materialize over the long-term. The assessment does not include marine movements thatwere considered one-time or of limited duration, unless otherwise noted.
5.2 Identification of potential harbour users
The assessment of potential demand is based on consultation with three types of harbour users:
Customer Type Potential Users1. Existing harbour users ESAI (steelmaking commodities)
Tenaris Algoma Tubes Inc. (unfinished and finished steel)Superior Slag Products Inc. (slag)
2.
Companies involved with commodities thatare currently shipped by vessel at otherCanadian Great Lakes ports
Avery Construction Limited (aggregates)Palmer Construction Group Inc. (aggregates)McDougall Energy Inc. (petrochemical products)Morton Salt, Inc. (salt)
3.
Companies with major operations in orplanned for Northern Ontario withcommodities that may be conducive tomarine movements but are not currentlyshipped by vessel to a large scale at otherCanadian Great Lakes ports
Vale (nickel and copper concentrate)Cliffs Natural Resources (chromite concentrate)
The identification of customers within the third category was based on the following approach:
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Information concerning industrial activityin Northeastern Ontario was reviewed toprovide a summary of potential harbourusers (see Figure 12);
The list of potential harbour users was
prioritized based on the perceivedsuitability for marine movements throughSault Ste. Marie. Specifically, industrialoperations were selected for consultationif the potential user was located within150 to 200 kilometres of Sault Ste. Marieand/or there was appropriate connectinginfrastructure between the operations andSault Ste. Marie that did not requiremultiple transfers between modes. Forexample, mineral ores were identified as apotential commodity and Vale and Xstrata
both have mineral processing operationsin Sudbury that rely on in-boundconcentrate. However, while Vale isconnected to Sault Ste. Marie through theHuron Central Railway, Xstrata does nothave a direct rail connection and wouldneed to rely on either truck movements ora truck-rail interchange, both of whichwere identified as cost prohibitive.Accordingly, Vale was included in theconsultation phase while Xstrata wasexcluded.
5.3 Existing harbour users
5.3.1 ESAI
ESAI is the largest user of the harbour facility, with total freight movements of 4.8 million tonnes in2011. We were advised by ESAI that future marine movements would be influenced by thefollowing:
ESAIs parent company has acquired an iron ore pelletizer plant in Minnesota and as such, will
discontinue the use of third party suppliers for iron ore pellets in the short-term. This change iniron ore supply will result in a modal shift, with 100% of ESAIs iron ore pellets transported byvessel (as compared to 49% during 2009 to 2011). This modal shift is expected to increaseESAIs inbound marine shipments by 1.30 million tonnes annually.
ESAI intends to increase the use of barge movements for finished steel products, resulting in
modal shift away from rail transportation. ESAI has announced short-term and long-term targetsfor barge movements, which are expected to increase ESAIs annual outbound marinemovements by 92,000 and 147,000 tonnes, respectively.
ESAI is contemplating increasing its annual steel production from the current level of 2.7 milliontons to approximately 5.0 million annually. This increase in steel production is expected to have
Figure 12 Industrial operations in Northeastern Ontario
Pulp and paper
Metal processing
Forest products
Sawmills were not included in our analysis of
potential harbour users due to their relatively small
size, the current absence of lumber movements
through Great Lakes ports and the distance of
most sawmills from Sault Ste. Marie.
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a significant impact on both inbound and outbound marine movements, with total marinemovements expected to increase by 3.5 million above current levels if production increases to5.0 million tons.
The assessment of ESAIs future marine shipments under the low, medium and high volumescenarios is outlined in Ta