National Protection and Programs Directorate Office of Cyber and Infrastructure Analysis

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2 Overview One of the Nation s most economically vital systems, the iron mining integrated steel production manufacturing supply chain is potentially one of the least resilient to disruption. The Poe Lock at the Soo Locks that connects Lakes Huron and Superior is a single point of failure in this supply chain. An unexpected 6-month closure of the locks would have devastating consequences for industries dependent on this supply chain, particularly the automobile manufacturing industry, and the National economy. 2

3 The Soo Locks Complex Consists Of Five Locks The MacArthur Lock constructed in 1943 too small for the vessels that move 70% of the commodities on the Great Lakes. Whitefish Island Canadian Lock The Poe Lock built in 1968 the only lock large movement of all vessels, carrying iron ore. Closed locks Two locks that are closed. Poe Lock MacArthur Lock A Canadian lock that is only large enough for recreational vessels. 3

4 History The first shipment of iron ore to pass through the Soo Locks was in That first shipment transformed the industrial base of North America. 4

5 Iron Ore/Steel Supply Chain Through The Centuries The route has changed very little from 1897 to today. The center of iron ore mining moved from Michigan to Minnesota. The bulk of the integrated steel mills moved from Lake Erie to Lake Michigan. Each of the 13 one-thousand foot Lakers carries upwards of 70,000 tons of iron ore. The one-thousand foot Lakers that carry the bulk of the iron ore trade can only transit the Poe Lock. Historical map from 1897 (red) and 1907 (gray) Historical map from 1940 Present day map 5

6 The Supply Chain Routes In Use Today 6

7 Why Only By Water? In 1884, about 2.3 million tons of iron ore were shipped from Lake Superior iron ore docks to the Great Lakes steel mills. By 1898, the volume had increased almost sixfold. Vessel rates, which started at about $3 per ton to move iron ore in 1856 dropped 83 percent to $0.50 by During the same period, rail rates decreased, but not nearly by the same degree or same rate. By 1907, iron ore could be shipped from Lake Superior to Lake Erie at one-seventh the cost of shipping iron ore from Lake Erie to Pittsburgh. About half of the integrated steel mills that make automotive quality steel today were built during this period of industrialization. These integrated steel mills, and others built as late as the mid-1960s, were constructed without an ability to receive iron ore by rail because the cost differential between rail and vessel was such that a rail option was not considered necessary. Port Railyard Note the structures and distance between the Port and the Railyard at Burns Harbor steel mill. 7

8 The Quirks Of Iron & Steel: Iron Ore Is Not Iron Ore It s not iron ore, it s taconite. All of the iron ore in the United States was mined during World War II. What is mined today was considered a waste product that contained some iron ore. The iron ore mined in Minnesota and Michigan is not fungible; what is mined and pelletized is geared for a specific blast furnace. The pellets are processed in batch; each blast furnace takes a different size pellet, and pellets are combined with either calcite or dolomite and mixed with other chemicals to make a specific pellet. If a steel mill decides to use a pellet not geared to their blast furnace, they run the risk of damaging it. At the very least, steel mills must source a new supply of coal because the chemistry involved in making steel is so exacting that every aspect is considered to ensure that the final product meets specifications. Ship loading taconite 8

9 The Quirks Of Iron & Steel: Steel Is Not Steel Most of the steel today is made in electric arc furnaces or mini-mills. Mini-mills use scrap steel and electricity to make steel primarily for the construction industry. What they cannot do is make steel for the auto, appliance, construction, farm, and mining equipment, rail car and locomotive industries. Only the integrated steel mills that mix iron ore with limestone and chemicals and blast in oxygen can make high strength, low weight, formable steel. The integrated steel mills are the old steel mills that once dotted the landscape from Pittsburgh to Chicago. Now, there are just over a dozen remaining. Workers at a blast furnace. 9

10 The Quirks Of Iron & Steel: Integrated Steel Steel that comes out of one of the integrated steel mills is not interchangeable with steel made in another integrated steel mill or even on a different line at the same mill. Typically, every car made in North America contains steel from the nine integrated steel mills that make automobile quality steel. Automobile companies will order a particular type of steel processed at a specific rolling facility at a specific mill at a specific time and have it shipped to other automotive tier 1 suppliers to process the steel. To change any part of this process could take up to 1 year. One factor driving this is the automotive paint. Automobile companies do not buy paint because it adheres well to the steel; auto companies buy steel because it adheres well to the paint. Car being painted on assembly line. 10

11 The Quirks Of Iron & Steel: Steel Coils Steel Is Rolled Into Coils, Each Weighing Approximately 30 Tons Every part of a car made with steel comes from a specific steel coil. Combined, there are about 1500 different recipes of steel. The inability to make just one type of steel coil can lead to auto lines shutting down. What this means is that, to produce a car in North America, just about every steel mill that makes automotive quality steel would need to be operating. Steel coils being unloaded at port 11

12 Hypothetical Unanticipated 6 Month Closure Scenario Rapid impact on iron ore mine integrated steel mill automobile manufacturing supply chain Steel production could not re-start right away. Blast furnaces and coke batteries have to be hot idled during closure Can damage or destroy blast furnace potential $100M to repair If during winter, cooling water can freeze, causing further damage Coke batteries even more susceptible to hot-idle damage Time-consuming inspections, and possible repairs, required after extended hot-idling Complicating factor is timing Soo Locks close from January 15 to March 25 annually due to weather, environmental, and maintenance issues Steel mill re-start dependent on sufficient inventory of iron ore to last through the normal winter closure Bottom line: (assumes extended idling of steel mills preferable to a second shutdown from insufficient iron ore inventory during normal winter closure): Automotive parts manufacturers could begin operations four weeks after steel mills restart First cars not likely to come off production lines for another 10 weeks. OCIA analysis suggests a similar restarting date for appliance, construction, farm, mining equipment, and railcar manufacturers 12

13 Hypothetical Closure Scenario Timeline One example of a possible closure scenario MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAR APR Army Corps of Engineers announces that the Poe Lock will not re-open as expected on March 25; rather, due to circumstances, an additional six months is required to re-open the Poe Lock. OCIA estimates that at least 78% of mining capacity will shutter immediately. Great Lakes steel mills declare force majeure and likely close mills about April 15; OCIA estimates 75% of U.S. capacity shuts down with most steel going into the construction, steel center, and tubular markets. SEP DEC Soo Locks re-opens end of September. Blast furnaces and coke batteries require checking to ensure that shutdown has not caused damage leading to further delays. Given the 4 months remaining until the winter closure, much of the initial re-stocking will be directed at building up winter inventory. Steel production is not anticipated to re-start until mid December. MAY Domestic automobile, farm, construction and mining equipment, and appliance operations forced to curtail operations by May 15. APR Automobile production will likely re-commence around early April. 13

14 Auto Industry From January 2000 to today, the U.S. has made, on an annualized basis, about million cars per year. During the first quarter of 2009, during the depths of the recession when two auto manufacturers requested a bailout, production levels had dropped to about 9 million cars on an annualized basis. Under a Poe Lock closure scenario, there would be nine months of auto production at close to a zero annualized rate. Industry perspectives on the OCIA closure scenario: The loss of the integrated mill steel supply for 180 days would be catastrophic to the North American Auto Industry including its tier one suppliers There is no contingency plan, stockpile or off shore sourcing action that could come close to mitigating the situation. [The Firm] does not have long term contingency plans for a disruption in normal steel supply. We have limited ability to purchase small amounts of some types of steel on the open market, but it would be unlikely to support full production of all required parts for even a single product line. Currently there are no contingency plans in place to respond to a disruption of normal steel supplies. 14

15 Unemployment In the United States, 11 million jobs would be lost with a 1.1 trillion dollar decrease in economic activity. Because of the integrated nature of the automotive supply chain, Canada and Mexico are anticipated to lose an additional 2-5 million jobs. Indiana, and Michigan and Ontario, Canada would face unemployment rates well in excess of 20% and Ohio, Kentucky, and Tennessee would exceed 15%. California, Illinois, New York, and Texas would each lose more than 500,000 jobs. Poe Locks Closure Scenario Unemployment Rates 30

16 2009 vs. Scenario 2009 Unemployment - At its peak in October 2009, unemployment was high across the Nation, particularly in California and Nevada in the west, South Dakota and Michigan in the Midwest and north, and Rhode Island in the east. North Dakota had the lowest unemployment rate at 4.2% and Rhode Island had the highest at 15.6%. Poe Lock closure scenario - The closure scenario would result in 11 million people out of work in the United States. Under the Poe Lock closure scenario, exceptionally high rates of unemployment would occur along the Great Lakes and south. Unemployment rates in Indiana and Michigan would reach or exceed 22%. All of the Great Lakes States, except for Minnesota and New York would have unemployment rates that exceed 10% Unemployment Rates Poe Locks Closure Scenario Unemployment Rates 16

17 Alternative Strategies OCIA considered other alternative strategies, all of which were logistically constrained. OCIA did not consider the economic costs of alternative methods of transportation; the only concern was whether steel could be imported or produced to make an automobile, irrespective of cost. The following are a list of alternative strategies to using Soo Locks: Moving Iron Ore By Rail - Infrastructure Moving Iron Ore By Rail - Congestion Moving Iron Ore By Truck Shipping Through The Port Of Escanaba Lightering Importing Foreign Iron Ore Importing Foreign Steel Producing Aluminum Cars Increasing Stockpiles 17

18 Supply Chain Alternative: Moving Iron Ore By Rail - Infrastructure Moving iron ore from the mines to the mills is not a viable mitigation; as one industry executive put it, it s not even in the realm of the possible; it s just not going to happen. There are an insufficient number of locomotives and rail cars to move the iron ore, even if the steel mills could receive iron ore by rail. Somewhere between rail- cars a day would be needed to move the iron ore; this number of railcars and the locomotives and train crews needed to operate the trains are not believed to exist. Industry executives reported that the current supply of rail cars that could carry iron ore would perhaps be best described as zero to extremely limited. = ONE LAKER has the same capacity as approximately SEVEN 100-car freight trains. 18

19 Supply Chain Alternative: Moving Iron Ore By Rail - Congestion The rail corridor between Minnesota and Chicago is so congested that Burlington Northern has to report to the Secretary of the Department of Transportation weekly on what they are doing to alleviate the congestion. That is with the current traffic; to move iron ore would result in the tripling of traffic between Duluth, MN and Milwaukee, WI, which is already some of the busiest tracks in North America. As it is, Chicago is so congested that, to get across the city of Chicago takes the same amount of time as it does to go from Chicago two-thirds the way to Los Angeles. The New York Times reported, and industry officials confirmed, that some trains go across Chicago at one-quarter the speed of an electric wheelchair. iately arbor. kes will Solution to congested rails may be years away Rail congestion in the news 19

20 Supply Chain Alternative: Moving Iron Ore By Truck Insufficient numbers of trucks and drivers exist in North America to move the iron ore from the mines to the mills. Based on the iron ore needed to reach the mills, a truck would have to enter a mill every 2.4 minutes, drop its load, and leave. To bring that many trucks laden with iron ore to the nine mills would mean that, if one stood at any point on the Interstate Highway System between Minnesota and Indiana, every 20 seconds a truck loaded with iron ore would pass on one side of the road and another truck would return empty on the other side. The Interstate Highway System would have to be shut down to all traffic except for the iron ore trucks, and no opportunity would exist for road maintenance. Truck carrying iron ore. 20

21 Achilles Heel The U.S. Army Corps of Engineers called the Poe Lock, the Achilles heel of the Great Lakes Navigation System. OCIA analysis suggests that the Poe Lock is more aptly described as the Achilles heel of the North American industrial economy. An unanticipated closure of the Poe Lock, the only lock large enough at the Soo Locks to allow passage of the Lakers carrying iron ore, would be catastrophic for the Nation. A Poe Lock Closure Would Have Widespread Impact The Soo Locks is not a Michigan problem, or a Michigan-Ontario problem, or a regional problem; the impacts would be felt throughout Canada, Mexico, and the United States, and given that the supply chains of the impacted industries are international, there could be global ramifications. A Loss of Gross Domestic Product Attributable to the Scenario (in billions) 21

22 Potential Mitigation Strategies Construct a second Poe-sized lock combining Sabin and Davis Locks. Develop an iron ore strategic stockpile that could hold a multi-month supply. Expand the Port of Escanaba and increase rail capacity so that it could move 22

23 For more information: 23