The
Department of Homeland Security, National Protection and Programs Directorate,
Office of Cyber and Infrastructure Analysis (OCIA-NISAC), has released “The Perils of Efficiency: An
Analysis of an Unexpected Closure of the Poe Lock and Its Impact.” We wish to thank the Principal Investigator Craig
S. Gordon, PhD and Supporting Investigator Marilee Orr for this disturbing but truly
important document, and for the editors of Seaway Review and the Lake Carriers
Association for making the report easily accessible. Below is a summary,
derived from the report, which can be found at http://www.lcaships.com/wp-content/uploads/2016/03/OCIA-The-Perils-of-Efficiency-An-Analysis-of-an-Unexpected-Closure-of-the-Poe-Lock-and-Its-Impact1.pdf.
"The Soo Locks, which are owned and operated by the United States Army Corps of Engineers (USACE), consists of four lock.The two primary locks in operation are the Poe Lock, rebuilt in 1968, and the MacArthur Lock, constructed in 1943.The Lakers carrying iron ore use the Poe Lock almost exclusively because the MacArthur Lock is too small to accommodate the larger Lakers; almost 70 percent of the U.S. Laker capacity on the Great Lakes is Poe-restricted, meaning that the Lakers can use only the Poe Lock. Lakers small enough to lock through the MacArthur Lock are referred, herein, as MacArthur-sized. The dependency on the Poe Locks to move the preponderance of the commodities, particularly iron ore, led USACE to call the Poe Lock “the Achilles’ heel of the Great Lakes Navigation System. There is currently no redundancy for the Poe Lock.”34 This lock is the weak link in Great Lakes commerce.
The scenario
closure used in the analysis lasts from March 25– September 25. Overall, about
78 percent of the domestic iron ore capacity is expected to shutter for the
duration of the scenario. Limestone deliveries could continue if only the Poe
Lock closed. Far less limestone is required to move upstream, as the iron
ore-to-limestone ratio is about 9:1. Further, limestone is far less dense than iron
ore and there are more options to deliver limestone to the pelletizing plant.
An extended
closure of the Poe Lock, which OCIA-NISAC assumes to be 6-months, would be
extremely detrimental to the North American automotive industry including
Canada and Mexico. Almost all North American automobile production would cease,
and, in addition to the automotive industry, other industries that depend on steel
including farm, mining, and construction equipment manufacturing, railroad locomotive
and railcar production, and appliances.
According to industry experts, short-term disruptions of a
single steel mill can cause disruptions throughout the North American supply
chain. Firms must scramble to find alternative suppliers and to begin managing
the process, part-by-part, to extend production times for at least some of
their lines. Eventually, keeping the system going becomes impossible and lines
shut down due to the lack of a single component. It could take more than 2
months to resupply the supply chain with enough steel-based product to restart
production from the loss of a single steel mill. Lead times for many automotive
parts are typically 8 – 14 weeks. However, regarding the current scenario, one
industry expert said, "it's all done if all of the steel mills shut
down."
A 6-month closure, from about March 25 to September 25 does not mean
that steel production could begin shortly thereafter. First, blast furnaces,
which presumably have been hot idled or kept warm during the closure, would
have to be re-inspected. Extended hot idling can damage or destroy a blast
furnace, incurring lengthy repairs times and costs well in excess of $100
million each, though processes have improved that could mitigate this risk. A
significant problem with hot-idling a blast furnace is the cooling water. Hot
idling a blast furnace during the winter may lead to the freezing of the
cooling water and damage to the blast furnace. Blast furnaces generally operate
continuously for about 15 years between significant maintenance periods. If a blast
furnace is not going to be operated, it must be kept warm by keeping coking coal heated, but not adding in iron ore,
limestone and enriched oxygen that make steel. Hot idling, the term to denote
this process of keeping the furnace warm is usually not done for periods longer
than a few weeks (see Platts, “Platts Steel Glossary,” at
www.steelbb.com/steelglossary/#term_206, accessed January 17, 2015).
Anything longer than a few weeks is considered, herein, to be an extended
period.
More problematic than re-starting the blast furnace is restarting the
coke batteries. Coke batteries concentrate the carbon from coal to
make coke, which is an essential ingredient in steelmaking. Industry executives
reported that the coke battery must be operated continuously or hot-idled
properly to prevent damage. The coke battery is far more likely than the blast
furnace to become damaged in this unanticipated outage scenario. OCIA-NISAC
analysts believe that the steel mills will not re-commence mill operations
until about mid-December, in order to secure sufficient inventory of iron ore to last through the
normal winter closure of the Soo Locks. Automotive parts manufacturers could
then begin operations in mid-January, but the first cars are not likely to come
off production lines until early April.
The scenario closure would have catastrophic impacts on the regional
and National economy. Economic modeling based on the assumptions described in
the preceding section shows that approximately $1.1 trillion in economic output,
as measured by the Gross Domestic Product (GDP), and over 10.9 million jobs
would be lost in the first year following the disruption. The impacts described
here are more severe than those predicted in prior studies because this
analysis took a comprehensive view of the supply chain and its relationship to
the National economy.
A 6-month closure of the Poe Lock, at the start of the navigation
season, would be expected to halt all automobile production and the sales of
cars manufactured in North America completely for almost 10 months, from about June
1 to April 1. That is, no automobiles would be produced in North America. By
comparison, during the 2009 recession, two of the three major automotive
companies required bailouts from the United States Government when annualized
sales of new automobiles had dropped from the typical 16–18 million units to
about 9 million units.
At the National level, the model predicts that the Poe Lock closure
scenario would add 5.8 percentage points to the unemployment rate, currently at
5.5 percent. This would bring the National unemployment rate under the closure
scenario to 11.3 percent. This would exceed the highest level of National
unemployment recorded during the 2008-2009 recession, which peaked at 10.0
percent in October 2009. Under the Poe Lock closure scenario, exceptionally high
rates of unemployment occur along the Great Lakes and south. Unemployment rates
in Indiana and Michigan would reach or exceed 22 percent and all of the Great
Lakes States, except for Minnesota and New York, have unemployment rates that
would exceed 10 percent.
A recession brought about by an unexpected closure of the Poe Lock
would be categorically different from historical recessions. Recessions are
usually caused by falling aggregate demand, credit contractions, or oil supply shocks,
for which government fiscal or monetary policy can mitigate the length or
severity of the recession. A supply shock as contemplated herein may be
unprecedented. The closest example may be recession following the 1973-1974
Arab Oil Embargo. In that case, however, oil was available in the United
States, but not in sufficient supply to meet demand. The dust bowl in the 1930s
resulted in a lack of arable land in the Midwest, which led to the largest
population migration in the United States.138 In the Poe Lock closure scenario,
there is no plan, policy, or remedy that could restart automobile production.
Government policy would be generally limited to transfer payments to those
individuals directly impacted by the event.
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.” Even if the steel mills could accept iron ore
from rail transportation, congested rail lines and the lack of equipment would
make the use of rail impractical. For 160 years, the steel mills along the
Great Lakes have received their iron ore via Lake Carrier; the mills are
designed to receive iron ore by water and there is logistically no way to
receive iron ore by rail. The Great Lakes steel mills are built with the iron
ore inventory facing the water and the rail lines on the other side of the
mills inland for truck or rail shipment of steel out.
There are not enough trucks, or drivers, in the Nation to move the iron
ore from the mines to the mills. Each One Thousand Footer Lake Carrier carries
approximately 70,000 tons of iron ore, which is equivalent to about 3,000
trucks. The mills use the 70,000 tons about every five days, which means that
600 trucks per day--1 truck every 2.4 minutes--would have to enter a steel
mill, drop its load and leave. To bring trucks to 7 mills would mean that, for
every point on the Interstate Highway System between Minnesota and Indiana,
there would be a truck loaded with iron ore passing every 20 seconds on one
side of the road and one truck returning empty on the other side of the road.
The Interstate Highway System would have to be shut down to all traffic except
for the iron ore trucks and no road maintenance could occur. Finally,
OCIA-NISAC estimates that the cost of moving iron ore by truck is approximately
four times the value of the iron ore itself and would likely be
cost-prohibitive in addition to impractical.
In terms of an impact to the North American economy, it is hard to
conceive of a single asset more consequential than the Poe Lock. As outlined in
the report, 10.9 million jobs in the United States, and possibly upwards of 13 million
jobs in North America, are likely dependent on the functioning of the Poe Lock.
An unprecedented supply shock could affect North America if the closure
scenario were to occur. The United States has historical knowledge of how to
respond to shocks caused by financial crises, oil prices or availability, or
falling aggregate demand. There is no similar guide for responding to a supply
shock that incapacitates a large set of industries.
As documented in this report, the iron mining - integrated steel production
- manufacturing, particularly automobile manufacturing, supply chain, is not only consequential, but
potentially one of the least resilient supply chain in North America. The
relationship between the steel mills and the auto assembly plants is complex.
There is a different steel coil for just about every part of an automobile made
with steel, and collectively, there are reportedly some 1500 different recipes
of steel for the automotive industry. Without the steady stream of iron ore
coming from Lake Superior through the Poe Lock, many or all of these 1500
different steel recipes cannot be made. The inability to make just one recipe
could stop production of a particular automobile; the inability to make a
couple of recipes could stop production for a particular automotive company;
and the inability to make a few recipes could stop production of all North
American automotive production."
