McAllister Yard, NYC.

McAllister Yard, NYC.
McAllister Yard, NYC. Courtesy, Capt. Paul Brown

Tuesday, March 15, 2016

Troubling DHS Analysis of an Unexpected Closure of the Poe Lock and Its Impact

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."

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