Professional Documents
Culture Documents
kpmg.ca
Table of Contents
Executive Summary
II
kpmg
ii
kpmg
Executive Summary
For major steel producing centres such as Sault Ste. Marie, marine transportation often represents
a critical component of supply chain management given the inherent cost advantages to marine
movements 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 by
Essar Steel Algoma Inc. (ESAI), located adjacent to ESAIs steel production facilities.
Third party
ESAI
5.0
4.0
3.0
2.0
1.0
0.0
2009
2010
2011
The expansion of the Sault Ste. Marie harbour complex has been a topic of interest within the
community 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 the
development of a public access port that would meet the needs of multiple regional users. This
study, commissioned by the Citys Transportation Infrastructure Steering Committee (the
Committee), involves the development of a market assessment leading to a business case for a
regional harbour capable of handling current and future commercial transportation movements in
the region.
kpmg
Through the competitive procurement process, the Committee selected KPMG LLP (KPMG) as
master consultant, with RGF Consultants, Todhunter Associates Inc. and Mike Barker Consulting
Ltd. 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 view
of 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 of
the harbour complex to accommodate existing marine movements is challenged by a
combination of deteriorating dock facilities, limited storage areas and insufficient water depths
to accommodate larger vessels. As a result, ESAI is limited in its ability to reduce its per unit
shipping costs (which would decrease if larger vessels were used) and is challenged to
economically receive ocean-going vessels.
Challenged to meet its existing transportation needs, ESAI has been required to implement
strategies that, while providing a temporary expansion in capacity, are neither efficient nor
representative of a longer-term solution. For example, ESAI has been required to establish
temporary commodity stockpiles in areas removed from the main docking facilities in order to
accommodate inbound marine movements.
Additionally, because the harbour complex is owned and controlled by ESAI, the capacity
pressures 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 from
the 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 to
significantly increase
Estimating potential future demand for the harbour facility represented a major element of the
study as it ultimately forms the basis of determining whether a harbour expansion is
warranted. The assessment of potential future demand for marine infrastructure in Sault Ste.
Marie considered the needs of:
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.
kpmg
16.0
Thirdparty
ESAI
12.0
8.0
4.0
0.0
Current
Low
Moderate
High
To a large extent, the interest expressed by third party users reflects the cost competitiveness
of marine transportation and the perceived advantages of placing goods on the water as
soon as possible.
While the exact timing of these increases in marine movements is difficult to precisely
forecast, 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 its
iron ore pellet shipments (as opposed to the current mix of rail and marine movements) within
five 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 for
third party users of the ESAI harbour facility increased marine shipments by both ESAI and
third 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 to
maximize the use of the existing infrastructure, with the potential for displacement of third
party users from the harbour complex, including the complete displacement of all third party
users in order to meet the long-term marine movement forecasts for ESAI. Cut-off from the
ESAI 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;
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 adverse
economic impact to the community exists higher transportation costs and other logistics
factors will impact the overall competitiveness of Sault Ste. Marie for users of marine
transportation, potentially resulting in the loss of future investment or the curtailment of
existing business and industrial activity.
kpmg
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 transportation
infrastructure is needed for Sault Ste. Marie, including securing a public access port for third
party 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 the
requirements of third party users with those of ESAI.
The demand analysis indicates the need for an investment in marine transportation
infrastructure of approximately $116 million to support the needs of both ESAI and third party
users, 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 and
Provincial levels of government to finance a portion of the costs, recognizing that contributions
from private sector participants will necessarily be required.
We understand that short-sea marine transportation projects are eligible for funding from the
Federal 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 would
translate into $47 million if the entire amount of the project costs were considered eligible for
funding.
Additionally, the Building Canada Fund, which cost shares projects with the Provincial
government, specifically mentions short-sea shipping as one of six priorities under the theme
of a stronger economy. A review of the criteria for the Building Canada Fund indicates that
the proposed harbour expansion, with its focus on increasing marine transportation and
diverting shipments from other modes to marine movements, appears to satisfy the short-sea
shipping eligibility criteria of the fund. Additionally, while the Building Canada Fund has
historically focused primarily on public sector projects, it does allow for funding of private
sector 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 its
commitment to deliver a new long-term plan for public infrastructure, the details of which have
yet to be announced.
In addition to funding for infrastructure investments, implementation-related activities could be
funded through organizations such as the Northern Ontario Heritage Fund Corporation and
Industry Canada FedNor.
It is important to recognize that securing senior government funding for the harbour expansion
will likely be influenced by the senior government decision-making process based on program
guidelines as well as political considerations. Notwithstanding the consistency of the harbour
expansion project with the eligibility criteria of both the Gateways and Border Crossings Fund
and 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 new
programs and criteria so that they can be support this initiative.
kpmg
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 increasing
demand for marine shipments combined with capacity limitations validates the communitys
interest 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 of
the need for an expanded harbour facility in the community.
The case for an expanded harbour facility is further supported by the economic and
employment benefits that would be generated by the project - $262 million in economic
activity generated by the infrastructure investment in the harbour, supporting just under 1,400
person-years of employment. The operations of the public access port are also expected to
generate $5 million of economic activity under the moderate volume scenario, supporting a
total of 17 direct, indirect and induced employment positions. Added to this economic
contribution is the secondary benefit that results from supporting existing and new industrial
activity in Sault Ste. Marie and the surrounding region. Expanded harbour facilities will support
potential future production capacity increases at Tenaris and ESAI, which would represent a
major contribution to the economy of Northern Ontario. For example, we understand that ESAI
currently generates approximately $1 billion in revenues from its Sault Ste. Marie operations
and is considering increasing production from the current level of 2.7 million tons annually to
as much as 4 million tons per year. This capacity expansion could result in as much as $300
million in incremental revenues for ESAI, which would in turn:
Support 1,800 employment positions as a result of the direct, indirect and induced
economic impacts.
kpmg
Concluding comments
An analysis of the potential demand from industrial users, the economic and other benefits of a
successful implementation and consideration of the implications of not proceeding supports the
Committees interest in pursuing an expanded harbour complex in Sault Ste. Marie.
It is important to emphasize, however, that the harbour expansion project represents a significant
undertaking 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 the
harbour complex. Notwithstanding these risks, however, it is evident that the status quo will not
continue 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 time
potentially constraining ESAIs ability to expand its operations and maximize its use of marine
transportation.
kpmg
1.1
The City of Sault Ste. Marie (the City) marks its centennial as a city in 2012, although the
communitys origins date back to the late 1880s. For most of its history, steelmaking has been
the major economic activity in the City, with Essar Steel Algoma Inc. (ESAI) representing the
largest employer in the community.
Steel production is a commodity-intensive activity requiring large inputs of raw materials such as
iron ore, coal and coke. The supply chain for ESAI relies significantly on marine movements for
importing raw materials and, to a lesser extent, shipping finished products and by-products to
customers and as such, the area adjacent to ESAIs production facilities (see Figure 1) includes a
number 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 through
ESAIs harbour facilities, with 0.6 million tonnes of by-products and finished steel exported by
vessel from the facilities.
While the ESAI accounts for the majority of marine movements through its harbour facilities, other
local businesses will utilize the harbour for both inbound and outbound movements, with thirdparty (i.e. non-ESAI) inbound and outbound freight movements during 2011 each amounting to 0.6
million tonnes.
In addition to ESAIs harbour facilities, a second commercial harbour (see Figure 1) is also in
operation in the City. Purvis Marine Limited (PML) currently operates the former government
dock, which was divested by Transport Canada to PML in the late 1990s. The PML harbour is
primarily used for inbound fuel shipments, with approximately 0.30 million tonnes of fuel imported
annually.
Figure 1 Sault Ste. Marie harbour facilities
kpmg
For a number of years, the prospect of expanding harbour facilities in Sault Ste. Marie has been
discussed by both ESAI, previous owners of the steel-making facility and community groups. As
discussed later in this report, ESAIs interest in expanding the current harbour facilities is
motivated by the expectation of increased inbound and outbound volumes as a result of
production 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 Sault
Ste. Marie as an investment destination and providing for economic growth and diversification. In
support 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 of
the existing facilities.
A port expansion study was completed in January 2009 that identified enhancements to the
existing ESAI harbour facilities and associated capital costs.
The January 2009 port expansion study formed the basis for a funding application by ESAI to PPP
Canada 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 by
PPP Canada that this funding application lacked a public sector component and did not propose a
strong competitive procurement process, which ultimately lead to the application not being
approved by PPP Canada.
In response to the decision by PPP Canada, the City and ESAI have commissioned an additional
study to develop a business analysis for the proposed harbour expansion that will support future
applications for senior government assistance.
1.2
Key deliverables
In October 2011, the City issued a request for proposal document for the development of a
market 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 our
report where they are addressed.
kpmg
Key Outcomes
Report Section
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 as
a whole, incorporating both new and traditional economic initiatives.
Chapter V
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 served
by the harbour
Chapter V
Identification of key decision making considerations for marine movements through the
proposed harbour
Chapter V
Chapter V
Chapter V
Chapter VIII
Chapter VI
kpmg
Key Outcomes
Report Section
Chapter VIII
Chapter VIII
Chapter VIII
Chapter VIII
Chapter X
Commentary on the potential opportunity costs associated with not proceeding with
the harbour project
Chapter X
Chapter X
Chapter X
Chapter IX
Identifying issues arising from the preliminary application to PPP Canada and
developing courses of action to address these areas
Chapter X
10
kpmg
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 local and regional users;
ii.
Assess interconnection and linkages with other transportation assets in Northeastern Ontario and the level of support that would be
provided by the expanded harbour;
iii.
Identify the potential benefits arising from a harbour expansion or conversely, the costs of not proceeding; and
iv.
Identify and develop strategies for potential Aboriginal interests, assess environmental management needs and port management.
The detailed worksteps associated with each of these components as well as the corresponding section of this report that outline the results of
our research are summarized in Table 2 below.
Table 2 - Study workplan
Phase
Demonstrate the current and
future demand for an
expanded harbour facility,
based on the needs of local
and regional users
Worksteps
1. Review and summarize available data concerning freight movements to and from
Report Section
Chapter IV
2. Review and summarize data relating to existing freight movements through Great
Chapter III
Lakes 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 current
Chapter II
11
Previously commissioned
studies are referred to in our
report
kpmg
Worksteps
5. Conduct interviews with existing users of the harbour to ascertain (i) historical freight
movements, 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 obstacles
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
8. Identification of the infrastructure and other requirements associated with the forecast
scenarios, 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 waterfront
areas that could support the proposed harbour development
12
Report Section
Chapter V
Section 5.3
Chapter V
Section 5.4
Section 5.5
Chapter VII
Section 7.2
Chapter VI
Section 6.3
An inspection of the ESAI
harbour facility was conducted
on February 28, 2012.
kpmg
Worksteps
10. For each freight movement forecast scenario, assess the potential utilization of other
transportation infrastructure and comment on potential constraints and benefits.
Report Section
Chapter VIII
Section 8.2
11. Develop financial forecasts for each freight movement forecast scenario that considers
Chapter VII
12. Quantify the direct, indirect and induced economic and employment impacts
associated with the financial forecasts based on input-output multipliers provided by
Statistics Canada.
13. Assess the anticipated environmental benefits associated with the harbour for each
freight 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 of
congruence with government programs and priorities.
13
Chapter VIII
Section 8.1
Chapter VIII
Section 8.2
Chapter X
Section 10.1, 10.2
kpmg
Worksteps
15. Identify traditional Native land use in the Sault Ste. Marie area and First Nations that
could potentially be impacted by the harbour project.
Report Section
Chapter X
Section 10.4
16. Review and summarize First Nation and Aboriginal consultation requirements based on
both minimum standards and best practices.
17. Meet with affected First Nations (as identified) to ascertain their initial perspectives on
the 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. Identify
any environmental issues or concerns
Chapter X
Section 10.3
19. Identify and evaluate potential governance models for the proposed harbour facility.
Chapter IX
Chapter X
requirements and timing and aligns with the requirements of potential funding
agencies.
14
kpmg
1.4
Restrictions
This report is based on information and documentation that was made available to KPMG at the
date of this report. KPMG has not audited nor otherwise attempted to independently verify the
information provided unless otherwise indicated. Should additional information be provided to
KPMG 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 in
connection with the implementation of advice and recommendations as provided by KPMG during
the course of this engagement shall be the responsibility of, and made by, the City, ESAI or other
parties.
This report includes or makes reference to future oriented financial information. Readers are
cautioned 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 the
variations may be material.
KPMGs role in this engagement has been to estimate future events based on information available
to it at the time of our report. As a result, the comments in this report should be viewed in the
context of being estimates based on available information, which may or may not be influenced by
unforeseen or uncontrollable events. KPMG cautions the reader that the financial performance of an
expanded harbour complex can vary significantly from the projections outlined in this report due to
economic, technological or regulatory changes, variances in capital costs and funding levels and
future decisions by customers, transportation companies, local municipalities and other government
agencies. Accordingly, KPMG will assume no responsibility or liability for any losses, damages or
expenses 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 or
opinion.
1.5
KPMG has no present or contemplated interest in the City or ESAI nor are we an insider or
associate 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
In connection with this engagement, KPMG has been provided with information that has been
deemed by the provider to be non-public, confidential, commercially sensitive and/or proprietary in
nature. In light of these factors, we have limited the disclosure of information in this report to a
level that is considered appropriate. In addition, we have provided excerpts of our report to the
selected parties to confirm the appropriateness of the level of disclosure.
15
kpmg
II
2.1
ESAIs harbour facility is located adjacent to its main production complex and is situated on the
western end of the Soo Locks. The Essar harbour facility is comprised of nine different docks that
are used for specific commodities (see Figure 2), as well as storage areas for inbound and outbound
commodities.
Figure 2 Overview of the ESAI harbour facility
5
6
4
3
7
2
9
Dock
1.
2.
3.
4.
5.
6.
7.
8.
9.
Steel dock
Bonehead dock
Iron ore dock
Iron-making stone dock
Coal dock
Commercial dock
Southwest slip
Sawmill Bay
Export dock
16
kpmg
The physical condition of individual docks varies considerably, with some docks in good to very
good condition while others are in need of significant repair and rehabilitation (see Table 3). Water
depths also vary by dock, ranging from 19 ft (5.8 m) at Sawmill Bay (No. 8) to 30 ft (9.1 m) at the
Steel 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
1.
2.
3.
4.
5.
6.
7.
Steel dock
Bonehead dock
Iron ore dock
Iron-making stone dock
Coal dock
Commercial dock
Southwest slip
8.
Sawmill Bay
9.
Export dock
2.1.1
Physical Condition
Good
Good but minor settlement and movement as
well as undermining of foundations noted
Extensive deterioration, including partial collapse
due to pile failure, leading to load restrictions.
Significant rehabilitation required.
Extensive deterioration, including collapse of dock
structure. Significant rehabilitation required.
Very good
Water Depth
From
To
25 ft
30 ft
(9.1 m)
(7.6 m)
22 ft
27 ft
(8.2 m)
(6.7 m)
23 ft
(7.0 m)
25 ft
(7.6 m)
19 ft
(5.8 m)
28 ft
(8.5 m)
24 ft
(7.4 m)
30 ft
(9.1 m)
During 2011, ESAI moved approximately 4.2 million tonnes of commodities into Sault Ste. Marie
through its harbour facilities, with an additional 0.6 million tonnes of outbound commodities moved
through its harbour facility (see Table 4). Inbound freight movements were 11% higher than 2010
levels, which we understand reflects the continuing improvement in the overall performance of the
steel industry.
Table 4 Inbound and outbound ESAI marine movements (in tonnes)
Commodity
Inbound
Iron ore pellets
Coal
Limestone
Coke
Scrap steel
Total ESAI inbound
Outbound
Steel coil and slabs
Tar
Other by-products
Total ESAI outbound
Total ESAI movements
2009
2010
2011
1,795,265
1,197,912
332,155
123,198
26,762
3,475,292
2,024,214
1,453,723
275,457
18,198
28,123
3,799,715
2,504,612
1,228,891
298,784
134,126
44,452
4,210,865
2,108,030
1,293,509
302,132
91,841
33,112
3,828,624
48.5%
29.8%
7.0%
2.1%
0.8%
88.2%
288,044
42,904
124,403
455,351
308,976
42,073
191,338
542,387
251,476
42,552
252,058
546,086
282,832
42,510
189,266
514,608
6.5%
1.0%
4.3%
11.8%
3,930,643
4,342,102
4,756,951
4,343,232
100.0%
17
kpmg
The majority of ESAIs marine movements involve iron ore pellets and coal, which accounted for
49% and 30% of all marine movements (inbound and outbound), respectively. The significance of
these 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 its
iron 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)
Iron ore
Coal
Limestone
Coke
Inbound movements
Scrap steel
Steel coil and slab
Outbound movements
Tar
Other byproducts
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
In addition to marine movements undertaken by ESAI, a limited number of third party users have
also moved commodities through the Export dock, specifically tube rounds for Tenaris (inbound) and
slag shipments by Superior Slag and Great Lakes Slag (outbound). As noted in Table 5, while third
party 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 approximately
half of all outbound movements from the ESAI harbour facilities.
Table 5 ESAI and third party marine movements (in tonnes)
Commodity
2009
2010
2011
Inbound
ESAI
Third party users
Total inbound
3,475,292
3,475,292
3,799,715
162,619
3,962,334
4,210,865
184,231
4,395,096
3,828,624
115,617
3,944,241
76.7%
2.3%
79.0%
Outbound
ESAI
Third party users
Total outbound
456,216
455,351
1,037,150
543,438
542,387
1,161,117
598,347
546,086
999,903
532,667
514,608
1,032,724
10.7%
10.3%
21.0%
Total movements
4,386,859
5,048,159
5,539,529
4,991,516
100.0%
18
kpmg
2.1.2
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 load
and 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
1.
2.
3.
4.
5.
6.
Steel dock
Bonehead dock
Iron ore dock
Iron-making stone dock
Coal dock
Commercial dock
7.
Southwest slip
8.
9.
Sawmill Bay
Export dock
Commodity
Vessel Calls
Total
Vessel Days
40
12
152
9
93
22
18
34
1
n.a.
103
30
12
40
2
47
5
72
85
1
n.a.
302
Average
Length of Call
18 hours
24 hours
6 hours
5 hours
12 hours
5 hours
96 hours
60 hours
24 hours
n.a.
70 hours
484
596
30 hours
The size and draft of vessels using the ESAI harbour facility will vary based on the type of
commodity involved, with:
self-unloading bulk carriers used for iron ore, coal, coke, limestone, by-products and slag (third
party) shipments;
ocean-going vessels capable of transiting the St. Lawrence Seaway (salties) used primarily for
the movement of steel products into Sault Ste. Marie (third party). In some cases, these
vessels have also been used by ESAI to transport coke and finished steel.
ESAI formerly used Seaway Marine Transport, which provided bulk carriers with capacities of
22,000 to 24,000 tons (20,000 to 21,800 tonnes) but has recently changed to Lower Lakes Towing
which 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 20,000
tonnes.
19
kpmg
2.1.3
Through discussions with representatives of ESAI and a review of information obtained during the
course of the study, we understand that there are a number of challenges and constraints
associated 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 ESAI
harbour facility (see Figure 4). With a maximum depth of 23 6 (7.2 m), ESAI is unable to utilize
larger vessels, including ships with drafts equal to the maximum seaway depth of 26 6 (8.1
m). As a result, ESAI is limited in its ability to reduce its per unit shipping costs (which would
decrease if larger vessels were used) and is challenged to economically receive ocean-going
vessels.
Figure 4 - Vidal Shoals location and maximum water depths
25
27
30
24
Vidal Shoals
23 6
30
Vessels destined for ESAI docks (other than export docks) are required
to proceed past the harbour facility and approach from the west
2. The existing dockside storage space is limited, requiring ESAI to move inventory of certain
commodities (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 space
has 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 service
harbour users, both through the rearrangement of the existing site and the use of vacant land
located adjacent to the harbour area.
20
kpmg
3. The Export dock (No. 9) is currently approaching its maximum capacity, with vessels present at
dock 302 days per year. The capacity pressures associated with the Export dock reflect laycan
commitments 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 loading
and unloading rates associated with those commodities moved through the Export dock (see
Figure 5).
Figure 5 Loading and unloading rates (tonnes per hour) for selected commodities
Iron ore (unloading)
Coal (unloading)
Limestone (unloading)
Coke (unloading)
Tube rounds (unloading)
Byproducts (loading)
Slag (loading)
-
1,000
2,000
3,000
4,000
5,000
To the extent that production increases materialize for ESAI, it is likely that the volume of
freight movements of by-products would increase as well, with the potential for displacement
of 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, marine
movements originating from or destined to ports east of the Soo Locks are subject to seasonal
closure in winter months. Historically, the Soo Locks cease operations on January 15, with the
locks reopening March 25, resulting in an operating season of 297 days. However, the 2010
operating 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 require
consistent deliveries of commodities. ESAI has compensated for the seasonal nature of its
marine shipments through a combination of (i) stockpiling commodities in advance of the
cessation 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 we
understand this results in a high per unit transportation cost due to the short-term nature of the
arrangement.
21
kpmg
2.2
The PML harbour facility is a former public dock that was administered by Transport Canada but
divested to PML in May 1998. Located to the east of the Soo locks, the PML harbour consists of a
150 m (485 foot) pier with a perpendicular 95 m (310 foot) dock and undeveloped land adjacent to
the 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
The PML facility is primarily involved in the inbound movement of petrochemical products, which
are 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 300
million litres of petrochemical projects are received from Sarnia, Ontario, with 15 to 20 vessel calls
per year. We understand that both the historical and anticipated future petrochemical shipments
are consistent with this level.
In addition to petrochemical movements, the PML facility will occasionally receive equipment and
other shipments that are too large to cross the International Bridge and are loaded on barge in
Michigan. We understand that these shipments have typically been sporadic and do not constitute
significant 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 harbour
facility). 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.
22
kpmg
2.3
Based on our analysis of the existing harbour facilities in Sault Ste. Marie, we make the following
comments and observations:
1. The current capacity constraints experienced at the Export Dock reflect the potential risk of
ESAI 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 on
expanding the Sault Ste. Marie harbour complex to the benefit of ESAI and other regional users.
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 of
existing freight movements, capacity for additional expansion and proximity to ESAI and other
customers. While the PML harbour facility is involved in freight movements, certain factors,
most notably the limited available footprint for ancillary services, mitigate the potential
expansion opportunities for the PML harbour facility.
23
kpmg
Meldrum Bay
Clarkson
Goderich
Sarnia
Hamilton
Courtright
Nanticoke
Windsor
3.1
During the period 2005 to 2009, a total of 349 million tonnes of freight was transported by vessels
to 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 to
2008, total freight movements in 2009 decreased to just over 55 million tonnes due to economic
conditions. 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 to
2009, with the ten largest Canadian ports accounting for 82% of all marine movements (see Table
7).
24
kpmg
Table 7 Summary of Great Lakes marine movements by Canadian port (in thousands of tonnes)
Port
Nanticoke
Hamilton
Thunder Bay
Sault Ste. Marie
Windsor
Five largest ports
Goderich
Meldrum Bay
Sarnia
Clarkson
Courtright
Ten largest ports
Remaining ports
Total
2005
2006
2007
2008
2009
14,139.4
12,195.3
8,125.0
5,781.2
5,151.3
45,392.2
4,695.9
4,546.1
3,271.9
2,869.7
3,089.2
63,865.0
14,454.3
78,319.3
13,863.8
12,642.6
8,331.2
5,748.1
5,517.8
46,103.5
4,455.7
4,593.7
4,046.6
3,072.4
3,221.0
65,492.9
14,329.7
79,822.6
13,038.2
11,531.1
8,484.6
5,002.8
4,850.2
42,906.9
3,967.4
3,440.8
3,920.4
2,963.3
2,534.1
59,732.9
13,919.4
73,652.3
14,147.7
10,824.7
7,901.7
5,829.5
4,619.8
43,323.4
4,995.8
3,923.0
3,598.9
3,175.6
2,633.0
61,649.7
12,512.7
74,162.4
5,777.5
8,215.7
7,216.3
4,515.5
4,705.6
30,430.6
5,563.8
2,648.4
3,442.2
2,564.1
1,484.9
46,134.0
10,633.8
56,767.8
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 (see
Figure 8). However, significant variations exist at the individual port level, with some Canadian
ports heavily involved with outbound movements while others are predominantly involved with
inbound movements. For example, outbound shipments represent 100% of freight movements for
Meldrum Bay and 92% of freight movements for Thunder Bay while inbound shipments account for
100% 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)
90
Outbound
80
Inbound
Total
70
60
50
40
30
20
10
2005
2006
2007
25
2008
2009
kpmg
In addition to being heavily concentrated from a port perspective, Canadian Great Lake marine
movements are also dominated in terms of commodities. During the period 2005 to 2009, seven
individual commodities accounted for 82% of all marine movements to and from Canadian Great
Lake ports (see Figure 9).
Figure 9 Average annual marine movements by commodity (2005 to 2009)
Iron ore
9.9 million tonnes
14.2%
Coal
15.8 million tonnes
22.7%
Salt
8.6 million tonnes
12.3%
Aggregates
7.2 million tonnes
10.3%
Other commodities
12.5 million tonnes
17.9%
Cement
3.4 million tonnes
4.9%
Wheat
5.4 million tonnes
7.7%
Limestone
7.0 million tonnes
10.0%
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 freight
movements, however, are international in nature, with 52% of shipments involving a U.S. Great
Lakes port and 6% of shipments involving a port located in another international region. Inbound
freight movements to Canadian ports tend to have a higher percentage of international port pairings
than outbound freight movements, with 67% of inbound movements and 45% of outbound
movements 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
Other Canadian Great Lakes ports
Other Canadian ports
Total domestic movements
Inbound
Outbound
Percentage of Total
Inbound
Outbound
Total
21.3%
31.0%
25.2%
11.5%
23.7%
16.5%
32.8%
54.7%
41.7%
44,004
23,839
67,843
44,038
33,616
77,654
129,358
9,753
139,111
53,483
10,818
64,301
62.5%
4.7%
67.2%
37.7%
7.6%
45.3%
52.4%
5.9%
58.3%
Total movements
206,954
141,955
100.0%
100.0%
100.0%
26
kpmg
3.2
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 (twice
that moved through Canadian Great Lakes ports). Consistent with the trend in Canadian marine
movements, 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, with
the ten largest ports (out of 72 that reported freight movements from 2007 to 2009) accounting for
91% 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)
Chicago
20.0 million tonnes
(13.3%)
Duluth-Superior
36.9 million tonnes
(24.4%)
Remaining ports
14.3 million tonnes
(9.5%)
Ashtabula
13.3 million tonnes
(8.8%)
Indiana Harbor
11.7 million tonnes
(7.7%)
Next five
largest ports
43.8 million tonnes
(29.0%)
Detroit
11.1 million tonnes
(7.3%)
In addition to being heavily concentrated from a port perspective, marine movements to and from
U.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 Canadian
shipments, with six commodities accounting for 91% of U.S. Great Lakes marine movements (as
compared to 77% for Canadian marine movements).
Table 9 U.S. Great Lakes marine movements by commodity (2005 to 2009 average)
Commodity
Iron ore
Coal
Limestone
Aggregates
Cement
Wheat
Salt
Subtotal
All other commodities
Total
27
kpmg
The majority of shipments to and from U.S. Great Lakes ports involve another U.S. port (either on
the Great Lakes or elsewhere in the U.S.). While international freight movements accounted for
approximately 35% of U.S. Great Lakes marine movements, the majority of these shipments were
to 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
98,534.4
98,534.4
64.4%
64.4%
Canadian ports
Other international ports
Total international movements
49,876.6
4,479.6
54,356.2
32.7%
2.9%
35.6%
152,890.6
100.0%
Total movements
3.3
Connecting Lake Superior with the lower Great Lakes via the St. Marys River, the Soo Locks are
comprised of five locks (four U.S., one Canadian), although only two locks are used for most, if not
all, commercial vessel movements through the locks (see Table 11).
Table 11 Overview of the Soo Locks
Lock
MacArthur
Poe
Davis
Sabin
Sault Ste. Marie canal
Jurisdiction
U.S.
U.S.
U.S.
U.S.
Canada
Construction
Date
1943
1968
1914
1919
1895
Passages
(2010)
5,685
4,322
8
None
n.a.
Current Status
Active
Active
Occasional use only
Permanently closed in 2010
Recreational use only
The Soo Locks operate on a seasonal basis, with the shipping season typically ending on January 15
and reopening on March 25, resulting in a 297 day season. However, the 2010 operating season
was 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 relatively
consistent on a monthly basis, ranging from 7.5 million to 8.5 million tonnes per month (see Figure
11).
Figure 11 Monthly cargo movements through Soo Locks, in millions of tonnes (2005 to 2010
shipping seasons)
10.0
8.0
6.0
4.0
2.0
-
Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec
2005
2006
2007
28
2008
2009
2010
kpmg
Consistent with the trend in Great Lakes marine movements, commodity movements through the
Soo Locks decreased significantly during the 2009 shipping season, with total shipments amounting
to 48.4 million tonnes in 2009 compared to 71.2 million tonnes in 2008 and 67.6 million tonnes in
2010. Excluding 2009, an average of 72.4 million tonnes passes through the Soo Locks on an
annual basis.
From a commodities perspective, shipments passing through the Soo Locks reflect the Great Lakes
marine movements in general in that a small number of commodities account for a significant
percentage of all shipments. As noted in Table 12, four commodities (iron ore, coal, wheat and
limestone) represent 91% of all shipments through the Soo Locks. A sizeable percentage of these
commodities originate from Lake Superior ports (Duluth, Thunder Bay and Two Harbors) and as
such, 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
Iron ore
Coal
Wheat
Limestone
Subtotal
Remaining commodities
Total
Percentage of total
3.4
Westbound
Eastbound
33.4
1,951.1
8.6
3,701.0
5,694.1
1,509.6
7,203.7
10.5%
Total
35,405.6
16,107.4
5,174.6
56,687.6
4,483.1
61,170.7
89.5%
35,439.0
18,058.5
5,183.2
3,701.0
62,381.7
5,992.7
68,374.4
100.0%
Percentage
of Total
51.8%
26.4%
7.6%
5.4%
91.2%
8.8%
100.0%
1. To the extent that demand exists for a public access port in Sault Ste. Marie, potential
customers will likely be limited to those involved in the movement of bulk commodities. As
noted in our analysis, the vast majority of marine movements through Great Lakes ports (both
Canadian and U.S.) involve iron ore, coal, limestone and aggregates. We also note that
commodities such as forest products, machinery and vehicles represent a very small
percentage of Great Lakes marine shipments (see Table 13) and as such, will likely not be
reflected 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 Port
Movements
12.8
0.5
6.0
29
U.S. Port
Movements
73.5
25.4
0.9
72.6
Total
73.5
38.2
1.4
78.6
kpmg
2. Given the dominance of eastbound shipments through the Soo Locks, there appears to be
limited potential to divert marine movements from other ports (both originating and destination
ports) to a public access port located in Sault Ste. Marie. Specifically, the majority of shipments
that pass by Sault Ste. Marie appear to originate from Lake Superior and terminate elsewhere in
the Great Lakes system. Diverting these movements to a public access port in Sault Ste. Marie
would 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 then
transported by rail or truck to their destination.
We do not consider these to represent financially viable options and as such, consider the
likelihood of diversion to be low.
3. Our analysis indicates that ports on the Great Lakes generally serve users that are located in
close proximity to the port facility. Accordingly, it is likely that demand for a public access port
in Sault Ste. Marie will be limited to local users, unless a major regional initiative can be located
that requires access to marine facilities on the Great Lakes.
30
kpmg
Road transportation
It is estimated that approximately 1.56 million truck trips occur annually that either begin or end in
Northeastern Ontario, transporting a total of 13.8 million tonnes of freight (see Table 14). The
majority of both commercial truck trips (85%) and associated freight volumes (90%) involve either
origins or destinations that are outside the individual district.
Table 14 Annual commercial truck movements by Northeastern Ontario district
District
Algoma
Cochrane
Sudbury
Greater Sudbury
Nipissing
Timiskaming
Parry Sound
Total
Percentage of total
Overall, less than 30% of Northeastern Ontario commercial truck movements start and stop within
Northeastern Ontario. In comparison, almost half of truck movements originating from or
terminating in Northeastern Ontario are paired with other parts of Ontario (see Table 15). The
Algoma 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
Algoma
Cochrane
Sudbury
Greater Sudbury
Nipissing
Timiskaming
Parry Sound
Total
Percentage of total
Within
District
631.4
364.6
10.7
n.a.
222.2
276.3
65.7
1,348.7
9.7%
31
U.S. and
Mexico
706.4
178.7
40.7
121.4
140.5
294.8
23.1
1,365.1
9.2%
kpmg
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 truck
movements, the most significant commodities are forest products, agricultural and food products
and manufactured goods, which collectively account for 75% of loaded truck movements (26% of
all truck movements) (see Table 17). To a large extent, truck movements reflect the traditional
economic 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 major
forestry 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.
Originating in
Northeastern
Ontario and
Ending
Elsewhere
16.5%
4.8%
5.0%
3.3%
2.1%
0.7%
2.3%
2.6%
37.3%
12.1%
49.4%
50.6%
100.0%
Total
(all pairings)
10.9%
7.9%
6.8%
3.1%
3.1%
3.0%
2.7%
2.4%
39.9%
13.1%
53.0%
47.0%
100.0%
Originating in
Northeastern
Ontario and
Ending
Elsewhere
45.7%
2.1%
3.5%
4.8%
8.5%
4.5%
7.4%
4.2%
80.7%
19.3%
100.0%
32
Total
(all pairings)
32.9%
9.8%
8.6%
5.8%
5.9%
5.6%
7.2%
4.1%
79.9%
20.2%
100.0%
kpmg
4.2
Rail transportation
During 2009, a total of 49.4 million tonnes of freight was moved along Ontario railways, the majority
of which (92%) involved an origin or destination that was outside of the Province (see Table 18). As
with marine movements, rail shipments experienced a significant decrease during 2009, declining
by 22% from 2008 levels.
Table 18 Ontario rail movements by origin and destination (in thousands of tonnes)
2005
2006
2007
2008
2009
7,050.2
18,840.8
8,703.9
34,594.9
6,967.5
18,418.5
8,840.3
34,226.3
6,710.2
18,001.0
7,809.5
32,520.7
6,053.5
16,436.6
7,293.8
29,783.9
5,098.0
14,720.6
5,535.7
25,354.3
9.7%
26.4%
11.7%
47.8%
6,804.0
7,894.6
17,341.8
32,040.4
6,811.6
7,800.6
17,501.4
32,113.6
7,194.5
7,451.7
15,256.5
29,902.7
6,893.4
8,026.2
13,281.2
28,200.8
6,233.0
6,917.3
8,368.3
21,518.6
10.4%
11.6%
21.9%
43.9%
7,821.4
5,753.5
5,717.3
5,094.7
2,572.9
8.3%
74,456.7
72,093.4
68,140.7
63,079.4
49,445.8
100.0%
Five Year
Average
Inbound
20.1%
19.1%
3.0%
2.6%
8.4%
5.5%
3.5%
1.2%
0.8%
0.4%
1.9%
0.2%
0.5%
3.3%
1.3%
71.8%
28.2%
100.0%
33
Total
19.0%
11.8%
6.0%
5.6%
4.0%
3.8%
3.3%
2.7%
2.7%
2.5%
2.4%
2.3%
2.1%
2.0%
1.9%
72.1%
27.9%
100.0%
kpmg
4.3
1. Based on our review of commercial truck movements in Northeastern Ontario, it would appear
that there are minimal opportunities for the diversion of freight shipments that currently move
by truck to marine. Specifically, we note that a significant percentage of the truck movements
to 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 and
the remainder of Northeastern Ontario, which account for 41% of all truck movements (see
Table 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 not
immediately located on the Great Lakes are also not likely candidates for diversion to marine
shipments. Furthermore, the types of commodities moved by truck to and from Great Lakes
ports are generally not consistent with marine transportation. While potential diversion
opportunities from truck to marine may exist, we anticipate these would involve relatively small
volumes at best.
2. We understand (through consultation with rail industry representatives) that the majority of rail
movements in Northeastern Ontario consist of shipments along the transcontinental main lines
for CP and CN, with lesser volumes transported along secondary lines including the Algoma
Central Railway, the Huron Central Railway and the Ontario Northland Railway. Given the
nature of these rail movements, the location of secondary rail lines in Northeastern Ontario and
the tendency for CP and CN to maximize rail volumes along their major routes, the current and
potential diversion opportunities from rail to marine would likely be small.
34
kpmg
Demand Assessment
5.1
Basis of analysis
The assessment of potential demand for harbour facilities in Sault Ste. Marie considers three
scenarios:
Low volume Representing the most conservative scenario, the low volume scenario is based
on the existing users of the ESAI harbour facility at current shipping volumes, adjusted for
announced 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 that
can be attributed to (i) contemplated production increases; (ii) potential modal shifts; (iii) new
port users; or (iv) increases in marine shipments that are contingent upon changes to the
existing harbour facilities, including expansions to docking, storage and materials handling
capacities or increases in water depths.
High volume Representing the most aggressive scenario, the high volume scenario reflects
all potential users for the ESAI harbour facility as identified during the consultation stage of the
study, with the highest potential level of marine shipments contemplated. The high demand
scenario inherently assumes that necessary improvements to the existing ESAI harbour
facilities materialize so as to facilitate their use by potential customers. Additionally, the high
demand scenario assumes optimal economic conditions and pricing for a marine routing through
the 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 that
were considered one-time or of limited duration, unless otherwise noted.
5.2
The assessment of potential demand is based on consultation with three types of harbour users:
1.
Customer Type
Existing harbour users
2.
3.
Potential Users
ESAI (steelmaking commodities)
Tenaris Algoma Tubes Inc. (unfinished and finished steel)
Superior Slag Products Inc. (slag)
Avery Construction Limited (aggregates)
Palmer Construction Group Inc. (aggregates)
McDougall Energy Inc. (petrochemical products)
Morton Salt, Inc. (salt)
Vale (nickel and copper concentrate)
Cliffs Natural Resources (chromite concentrate)
The identification of customers within the third category was based on the following approach:
35
kpmg
5.3
5.3.1
ESAI
ESAI is the largest user of the harbour facility, with total freight movements of 4.8 million tonnes in
2011. We were advised by ESAI that future marine movements would be influenced by the
following:
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 in
iron ore supply will result in a modal shift, with 100% of ESAIs iron ore pellets transported by
vessel (as compared to 49% during 2009 to 2011). This modal shift is expected to increase
ESAIs 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 targets
for barge movements, which are expected to increase ESAIs annual outbound marine
movements by 92,000 and 147,000 tonnes, respectively.
ESAI is contemplating increasing its annual steel production from the current level of 2.7 million
tons to approximately 5.0 million annually. This increase in steel production is expected to have
36
kpmg
a significant impact on both inbound and outbound marine movements, with total marine
movements expected to increase by 3.5 million above current levels if production increases to
5.0 million tons.
The assessment of ESAIs future marine shipments under the low, medium and high volume
scenarios is outlined in Table 20.
Table 20 Estimated ESAI future marine movements (in thousands of tonnes)
Low
1,270.0
1,270.0
4,757.0
6,027.0
+26.7%
Volume Scenario
Moderate
1,270.0
92.0
1,362.0
4,757.0
6,119.0
+28.6%
High
1,270.0
147.0
3,488.0
4,905.0
4,757.0
9,662.0
+103.1%
In order to accommodate these changes in marine movements, ESAI will require extensive
investment in its existing harbour facilities. ESAI has provided two documents relating to potential
infrastructure enhancements for its harbour facilities:
Essar Steel Algoma Port Study, prepared by SNC-Lavalin, which outlines proposed
improvements to the current harbour facilities, including a new public access port to be located
adjacent to the Export Dock, expansion of the Sawmill Bay dock and improvements to the
Commercial Dock and Iron Ore dock. The total capital cost associated with these
improvements was estimated to be $337.2 million.
Sault Ste. Marie Port Expansion Proposal, prepared by ESAI, which proposed the construction
of a new public access port and warehouse, a finished product dock and warehouse and
improvements to the existing Iron Ore Dock. The proposed infrastructure program was
intended to support ESAIs expansion to 5.0 million tons of annual production and had an
estimated cost of $173.6 million.
5.3.2
Tenaris
Tenaris typically receives shipments of solid steel bar and green pipes through the Export Dock,
with annual volumes in the range of 160,000 to 200,000 tonnes per year. We were advised by
Tenaris that the potential for increased marine movements does exist:
Tenaris is planning to increase production levels by 15% to 20% over the short to mid-term
future which in turn would result in increased inbound steel movements of 40,000 tonnes to
50,000 tonnes per year.
Tenaris currently ships between 120,000 tonnes and 160,000 tonnes of raw steel into Sault Ste.
Marie annually by train from a supplier in Quebec and has investigated the potential of shifting
these shipments to marine. At the present time, the cost of a rail movement is lower than
marine due to the backhaul nature of the movement but Tenaris has indicated that the
differential is small and that the planned expansion may change the cost of marine movements.
Tenaris has the potential to utilize its Sault Ste. Marie operations as a distribution centre for
products manufactured by other Tenaris facilities. Under this concept, finished product would
be included in shipments of solid steel bars and green pipes such that 85% of a vessels
37
kpmg
capacity would be used for raw materials while the remaining 15% would be used for finished
products. If this materializes, inbound marine movements for Tenaris would increase by an
additional 67,000 tonnes annually.
The assessment of Tenaris future marine shipments under the low, medium and high volume
scenarios is outlined in Table 21.
Table 21 Estimated Tenaris future marine movements (in thousands of tonnes)
Volume Scenario
Moderate
40.0
40.0
180.0
180.0
180.0
220.0
0.0%
+22.2%
Low
Modal shift of raw steel from rail to vessel
Increase in production by 15%
Increase in production by 20%
Increase in marine movements of finished products
Incremental change in marine movements
Current annual marine movements
Indicated future annual marine movements
Percentage change from current level
High
140.0
50.0
67.0
257.0
180.0
437.0
+142.8%
Currently, Tenaris unloads its vessels directly onto trucks at dockside as it is precluded from
unloading to the ground due to the provisions of ESAIs collective agreements. This results in an
extremely slow unloading rate for its vessels, which challenges the cost competitiveness of
increased marine movements. As a condition to achieving the volumes identified in the demand
scenarios, Tenaris would require:
Enhanced transportation access for the public access port, including dedicated truck access and
dockside rail service. Tenaris also indicated that the current switching arrangements with CN
and ESAI are problematic and that any rail service to the public access port should ideally
bypass the ESAI facility or otherwise resolve the limitations associated with the current
switching arrangements.
5.3.3
Slag movements
We were advised by representatives of Superior Slag Inc. that the potential exists for increased
movements of slag products by ship from Sault Ste. Marie, particularly in response to increase
demand for slag for road building and other infrastructure uses, with an annual increase of 80,000
tonnes considered reasonable. However, this increase in slag shipments would be conditional upon
increasing the capacity of the existing harbour facility and other factors.
The assessment of future marine shipments for slag under the low, medium and high volume
scenarios is outlined in Table 22.
Table 22 Estimated future slag marine movements (in thousands of tonnes)
Volume Scenario
Moderate
80.0
80.0
613.0
613.0
613.0
693.0
0.0%
+13.1%
Low
Potential increase assuming expansion of harbour capacity
Incremental change in marine movements
Current annual marine movements
Indicated future annual marine movements
Percentage change from current level
38
High
80.0
80.0
613.0
693.0
+13.1%
kpmg
5.4
5.4.1
Aggregate producers
While aggregates account for approximately 10% of marine movements to and from Canadian
Great Lakes ports, there are currently no aggregate movements through the ESAI harbour facilities
with the exception of slag. The assessment of increasing marine movements through aggregate
shipments was determined through consultation with two local aggregate producers Avery
Construction Limited (Avery) and Palmer Construction Group Inc. (Palmer).
Pooling arrangements, whereby multiple aggregate producers would contribute towards a common
stockpile at the harbour facilities, were identified as potential opportunities by both Avery and
Palmer. As such, it is possible that multiple aggregate producers in the Sault Ste. Marie area could
use the harbour facility if these arrangements were in place, recognizing that a party would need to
be responsible for coordinating the receipt and sale of aggregates.
Avery indicated the volumes associated with marine shipments (20,000 to 25,000 tonnes) were not
sustainable based on its available aggregate reserves. As such, its participation would likely be
limited to a pooling arrangement. However, Palmer indicated that it did have sufficient aggregate
reserves for sustained marine shipments, with the potential to ship similar amounts to those
transported by other harbours in Northeastern Ontario such as Bruce Mines and Thessalon, or
approximately 100,000 tonnes per year.
The assessment of future aggregate shipments under the low, medium and high volume scenarios
is outlined in Table 23.
Table 23 Estimated future aggregate marine movements (in thousands of tonnes)
Volume Scenario
Moderate
100.0
100.0
100.0
0.0%
n.a.
Low
Aggregate shipments to customers in Great Lakes Region
Incremental change in marine movements
Current annual marine movements
Indicated future annual marine movements
Percentage change from current level
High
100.0
100.0
100.0
n.a.
Both Palmer and Avery indicated that community ownership of the public access port would be
required to ensure fair and equitable treatment of all potential users. Palmer also indicated that
while rail movements to the port were possible, dock-side rail access was not considered essential
for aggregate shipments.
5.4.2
Petrochemical products
From 2005 to 2009, an average of 1.99 million tonnes of fuel oils, gasoline and aviation fuel were
transported through Canadian Great Lakes ports annually, including 0.3 million tonnes delivered to
the PML harbour facilities. Based on discussions with McDougall Energy Inc., the potential for
marine movements of petrochemical products through the ESAI harbour facilities was determined
to be low given the cost effectiveness of the existing pipeline at the PML facility as compared to
the need to transport petrochemical products by truck or by rail from the ESAI harbour facilities to
the tank farms located in the eastern portion of Sault Ste. Marie. Accordingly, we have not
considered petrochemical shipments in any of the demand scenarios.
39
kpmg
5.4.4
Salt
Salt was previously unloaded at the Export Dock but was discontinued approximately five years ago
as ESAI required the area occupied by the salt pad. Currently, Morton Salt, Inc. (Morton) delivers
salt by self-unloader to a private dock located to the east of Sault Ste. Marie, with the salt
transported by truck to the city. If its primary harbour facility is not available, Morton will
sometimes use the harbour facility in Wawa.
Morton has expressed interest in utilizing the ESAI harbour facility for salt deliveries that would not
only meet its demand in Sault Ste. Marie but also potentially provide supply for contracts elsewhere
in Northeastern Ontario. While future volumes would vary based on contractual arrangements, we
understand that historical shipments amounted to 78,000 tonnes to 135,000 tonnes annually.
The assessment of future salt shipments under the low, medium and high volume scenarios is
outlined in Table 24.
Table 24 Estimated future salt marine movements (in thousands of tonnes)
Volume Scenario
Moderate
78.0
78.0
78.0
0.0%
n.a.
Low
Lower end of range of historical salt shipments
Upper end of range of historical salt shipments
Incremental change in marine movements
Current annual marine movements
Indicated future annual marine movements
Percentage change from current level
High
135.0
135.0
135.0
n.a.
In order to utilize the ESAI harbour facility, Morton would require the construction of an asphalt salt
pad of 400 to 500 feet in length and 200 to 250 feet in width, which would be sufficient to store
75,000 to 80,000 tonnes of salt. The pad would require a minimum 50 foot setback from the water
to minimize contamination risks. Weigh scales will also be required, with full Seaway draft
considered ideal.
5.5
5.5.1
Currently, Vale ships nickel concentrate from its Voiseys Bay operation to Quebec City, with
concentrate moved via rail to its smelter and refinery complex in Sudbury. Vale did investigate the
potential of moving nickel concentrate into the Great Lakes but did not proceed with this option due
to the shallower draft of the Great Lakes Seaway (which reduces vessel sizes and increases the per
unit cost of transportation) and concerns over Aboriginal opposition to the proposed harbour facility.
Vale plans on discontinuing shipments from Voiseys Bay to Sudbury in the near future (to be
replaced by concentrate shipped from Thompson, Manitoba) and as such, this does not represent a
potential long-term opportunity for the ESAI harbour facility.
With the closure of its nickel refinery, Vale ships copper concentrate to Quebec and have identified
these movements as a theoretical possibility for diversion to the ESAI harbour complex. Annual
movements of copper concentrate amount to approximately 70,000 tonnes.
The assessment of future copper concentrate shipments under the low, medium and high volume
scenarios is outlined in Table 25.
40
kpmg
Table 25 Estimated future copper concentrate marine movements (in thousands of tonnes)
Volume Scenario
Moderate
0.0%
0.0%
Low
Diversion of Vale copper concentrate from rail to marine
Incremental change in marine movements
Current annual marine movements
Indicated future annual marine movements
Percentage change from current level
5.5.2
High
70.0
70.0
70.0
n.a.
Chromite concentrate
Cliffs Natural Resources Inc. (Cliffs) is currently in the pre-feasibility stage for the proposed Ring
of Fire chromite mine and processing facility. As currently envisioned, approximately 1 million
tonnes of chromite concentrate will be shipped annually directly to Asia from an ore processing
facility located in Northwestern Ontario. An additional 1.3 million tonnes of concentrate will be
shipped annually to a chromite processing facility, the location of which has yet to be determined.
Consultation with Cliffs indicates that it is still in the planning stages for the project and as such, is
considering optional routings for the movement of concentrate to Asia, which may include rail
movements to a port either on the Pacific or Atlantic seaboard. During consultation, Cliffs indicated
that movement to a port on the Great Lakes would also represent a potential opportunity,
particularly given the cost competitiveness of marine over rail and potential limitations on the
capacity to transfer from rail to ship on the Atlantic seaboard.
While a portion of the production from the chromite processing facility will be shipped to customers
in the United States and Europe, the absence of a defined location for the facility at the present
time precludes this as an identified opportunity for the ESAI harbour complex at this time.
The assessment of future chromite concentrate shipments under the low, medium and high volume
scenarios is outlined in Table 26.
Table 26 Estimated future chromite concentrate marine movements (in thousands of tonnes)
Volume Scenario
Moderate
0.0%
0.0%
Low
Shipments of chromite concentrate to Asia via the Great Lakes
Incremental change in marine movements
Current annual marine movements
Indicated future annual marine movements
Percentage change from current level
High
1,000.0
1,000.0
1,000.0
n.a.
This opportunity would see the movement of concentrate from the ore processing facility to Sault
Ste. Marie accomplished through the use of rail cars. As a result, rail access to the ESAI harbour
complex is a requirement under this alternative. The chromite concentrate is intended for direct
input into furnaces, and it would also be necessary to minimize the handling of the material in order
to reduce breaking it into smaller pieces (similar to coke). Accordingly, appropriate materials
handling equipment (including rotary railcar dumpers) would also be required if this opportunity
were to materialize.
5.5.3
Other sectors
Additional consultations were held with industry representatives to assess the potential interest in
marine movements of forestry commodities as well as ferry services for commercial motor
vehicles. The results of these discussions did not identify any potential opportunities for marine
movements in these sectors.
41
kpmg
5.6
Table 27A Summary of potential annual marine freight movements (in thousands of tonnes)
(in thousands of tonnes)
Volume Scenario
Moderate
Low
High
ESAI
Current annual marine movements
Additional annual marine movements
Total annual marine movements
4,757.0
1,270.0
6,027.0
4,757.0
1,362.0
6,119.0
4,757.0
4,905.0
9,662.0
793.0
793.0
793.0
298.0
1,091.0
793.0
1,642.0
2,435.0
Total users
Current annual marine movements
Additional annual marine movements
Total annual marine movements
Percentage increase
5,550.0
1,270.0
6,820.0
+22.9%
5,550.0
1,660.0
7,210.0
+29.9%
5,550.0
6,547.0
12,097.0
+118.0%
Table 27B Summary of potential annual marine freight movements by commodity (in thousands of
tonnes)
(in thousands of tonnes)
Low
Inbound movements
Iron ore
Coal
Limestone and scrap steel
Coke
Manganese ore
Steel products
Total inbound movements
Outbound movements
Tar
Slag
Chromite concentrate
Copper concentrate
Aggregate
Salt
Coils and slabs
By-products
Total outbound movements
Total annual marine movements
Volume Scenario
Moderate
High
3,719.0
1,229.0
458.0
134.0
23.0
180.0
5,743.0
3,719.0
1,229.0
458.0
134.0
23.0
220.0
5,783.0
5,352.0
2,544.0
521.0
134.0
23.0
437.0
9,011.0
45.0
613.0
218.0
201.0
1,077.0
6,820.0
45.0
693.0
100.0
78.0
310.0
201.0
1,427.0
7,210.0
87.0
693.0
1,000.0
70.0
100.0
135.0
800.0
201.0
3,086.0
12,097.0
Under all scenarios, the level of forecasted increase in marine movements (particularly for ESAI)
poses the significant risk of exceeding the capacity of the existing ESAI harbour facilities. As a
result, the potential exists for third party users to be displaced as the port requirements of ESAI
increase in the future, leaving third party users with (i) no access to marine movements; or (ii) the
requirement to establish a greenfield public access port. Both alternatives have the potential to
result in a significant (and potentially permanent) disruption of marine movements to and from Sault
Ste. Marie for third party users, with implications for operating costs and supply chain management.
42
kpmg
5.7
The freight volumes identified through consultation with industry representatives are consistent
with the results of previous studies of the demand for a public access port in Sault Ste. Marie,
although the nature of the commodities identified varies (see Table 28).
Table 28 Comparison of volume scenarios with previous public access port studies (in thousands
of tonnes)
Commodity
(third party users only)
Steel
Slag
Aggregates
Salt
Copper concentrate
Chromite
Forest products
Commercial goods
Total
100.0
100.0
78.0
135.0
70.0
1,000.0
793.0
1,091.0
2,435.0
43
SNC Study
No detail
provided
as to
volume by
commodity
2,400.0
800.0
900.0
kpmg
The proposed harbour expansion has been described as a one port project as it is intended to
address the existing marine shipping constraints for both ESAI and third party users. A
comprehensive approach to planning for marine transportation infrastructure recognizes that in
absence of a focus on the needs of both types of users, the anticipated increases in future
shipments by ESAI would result in the continued displacement of third party users, eventually
eliminating marine movements to and from Sault Ste. Marie for existing and future third party users.
In order to secure long-term capacity for third party users, ESAI is required to relinquish a portion of
its existing harbour facility, in turn necessitating the development of new capacity on the property.
As the solution to the needs of third party users goes hand-in-hand with an expansion of ESAIs
capacity, a comprehensive approach to planning is required.
6.2
The proposed capital program for the harbour project is comprised of two elements:
The establishment of a public access port adjacent to the existing export dock, exclusively for
the use of third parties. This site represents the preferred location for the public access port
based on its separation from ESAIs main operations, the ability to access the site from the
western end of the property (precluding the need to transit ESAIs main facility), its proximity to
slag deposits (representing a major component of third party shipments) and the availability of
vacant land for off-dock storage; and
Capacity upgrades to the existing ESAI docks. As the proposed site of the public access port
has been identified by ESAI as the preferred location for inbound iron ore shipments and
outbound finished steel shipments, an expansion of the existing ESAI facility is necessary to
allow ESAI to meet its own inbound shipping needs while accommodating the public access
port. Planned capacity upgrades to the ESAI docks are focused on an expansion of the capacity
of the existing iron ore dock (for inbound iron ore pellet shipments) and the current export dock
(which will be used for the outbound movement of finished steel) and would involve the
reconstruction of the existing docks, expanding dredging (including the Vidal Shoals) to increase
water depths and allow the use of larger vessels, and the installation of new materials handling
and storage equipment, including an ore reclaimer-crawler for iron ore pellets and a gantry crane
and warehouse for finished steel coils and slabs.
A graphical depiction of the One Port Project capital investment is provided on the following page.
44
kpmg
6.3
Infrastructure costs
Infrastructure costs for the proposed harbour expansion have been based on the Sault Ste. Marie
Port Expansion Proposal prepared by ESAI in support of its application for government funding for
the redevelopment of its harbour facilities. In certain instances, these costs have been adjusted to
reflect elements that were not considered essential in light of the volume and nature of
commodities considered under the moderate volume scenario.
After consideration of adjustments to the original cost estimates and the inclusion of a contingency
provision, the total capital costs associated with the harbour expansion project have been assumed
to be $116.4 million (see Table 29), based on the moderate volume scenario for third party users.
To the extent that the high volume scenario is realized, these costs would increase by an additional
$10 million, reflecting the need for additional materials handling equipment and facilities for the
transfer of chromite concentrate from railcars to vessels.
45
kpmg
6.4
Finished Steel
Dock Expansion
Total
$6,637,000
$1,586,000
$2,780,000
$1,400,000
$12,403,000
$11,533,000
$9,112,000
$44,517,000
$1,360,000
$66,519,000
$3,992,000
$1,020,000
$8,119,000
$1,100,000
$14,231,000
$22,162,000
$11,718,000
$52,636,000
$5,237,000
$1,400,000
$93,153,000
$3,101,000
$15,504,000
$16,630,000
$83,149,000
$3,558,000
$17,789,000
$23,289,000
$116,442,000
Infrastructure funding
As discussed in more detail in Chapter 10, Federal programs are available for harbour development
projects such as the proposed Sault Ste. Marie harbour expansion. Based on funding levels
provided to other harbour development projects, it is assumed that contributions from senior levels
of government would amount to 25% to 40% of the initial infrastructure investment requirement, or
$29 million to $47 million. The remaining portion of the capital costs would be financed through
private sector contributions (ESAI and third party users) as well as debt potentially issued by the
corporation that owns and operates the public access port.
46
kpmg
Basis of analysis
The focus of the financial analysis for the proposed harbour expansion is on the public access port
component of the project, recognizing that ESAI will undertake its own assessment of the financial
case supporting an expansion of its harbour capacity. It is expected, however, that the one-harbour
project concept would contribute towards the overall financial case for the ESAI component of the
project through the attraction of senior government funding as well as the sharing of project risk
with other private sector organizations.
The preparation of a financial model for the proposed public access port is based on the assumption
that the facility will be structured as an independent operation separate from the ESAI port facilities.
Establishing an independent public access port was identified as a key requirement by potential
users during the consultation phase and the financial model considers a public access port situated
adjacent to the existing Export Dock on land leased from ESAI, with road access available on the
western end of the property (see Figure 14). Under this model, ESAI would retain control of
harbour operations for its own freight movements, including the operation of the existing Export
Dock.
Figure 14 Proposed layout of public access port
ESAI Dock Facilities
Slag Storage
47
kpmg
7.2
Transportation model
The results of our consultation and associated volume scenarios form the basis of a transportation
model that quantifies the vessel calls (visits) and vessel days, based on the following variables:
The detailed transportation model, which forms the basis of the financial analysis, is summarized in
Table 30.
Table 30 Summary of commodity shipments, vessel calls and vessel days
Low
793.0
45
81
7.3
Volume Scenario
Moderate
1,091.0
64
102
High
2,435.0
120
179
Operating revenues
Canadian Great Lakes ports typically charge tariffs for the use of their facilities that include:
Wharfage charges, calculated based on the type and value of commodity (i.e. a cost per tonne
that varies based on the commodity being loaded or unloaded);
Berthage charges, determined based on the gross tonnage of the ship and its length of stay in
the harbour;
For the purposes of the financial analysis, we have used the tariff structure published by the Port of
Hamilton, recognizing that the actual tariff structure will be determined by the operators of the
public access port. We have also made assumptions as to the type and gross tonnage of vessels
that will call at the public access port for the purposes of determining berthage charges (see Table
31).
Table 31 Summary of key assumptions for wharfage and berthage charge calculations
Commodity
(public access port only)
Steel
Slag
Copper concentrate
Chromite concentrate
Aggregates
Salt
Wharfage Charge
per Tonne
$0.696
$0.113
$0.077
$0.077
$0.113
$0.240
Type of Vessel
Bulk carrier
Bulk carrier
Bulk carrier
Bulk carrier
Bulk carrier
Bulk carrier
Gross Tonnage
(GRT)1
22,654 GRT
19,853 GRT
19,853 GRT
19,853 GRT
19,699 GRT
19,699 GRT
Berthage
Charge per GT
$0.0313 for the first 12
hours, $0.0188 for each
subsequent 12 hour
period in port
Based on the different volume scenarios and this tariff structure, we have calculated the potential
annual wharfage and berthage charges for the public access port to be in the range of $138,000 to
$679,000 (see Table 32).
Gross tonnage (GRT) is a calculation of a ships total internal volume and one GRT is equal to 100 cubic feet
of space. GRT is not intended to reflect the weight of a ship, nor its capacity in terms of tons.
48
kpmg
Wharfage charges
Berthage charges
Total
Volume Scenario
Moderate
$261,000
$94,000
$355,000
High
$507,000
$172,000
$679,000
In addition to these revenues, the public access port will also receive revenues from harbour dues,
storage fees and stevedoring licensing fees:
Harbour dues are charged on an annual basis based on the gross tonnage of the vessel;
Storage fees can represent a significant revenue source for the public access port but are
negotiated on an individual basis with customers; and
Larger Canadian Great Lakes ports do not generally deliver stevedoring services to harbour
users but rather will provide a license to one or more terminal operators for stevedoring and
other services.
Revenues relating to stevedoring licensing and storage fees are contingent upon a number of
factors and as such, are difficult to predict with any degree of certainty. Accordingly, the financial
analysis is based on the assumption that total revenues for the public access port on a per tonne
basis will be consistent with that of other harbours.
Table 34 summarizes the annual volumes and total reported revenues for two ports with annual
volumes that are consistent with the high volume scenario for the public access port, and have
calculated the average revenue per tonne to be in the order of $2.50 (see Table 33). Based on this
level of revenue, the potential revenue for the public access port is calculated to be in the range of
$2.0 million to $5.9 million, of which $1.8 million to $5.2 million is derived from revenue sources
other than wharfage and berthage charges (see Table 34).
Table 33 Calculated total revenue per tonne, comparator ports
Harbour
Total
Tonnage
2,901,300
2,118,400
Trois Rivieres
Belledune
Weighted average
Total
Revenue
$5,040,000
$7,499,000
Revenue per
Tonne
$1.74
$3.54
$2.50
Table 34 Calculated public access port revenue based on differing volume scenarios
Low
793,000
$2.50
$1,983,000
Volume Scenario
Moderate
1,091,000
$2.50
$2,726,000
High
2,435,000
$2.50
$6,088,000
$138,000
$355,000
$679,000
$1,845,000
$2,371,000
$5,409,000
49
kpmg
7.4
Operating costs
Consistent with the approach to calculating potential operating revenues, the quantification of
potential operating costs is based on the average operating cost for other ports, which is calculated
to be $1.13 per tonne (see Table 35). Accordingly, the potential operating costs for the public
access port are calculated to be in the range of $0.9 million to $2.8 million, resulting in potential
operating profits of $1.1 million to $3.3 million annually (see Table 36).
Table 35 Calculated total operating costs per tonne, comparator ports (excluding amortization)
Harbour
Total
Tonnage
2,901,300
2,118,400
Trois Rivieres
Belledune
Weighted average
Total
Operating Costs
$2,724,000
$2,925,000
Operating Costs
per Tonne
$0.94
$1.38
$1.13
Table 36 Calculated public access port operating costs based on differing volume scenarios
Low
793,000
$1.13
$896,000
$1,983,000
$1,087,000
7.5
Volume Scenario
Moderate
1,091,000
$1.13
$1,233,000
$2,371,000
$1,138,000
High
2,435,000
$1.13
$2,752,000
$6,088,000
$3,336,000
Based on the volume scenarios developed and the assumed revenues and operating costs, the
financial model for the public access port indicates that it could generate $1.1 million in operating
profits under the low to moderate volume scenarios, increasing to $3.3 million under the high
volume scenario (Table 37). This operating profit would be available to meeting ongoing
infrastructure reinvestment requirements (calculated to be approximately $310,000 per year based
on the estimated infrastructure cost and useful life under the low and moderate volume scenarios
and $810,000 under the high volume scenario, with the difference representing increased costs for
materials handling equipment) and any debt issued by the corporation that owns and operates the
public access port.
Table 37 Assumed public access port financial performance
Low
$1,983,000
$896,000
$1,087,000
($310,000)
$777,000
50
Volume Scenario
Moderate
$2,371,000
$1,233,000
$1,138,000
($310,000)
$828,000)
High
$6,088,000
$2,752,000
$3,336,000
($810,000)
$2,526,000
kpmg
7.6
1. Government assistance as well as some form of private sector contributions for the initial
development costs will be necessary for the harbour expansion project, particularly given the
level of associated infrastructure investment required to meet the needs of current and future
harbour users.
2. In the absence of government assistance, the most likely scenario would involve ESAI
proceeding with the expansion of its harbour along the lowest cost scenario, which would likely
involve the displacement of third party users in order to meet ESAIs marine transportation
requirements.
3. The physical layout of the proposed public access port is relatively constrained and as such,
alternative strategies for expanding the available footprint will need to be considered. For
example, consideration could be given to:
Relocating portions of the current slag stockpiles located adjacent to the public access
port area to increase the available footprint; and/or
Incorporating available industrial lands located to the north of the ESAI harbour facility
to provide additional areas for materials storage and other requirements; and/or
Acquiring the existing ESAI Export Dock to provide additional storage and berthing
capacity. This likely represents a longer term strategy as the increase in berthing
capacity should be supported by sufficient volumes of marine movements.
Expanding the operating area of the public access port is necessary to maximize the revenue
generated from port users. In the absence of sufficient area for storage, warehousing and
other activities, the public access port will likely be incapable of generating the same level of
revenue as other ports (which is a key assumption in the financial model). Preliminary
discussions with ESAI have indicated a willingness to consider necessary changes to expand
the public access ports footprint.
51
kpmg
The potential economic impact of the harbour development project has been estimated through
input-output models developed by Statistics Canada that express economic and employment
impacts in terms of gross (total) output and value added economic activity:
Gross output represents the total value of all economic and business activity from the public
access port. This is recognized as the most comprehensive measures of economic activity as it
considers all business transactions associated with the ports expenditures.
Value added expenditures eliminate duplication within the gross output measure by considering
only final goods and excluding transactions between parties that would be counted twice (as a
revenue to one party and an expenditure to the other). Value added is intended to reflect the
contribution of the public access port to Gross Domestic Product (GDP) as it attempts to
measure incremental economic activity and wealth generation.
Economic and employment impacts are also presented as direct, indirect and induced:
Direct impact measures the initial requirements for an extra dollars worth of output of a given
industry. The direct impact on the output on an industry is a one dollar change in output to
meet the change of one dollar in the final demand. Associated with this change, there will also
be direct impacts on GDP, jobs and imports.
Indirect impact measures the changes due to inter-industry purchases as they respond to the
new demands of the directly affected industries. This includes all the chain reaction of output
up the production stream since each of the products purchased will require, in turn, the
production of various inputs.
Induced impact measures the changes in the production of goods and services in response to
consumer expenditures induced by households income (i.e. wages) generated by the
production of the direct and indirect requirements.
Economic impact models developed by Statistics Canada indicated that the $116 million
infrastructure investment associated with the harbour development project can potentially generate
up to $262 million in economic activity, contributing as much as $122 million to gross domestic
product and supporting almost 1,400 person years of employment2 (see Table 38).
Table 38 Estimated one-time economic impacts from harbour infrastructure investment
Economic Activity
(Gross output)
Value Add
(GDP)
Employment
(person years of
employment)
$207 million
$55 million
$262 million
$89 million
$33 million
$122 million
1,044 person years
348 person years
1,392 person years
A person year of employment is equal to one year of full-time employment for one individual. For
example, 20 person years of employment represents full-time employment for one person for 20
years, or one year for full-time employment for 20 people.
52
kpmg
The economic impact models developed by Statistics Canada also estimate the potential total
(gross) economic activity associated with the public access ports activity under the moderate
volume scenario to be as much as $5.2 million per year, representing a $1.8 million contribution to
gross domestic product annually and supporting 17 direct, indirect and induced employment
positions (see Table 39).
Table 39 Estimated annual economic impacts from port operations
Economic Activity
(Gross output)
Value Add
(GDP)
Employment
(person years of
employment)
Low
$3,700,000
$600,000
$4,300,000
$1,100,000
$400,000
$1,500,000
11
4
15
Volume Scenario
Moderate
$4,400,000
$800,000
$5,200,000
$1,400,000
$400,000
$1,800,000
13
4
17
High
$11,300,000
$1,900,000
$13,200,000
$3,500,000
$1,100,000
$4,600,000
32
12
44
In addition to economic and employment benefits attributed to the investment in the harbour, the
initiative is also expected to result in a secondary economic benefit to the Sault Ste. Marie area
through support for industrial operations in the region. An expanded harbour facility would not only
continue to serve existing third party users, but would also provide added capacity for production
expansions at Tenaris (15% to 20% above current volumes) as well as ESAI (up to 48%, assuming
production increases from the current 2.7 million tons per year to 4.0 million tons per year). If the
potential capacity expansions for both organizations materialize, the associated economic impact
would be significant, with the economic impact of an additional $10 million in revenue outlined in
Table 40.
Table 40 Estimated annual economic impacts from industrial expansions supported by harbour
project (impact per $10 million of incremental revenue)
Annual Economic Impact per $10 million of Revenue
ESAI
Tenaris
Total
Economic
Activity
(Gross output)
Value Add
(GDP)
Employment
$18.2 million
$2.8 million
$21.0 million
$5.9 million
$1.7 million
$7.6 million
50 person-years
10 person-years
60 person-years
$16.3 million
$2.5 million
$18.8 million
$5.6 million
$1.5 million
$7.1 million
40 person-years
20 person-years
60 person-years
$34.5 million
$5.3 million
$39.8 million
$11.5 million
$3.2 million
$14.7 million
90 person-years
30 person-years
120 person-years
We understand that ESAI currently generates approximately $1 billion in revenues from its Sault
Ste. Marie operations and an increase in production up to 4 million tons per year could result in as
much as $300 million in incremental revenues, which would in turn:
Support 1,800 employment positions as a result of the direct, indirect and induced economic
impacts.
53
kpmg
8.2
Marine transportation is widely viewed as being more energy efficient and emitting the lowest level
of greenhouse gas emissions than either heavy trucks or rail (see Figure 15).
Figure 15 Comparison of energy consumption and emissions by mode of transportation
14 g/Tkm
Ship
200 kj/Tkm
24 g/Tkm
Rail
640 kj/Tkm
57 g/Tkm
Heavy truck
800 kj/Tkm
-
100
200
300
400
500
600
700
800
900
To the extent that the public access port diverts traffic from modes of transportation other than rail,
the potential exists for environmental benefits. As noted earlier, certain of the potential incremental
marine movements can be attributed to modal shift, providing a basis for the argument that the
public access port will result in reduced energy consumption and greenhouse gas emissions (see
Table 41).
Table 41 Estimated potential environmental contributions
Volume Scenario
Moderate
Low
Energy consumption (millions of kilojoules)
Marine movement through public access port
Alternative land movement
Estimated potential environmental benefit
Percentage savings
Greenhouse gas emissions (thousands of kilograms of CO2)
Marine movement through public access port
Alternative land movement
Estimated potential environmental benefit
Percentage savings
8.3
High
253.7
79.3
174.4
68%
337.8
101.1
236.7
70%
772.4
235.5
536.9
70%
9.516
5.551
3.965
42%
15.069
7.007
8.062
54%
32.134
16.485
15.649
49%
The potential increases in marine shipments through the ESAI harbour complex (including the public
access port) result from a combination of modal diversion (i.e. shifting from rail to marine) and
production capacity increases by existing harbour users. With respect to the public access port,
local railways are expected to experience both positive and negative impacts as a result of the
diversions, with the overall level of rail movements expected to be higher under the high volume
scenario due primarily to the movement of chromite concentrate on the CN line between Sault Ste.
Marie and the CN transcontinental rail line (see Table 42).
54
kpmg
These increases in rail movement are expected to be offset by the shift of iron ore pellets from rail
to marine which, while not related to the public access port directly, still impacts on local
transportation infrastructure. This impact is of particular concern as it is certain to materialize, unlike
the movement of chromite concentrate, which is included only under the high volume scenario due
to the requirements associated with realizing this movement and the potential for alternative
routings.
Table 42 Estimated potential modal shifts
Affected
Infrastructure
CN
Huron Central
Port of Thessalon
CN
70.0
135.0
CN
1,070.0
275.0
1,270.0
CN
147.0
1,070.0
1,692.0
In addition to the modal shifts noted above, all components of local transportation infrastructure will
likely benefit from the planned production expansions of both ESAI and Tenaris.
55
kpmg
IX Governance
9.1
Basis of Analysis
The proposed harbour expansion initiative will involve the sharing of the existing harbour complex
between ESAI and a public access port, with ESAI retaining sole responsibility for the operation and
governance of its portion of the harbour complex while the public access port will likely involve a
governance model that involves multiple public and private sector stakeholders. This chapter
provides information on the governance issues and options for the public access port component of
the expanded harbour complex.
9.2
This section addresses the topic of institutional arrangements for ports in Canada from a general
perspective, as the background provided here provides useful context for understanding possible
governance arrangements for the harbour development in Sault Ste. Marie. Governance options for
Sault Ste. Marie are addressed more specifically in the next section.
Figure 16 (next page) illustrates how various institutional arrangements for ports have existed
concurrently in Canada, how these have changed over time, and how the current landscape looks.
Without attempting to describe the origins of the hundreds of ports in Canada, it suffices to say that
a variety of arrangements governed the founding and early development of ports. In the distribution
of powers set forth in Canadas constitution since 1867, the federal government has always had
responsibility for shipping, ports and navigable waterways. By the early 20th century, the
administrative role of the federal government and its agencies was codified at most ports. A
number of Harbour Commissions were established at this time including those of Hamilton and
Toronto. By the 1930s a more comprehensive approach to port management was deemed
necessary at many locations across the country, one which offered greater centralization of control
over the administration of ports by the federal government. The National Harbours Board was
established in 1936: the vast majority of ports, including many larger ports, were under the control
of this entity. This would have included the Pim Street Wharf (government dock) in Sault Ste.
Marie. The exceptions included a few ports which retained their status as harbour commissions,
and a small number of private ports including the port facilities of Algoma Steel.
(It is important to understand that many public ports under the ownership of government include
significant amounts of activity conducted by private enterprise, for profit, within the ports
jurisdiction. Most port authorities in Canada, for example, primarily act as landlords, whereas it is
the private sector terminal operators which provide much of the cargo handling services in the
ports. The term private port refers to one where the land and infrastructure are in private
ownership. Until recently, large ports in this category were relatively rare in Canada, and included
examples such as the Algoma Steel harbour facility; the port of Kitimat BC developed by the private
sector to serve the aluminium industry, and the port of Port-Cartier QC developed by Quebec
Cartier Mining (Arcelor Mittal) to serve the iron ore industry. It is equally important to note that
private ports may handle cargo for third parties, as is the case of ESAI, and with the
transshipment of grain at Port-Cartier, for example.)
56
kpmg
The National Harbours Board was abolished in 1983. In its stead, hundreds of smaller public
harbours and ports were administered by the Harbours and Ports Directorate of Transport Canada,
including the Pim Street Wharf in Sault Ste. Marie. Fourteen ports, including several of Canadas
largest, were under the control of a new federal agency, the Canada Ports Corporation. The nine
harbour commissions and the various private ports were unaffected by these changes. Seven of
the ports controlled by the CPC were granted a certain amount of autonomy and were set up as
Local Port Corporations, while the other seven were administered more directly by the CPC.
By the 1990s there was a pronounced shift by the federal government to withdraw from the
operation of many economic activities and this was felt strongly in the transportation sector, at a
time when the federal government privatized, for example, Nav Canada, Canadian National, and Air
Canada.
57
kpmg
St. John's
----------------->
Halifax
----------------->
----------------->
Saint John
Qubec
----------------->
Montral
----------------->
Vancouver
----------------->
Prince Rupert ----------------->
St. John's
Halifax
Saint John
Qubec
Montral
Vancouver
Prince Rupert
Belledune
Sept-les
Chicoutimi
Trois-Rivires
Prescott
Port Colborne
Churchill
Belledune
----------------->
Sept-les
----------------->
Chicoutimi
----------------->
Trois-Rivires----------------->
Prescott
----------------->
Port Colborne ----------------->
----------------->
Churchill
Belledune
Sept-les
Chicoutimi
Trois-Rivires
Prescott
Port Colborne
Churchill
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
Belledune
Sept-les
Saguenay
Trois-Rivires
Divisional Ports
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
Oshawa
----------------->
Toronto
Hamilton
Toronto
Hamilton
Windsor
Thunder Bay
Fraser River
North Fraser
Nanaimo
Port Alberni
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
4
4
4
Harbour Commissions
(1911, 1912) -- 1964 -- 1999 -- (2001, 2012)
Oshawa
-----------------> Oshawa
-----------------> Toronto
-----------------> Hamilton
Windsor
Thunder Bay
Fraser River
North Fraser
Nanaimo
Port Alberni
----------------->
----------------->
----------------->
----------------->
----------------->
----------------->
Windsor
Thunder Bay
Vancouver Fraser
Vancouver Fraser
Nanaimo
Port Alberni
numerous others
numerous others
numerous others
3
3
Private Ports
Sault Ste. Marie (Algoma
Steel)
others
6
7
6
Notes:
1. Various ports were initially created as Harbour Commissions; only those which continued as Harbour Commissions up until 1999
are so designated here.
2. The dates shown are the dates when the letters patent became effective.
3. In 2008 the three separate Canada Port Authorities of Vancouver, Fraser River and North Fraser were amalgamated into one CPA.
4. Prescott, Port Colborne and Churchill were the only former Canada Ports Corporation ports or Harbour Commissions not to be
created as CPAs. All three were reclassified as Regional Ports and were divested by Transport Canada.
5. Pursuant to the Canada Marine Act , remaining Transport Canada Regional Ports are slated to be divested to local interests.
6. The harbour bed remains under the purview of Transport Canada.
7. Some port facilities at Port Colborne continue to be owned by TC and operated by the Saint Lawrence Seaway Management
Corporation.
58
kpmg
The federal government established a National Marine Policy in 1995 which reflected this trend
towards commercialization of some government activities, and withdrawal from others through
privatization or other form of ownership transfer. The National Marine Policy envisaged a greatly
reduced scope for federal involvement in the day-to-day activities of ports. This was to be
accomplished by two means: first, by granting considerably more local autonomy to the largest
ports than was provided under the CPC (although the ports would continue to be owned by the
federal government), and establishing them under new governance as Canada Port Authorities
(CPAs). And secondly, by a radical divestiture program of regional ports. This policy was put into
effect by the Canada Marine Act, although the process of divestiture had actually started before the
act became law.
By 1999, letters patent were granted for 17 CPAs, with Belledune NB obtaining status in 2000 and
Hamilton in 2001. For various reasons, the former Oshawa Harbour Commission only became a
CPA in 2012. Meanwhile, in 2008 the three geographically close CPAs of Vancouver, Fraser River
and North Fraser amalgamated into the single CPA of Vancouver-Fraser.
Under the Canada Marine Act, the remaining public ports were assigned as either regional or
remote. The Act called for regional ports to be divested by Transport Canada to other willing
parties, while Transport Canada would retain direct control of remote ports (typically in Canadas
north, or otherwise geographically isolated). The chart below illustrates that out of Transport
Canadas original inventory of 549 ports under the former Harbours and Ports Directorate, a total of
271 have been divested by the department, and another 211 have been de-proclaimed, for a total of
67 ports now remaining with Transport Canada (see Figure 17). Parties to whom these ports were
divested include other federal departments such as the Department of Indian Affairs, provincial
governments, municipal governments, various forms of local or regional economic development
agencies (typically operated as not-for-profit entities), and private sector enterprises. The transfer of
the Pim Street Wharf to Purvis Marine Limited in 1998 is an example of the latter.
Figure 17 Transport Canada Ports Program: Transfer Inventory as of December 31, 2011
600
500
Pacific
Ontario
Quebec
Atlantic
400
300
200
100
Original TC Inventory
Total Divested
59
Total De-proclaimed
Remaining TC Sites
kpmg
The transfer process continues, with recent examples from 2010 of the transfer of ownership from
the federal government including:
The Bay dEspoir Properties to the Government of Newfoundland and Labrador; and
The Port of Summerside to the Summerside Port Corporation Inc., a not-for-profit local entity
with membership from local businesses and community stakeholders that has been established
to promote the development of the port.
The terms of transfer, especially to private enterprise, often included a requirement for a minimum
number of years to offer service without discrimination to third parties. As time has passed and the
various conditions of transfer reach their sunset terms, the distinction blurs in many cases between
those ports which have been transferred over the past seventeen years (since the National Marine
Policy and anticipation of the Canada Marine Act), and those ports which had been private since
their inception, such as the Algoma Steel port facilities.
9.1.1
Paraphrasing the Canada Marine Act, to qualify as a CPA, a port must meet several criteria; namely,
the port:
Clearly, size is not the defining feature of CPAs. Out of Canadas top ten ports, four (Come-byChance NF, Port Hawkesbury NS, Port-Cartier QC and Newfoundland Offshore) are not CPAs.
Conversely, two ports which are CPAs (Saguenay and Oshawa) do not even rank among the top 50.
Although several of the four large ports noted above which are not CPAs handle a very limited
number of commodities, this is also not grounds for exclusion. For example, the Sept-les Port
Authority is a CPA yet iron ore and concentrate (classed as a single commodity) accounted for 88%
of the ports tonnage in 2010. Instead, what is apparent is that the CPAs correspond closely to the
ports of the former Canada Ports Corporation and former Harbour Commissions:
of the 7 Divisional Ports of the Canada Ports Corporation are CPAs (the remaining three were
divested to local interests and will not become CPAs); and
Although the Canada Marine Act does permit the creation of additional CPAs, it is unlikely at this
time.
There are several drawbacks and challenges inherent in obtaining CPA status:
CPAs pay annual stipends to the federal government, based on their gross revenues.
60
kpmg
Although the legislation has been adjusted, originally CPAs had no recourse to federal grants; no
access to federal loan guarantees or ability to pledge their land or infrastructure as collateral;
and their commercial borrowing limits were set by the federal government.
Creating letters patent and obtaining CPA status is administratively cumbersome and complex.
The federal government retains an interest in the governance of CPAs through the process of
selecting Board members.
CPAs are very restricted from generating revenue from non-port-related activity.
On the other hand, it is the federal government which invested hundreds of millions of dollars over
decades in those ports which became CPAs. Furthermore, prior to adopting the Canada Ports
Corporation Act, the federal government cancelled $727 million worth of the former National
Harbour Board debt and unpaid interest to enable CPC ports to operate without the burden of past
debts. So CPAs, other public ports, and former public ports which have been divested, have a
legacy of government investment which private port facilities such as Algoma Steel do not. And in
some cases, public ports may have access to new federal investment through programs such as
the Gateways and Border Crossings Fund. Finally, CPAs are not subject to income taxes.
It is recommended that the generic term port authority be avoided in the context of the
development of a market assessment leading to a business case for a regional harbour in Sault Ste.
Marie. This is to avoid overlap and possible confusion with the term Canada Port Authority,
which refers specifically to those (now eighteen) agents of the federal government, established
under letters patent under the legislation of the Canada Marine Act.
9.1.2
Harbour commissions
Harbour Commissions no longer exist in Canada. The former Harbour Commissions now carry on
as CPAs. In light of the legislative framework of the Canada Marine Act, and Transport Canadas
policy of divesting regional ports, it is most unlikely that any port will acquire or re-acquire the status
of a Harbour Commission in the foreseeable future.
9.2
Given the current institutional arrangements for ports in Canada, structuring the public access port
as either a CPA or harbour commission do not represent valid alternatives. Rather, governance
options for the public access port involve either public (e.g. City) or private ownership.
While ESAI has indicated that it does not wish to operate the public access port, the potential does
exist for another private sector party to own the facility. However, direct control of the port by one
company was cited as a disincentive as potential users expressed concerns over the fairness of
access to the port facilities, particularly if the owner was a competitor of other users. Additionally,
the magnitude of the investment required for the public access port likely precludes smaller local
companies from direct ownership, with only larger companies (e.g. Tenaris) capable of a project of
this size. However, direct ownership of the port by a large user has the associated risk of other
smaller users being displaced if capacity limitations emerge, resulting in a repetition of the current
situation facing third party harbour users in Sault Ste. Marie.
61
kpmg
Given the need for common ownership of the public access port, governance options could include:
A corporation established under the Co-Operative Corporations Act. Shareholders of the cooperative corporation could include users of the public access port, shipping companies and
other interested stakeholders. Under the Co-Operative Corporations Act, however, each
shareholder is entitled to one vote, thereby avoiding concerns over the port being dominated by
a single user. The status of the co-operative as a separate legal entity (including a separate
board of directors) also provides a degree of assurance as to the independence and fairness of
its operations. The corporation would also be required to operate at a break-even basis
(allowing for reserves for specified uses), thereby minimizing profit motivation with respect to
the public access ports operations.
A community development corporation (CDC) established by the City. This model is similar
to the Sault Ste. Marie Airport Development Corporation, which operates independently from
the City.
62
kpmg
Other Considerations
10.1
Amount
($ billions)
$5.800
$11.800
$7.300
$1.000
$0.500
$1.250
$2.100
$1.000
$2.275
Total
$33.025
Following the launch of the Building Canada plan, Infrastructure Framework Agreements were
signed with each provincial and territorial government. Under these agreements, all orders of
government committed to work together to fund projects supporting the nation's priorities: a
growing economy, a cleaner environment and prosperous communities. Through Canada's
Economic Action Plan, the Government of Canada made changes to several Building Canada plan
programs, including simplified approval processes to help more projects get underway quickly,
topping up of funding for infrastructure projects in small communities and accelerated payments for
"ready-to-go" infrastructure projects.
The federal government will contribute some $33 billion over seven years towards infrastructure
projects under the plan. However, only a limited number of component programs are eligible or
likely to be a potential source of funding for the Sault Ste. Marie harbour project. The Gateways and
Border Crossings Fund probably offers the best match for the type of investment required at Sault
Ste. Marie.
10.1.1 Gateways and Border Crossings Fund
The $2.1 billion Gateways and Border Crossings Fund is designed to improve the flow of goods
between Canada and the rest of the world, by enhancing infrastructure at key locations, such as
major border crossings between Canada and the U.S. At least $400 million from this fund is
earmarked for the construction of the Detroit River International Crossing (DRIC). The balance is
being used for a variety of projects related to the transportation, handling and processing of goods
and people. Although much would depend on the governance arrangement ultimately championed,
on a prima facie basis, development of a public-use facility for the Sault Ste. Marie harbour would
certainly be a potential candidate for funding under the Gateways and Border Crossings Fund.
Several recent port-related projects received federal funding from this fund (including projects with
63
kpmg
costs in the range of the Sault Ste. Marie harbour expansion), with the average funding for these
projects amounting to just under 30% of project costs (Table 44).
Table 44 Gateways and Border Crossings Fund investments
Port
Montreal
Sept-Isles
Saguenay
Total/Average
Funding
Date
March 2012
February 2012
January 2012
Total
Project Cost
$39.3 million
$220.0 million
$36.0 million
Program Funding
Amount
Percentage
$15.1 million
38.4%
$55.0 million
25.0%
$15.0 million
41.7%
28.8%
The other five priorities cover the National Highway System, connectivity and broadband, local and regional airports,
tourism, and short-line railways.
64
kpmg
65
kpmg
Provincial funding
The Northern Highways Program, a multi-year plan for the rehabilitation and selective expansion
of highways in Northern Ontario that expires in 2014 along with the Building Canada Fund. The
Ministry of Northern Development and Mines has committed $524 million in funding to the
Northern Highways Program for the 2012-2013 fiscal year.
The Northern Ontario Growth Plan, a 25-year plan intended to guide Provincial decision-making
and investment in Northern Ontario in order to strengthen the regions economy through
diversification, new investment and the development of new industrial sectors.
The Northern Ontario Growth Plan is addresses six areas economy, people, communities,
infrastructure, environment and Aboriginal peoples. Within the infrastructure element, the Northern
Ontario Growth Plan identified the need to plan for and support a multi-modal transportation system
that optimizes the existing transportation system and meets the needs of existing and emerging
priority sectors.
66
kpmg
At the present time, the Ministry of Transportation (which appears to be the lead agency for this
aspect of the Growth Plan) is undertaking preliminary studies to gain an understanding of the
economic profile of Northern Ontario and the forecasted performance of key sectors. This initial
stage will be followed by the development of a broader study on transportation in Northern Ontario,
which is expected to inform Provincial priorities for transportation. The anticipated outcomes of the
multimodal transportation study are not intended to identify specific transportation infrastructure
projects, but rather lead to further planning activities.
In the event that the Province of Ontario supports the proposed harbour expansion (either as a
result of local efforts or in connection with the Northern Ontario Growth Plan), we anticipate that
funding will be provided under an arrangement similar to the Ontario Infrastructure Framework
Agreement (which runs concurrent and is linked with the Building Canada Fund). Under the
Framework Agreement, the Province committed a total of $6.3 billion as its commitment to Building
Canada projects, a portion of which ($15 million) was used to fund the rehabilitation of the Huron
Central Railway (which also received $15 million in Federal funding under the Building Canada
Fund).
In addition to funding for infrastructure investments, implementation-related activities could be
funded through the Northern Ontario Heritage Fund Corporation and additionally, Industry Canada
FedNor.
10.3
The Canadian Environmental Assessment Act (CEAA) is the main piece of Federal environmental
legislation and has four main purposes:
to ensure that the environmental effects of projects receive careful consideration before
responsible authorities take action in connection with them;
to encourage responsible authorities to take actions that promote sustainable development and
thereby achieve or maintain a healthy environment and economy;
to ensure that projects carried out in Canada or on federal lands do not cause significant adverse
environmental effects outside the jurisdictions in which the projects are carried out; and
to ensure that there is an opportunity for public participation in the environmental process
The scope of the harbour expansion project, which involves dredging, the potential movement of
contaminated materials (slag) and in-water works within the planning jurisdiction of a Federal
Regulated International Waterway will trigger the requirement for an environmental assessment
under CEAA. The potential for Federal financial assistance will also establish the requirement for an
environmental assessment, as will the involvement of water lot ownership.
The recent Federal budget contains provisions to fast track the CEAA process, with the intention
of completion environmental assessments within a two-year timeframe.
10.3.1 Project description
The environmental assessment process begins with the development of a project description for
submission by the Federal government. Under the CEAA, project descriptions are required to
address the following:
1.
2.
Project components
67
kpmg
3.
4.
5.
A description of main components of the projects, including any permanent and temporary
structures, associated infrastructure, associated construction and type of equipment
The capacity and the size of the main components of the project
The construction, operation and decommissioning phases, and the timing and scheduling of
each phase
Project activities
Site plans
The identification of any toxic/ hazardous materials, recognizing that slag is likely considered
in this category
Servicing
6.
7.
8.
9.
Waste disposal
Environmental features
A summary of the physical and biological components in the area likely to be affected by the
project
Information on whether the project may affect fish and fish habitat, and navigable waters
Land use
Additional requirements related to fish, fish habitat and navigable waters (required for
components of the project to be constructed or activities which will occur in a watercourse or
within 30 metres of a watercourse)
68
kpmg
The physical characteristics of the waterway (length, width, depth, seasonal flow,
fluctuations)
Information on freshwater and marine fish and fish habitat, including qualitative and
quantitative description of the fish habitat
The existing use of the waterway (kind, size and frequency of vessels; description of
existing conditions in the waterway)
Transport Canada
After comments and concerns are received from all parties, it will be determined which Federal
authority will assume the role of lead agency (the Responsible Authority). The Responsible
Authority will be tasked with the coordination of Federal authorities participating in the
environmental assessment process, including the preparation of the environmental assessment
reports and all approvals related to the environmental assessment. The Responsible Authority will
also be responsible for the coordination of ongoing construction monitoring reports which are
required monthly during construction and the final closeout document which is required to
successfully complete the environmental approval process.
10.3.3 The requirement for public consultation
Public consultation with the general public and all identified stakeholders (including First Nations) is
a requirement of the environment assessment process and documentation concerning consultation
must be submitted to the Responsible Authority.
10.4
69
kpmg
Government officials administer the substantive aspects which include determining whether a
duty to consult exists; identifying which Aboriginal communities must be consulted; assessing
the extent and adequacy of the consultation; and determining the need for and adequacy of any
accommodation.
Procedural aspects can (and in the case of the harbour development project likely will) be
delegated to the project proponent. They include providing notice of the project; providing
information to the impacted communities; ensuring the Aboriginal communities understand the
information provided; answering questions; gathering information about possible adverse
impacts and modifying plans to minimize them where possible.
Approval of the project by the band or community council is not required for an effective
consultation to have been conducted. Rather, government officials will assess the efforts made by
the proponent to address Aboriginal issues and concerns.
Initial research into the issue of Aboriginal consultation indicates that the ESAI harbour complex is
located within the traditional territory of the Batchewana First Nation of Ojibways (BFN). In
addition, the Metis Nation of Ontario (MNO) asserts Aboriginal harvesting rights in what is
referred to as the Historic Sault Ste. Marie Area. Accordingly, both the BFN and MNO were
contacted to discuss their initial views on the project.
10.4.2 Batchewana First Nation of Ojibways
The BFN have been residents of the Sault Ste. Marie area since before European contact. The BFN
are signatories to the Robinson-Huron Treaty (1850) and the subsequent Pennefather Treaty (1859)
but feel that the conditions of these treaties have never been fully fulfilled. As a result, the BFN is
taking a proactive approach to reconcile land issues, including an active land reclamation process
and the publishing of the BFNs Notice of Assertions4, which states the BFNs position on Territory,
Treaties, Reserves, Resources and Relationships. With respect to the harbour expansion project,
the BFNs position is that:
All crown lands fall into the categories of Unsold Surrendered Lands or Continuing BFN rights
and interests in our Original Territory Engagement;
The bed of the river adjoining the current ESAI port facilities is crown land; and
Accordingly, there exists a consultation requirement with the BFN given that the BFN has a
huge interest in the area.
Notwithstanding its issues with respect to treaty rights and obligations, the BFNs Notice of
Assertion states that it prides itself as a good neighbor to other First Nations and to other
communities, with the BFN and its members not seeking out confrontation but rather seeking to
avoid it whenever possible.
We were advised that the BFN have developed a policy that proponents must apply for a work
permit that must then be approved by the First Nation. We further understand that government
officials advise that such approvals are not necessary but that where they have been acquired;
things like the requested crown land dispositions go much more smoothly. Accordingly,
consideration could be given to securing a work permit from the BFN as part of the implementation
planning for the harbour development project.
4
70
kpmg
We were also advised that the First Nation will handle all of the consultation with the BFN locally,
with a very low likelihood that other organizations (tribal councils, regional FN organizations or
Aboriginal Affairs and Northern Development Canada) involved in the process.
Representatives of the BFN also indicated that the Garden River First Nation may have some
interest in water quality issues in the St. Marys River in connection with the harbour development
project. However, the BFN also indicated that the two First Nations cooperate and that the Garden
River First Nation will usually leave matters that originate on BFN traditional lands to the BFN.
10.4.3 Metis Nation of Ontario
Under Section 35(2) of the Constitution Act, Metis are recognized as Aboriginal peoples of Canada.
In Ontario, the Aboriginal rights of Metis are limited to harvesting, with the Interim Harvesting
Agreement with the Province of Ontario (2004) governing the enactment of these rights.
The MNO has established a consultation policy which indicates that the Crowns duty to consult is
triggered when it plans, undertakes or authorizes a policy, project or development that has the
potential to affect the rights, interests or way of life of the regional Metis communities that rely on
these territories. Industry may undertake procedural aspects of the Crowns duty, but the duty itself
remains solely with the Crown. Based on discussions with representatives of the MNO, it is
anticipated that consultation issues with the MNO are centred on the impact of the construction
and dredging on fisheries, with employment opportunities for Metis also representing a potential
consultation topic.
10.4.4 Consultation issues
Based on a review of consultations between proponents for other projects and First Nations, the
following issues have been identified that may impact on the consultation process for the harbour
development:
Consultation processes with First Nations typically involve longer timeframes and as such,
sufficient time should be allocated for the consultation process. Timing of consultation
processes may also be impacted by Council elections (occurring every two years), which may
result in a significant change in leadership and the need to revisit previous discussions;
First Nations are inherently intensely democratic, with a high degree of importance placed on
community consultation and input. Accordingly, consultation processes should incorporate a
sufficient level of community discussion.
The importance of cultural aspects should not be underestimated, particularly with respect to
terminology. Consultation processes may benefit from the use of experienced consultants that
are aware of cultural and other sensitivities.
The degree of structure around consultation processes will vary by First Nation, with some First
Nations having more experience than others based on their involvement in other projects.
Where possible, proponents should consider advancing the consultation process by suggesting
a structured approach documented in a memorandum of understanding or other form of
document, as well as periodic feedback on the consultation process. In addition,
documentation concerning decisions made is also important to avoid potential
misunderstandings between the First Nation and the proponent.
71
kpmg
Similarly, First Nations will have differing levels of resources and capacity, with staff members
often involved in a number of different projects. Proponents could advance the consultation
process by providing support for the First Nation(s) involved, including financial support for
technical studies, community gatherings, etc.
Environmental concerns, employment, training and business opportunities are primary areas of
interest in the consultation process. Proponents should be prepared to make meaningful
proposals to the First Nation(s) in these areas as part of the consultation process.
72
kpmg
1. An immediate priority of the project should be applications to senior government agencies for
infrastructure funding (specifically the Gateways and Border Crossings Fund) and
implementation activities (FedNor, Northern Ontario Heritage Fund).
2. Negotiations should be commenced with ESAI and other private and public sector stakeholders
for the development of a suitable partnership arrangement that would involve land for the public
access port component of the project, the development of a strategy for securing government
funding and other implementation issues.
3. A decision should be made as to the appropriate governance structure for the public access port
(co-operative corporation, CDC), with the governance structure established within a relatively
short timeframe.
Consideration should be given to deferring all other implementation requirements (CEAA processes,
Aboriginal and First Nation consultation) until such time as these issues have been resolved.
Implementation activities for the public access port will be the responsibility of the corporation
established for the purposes of owning and operating the public access port, with ESAI responsible
for the redevelopment of its portion of the harbour expansion project.
Notwithstanding the use of a CDC or cooperative for the ownership and governance of the public
access port, consideration should be given to the use of a third party for the design, construction
and operation of the port (and potentially financing).
A suggested implementation workplan is provided on the following page.
73
kpmg
Senior
government
funding for
implementation
Senior
government
funding for
infrastructure
Partnership retains
procurement, technical
and legal advisors
Partnership retains
engineering firm for CEAA
process
Partnership undertakes
procurement process and
selects proponent
Partnership completes
environmental assessment
process
Partnership completes
Aboriginal and First Nation
consultation
Component
Construction and operation
of expanded harbour
facility
Procurement process
Environmental assessment
Aboriginal and First Nation consultation
Time Requirement
Cost
Two years
Two years
Two years
$4.0 million
$1.0 million
$0.3 million
Total
$5.3 million
74
kpmg
There is a need to address the situation for third party harbour users within the short-term,
regardless of whether additional volumes of marine movements materialize in the future. In the
absence of a major redevelopment of the harbour which includes the creation of a separate
public access port, ESAIs future plans will likely result in the squeezing out of third party
users as ESAI attempts to meet its own requirements for dock and storage space.
The analysis has identified several potential sources of additional demand, with our analysis
indicating the potential for third party movements to increase by as much as 30% in the short
term and 200% in the long term, mandating an increase in the overall capacity of the harbour
complex. While the majority of these increases are expected to come from existing users of the
harbour facility and involve commodities that are currently moved through ports elsewhere on
the Great Lakes, the market assessment has identified some potential customers that currently
do not use the Sault Ste. Marie harbour complex that could be interested in a marine movement
via Sault Ste. Marie.
The ability to secure senior government funding for the harbour expansion is a significant
contributor to its overall success. In the absence of senior government funding, financial
reasoning would lead ESAI to displace third party users from the harbour complex rather than
undertake significant infrastructure investments to accommodate them.
Despite the congruence of the project with funding programs such as the Gateways and Border
Crossings Fund and the Building Canada Fund, the significant private sector component of the
proposed harbour expansion project will likely require a parallel effort to generate political
support for the project. The recent success of the Huron Central Railway in obtaining funding
under the Building Canada Fund provides precedence for establishing a partnership of private
and public sector stakeholders to support the advancement of the proposed harbour expansion
project.
There are a number of non-financial issues that will likely impact on the harbour expansion,
particularly the public access port component. Specifically, the physical layout of the area is
extremely confined, limiting the amount of available space for storage, materials handling and
transportation infrastructure. Additionally, a sizeable amount of the surrounding area is currently
used for slag storage, reducing the development potential of the property. While potential
solutions are available and initial discussions with ESAI indicated a willingness to consider
potential strategies to address these issues, these will need to be implemented as part of the
overall harbour expansion project.
75
kpmg
This report represents the third study since 2004 that examined the concept of port expansion
in Sault Ste. Marie. The results of our analysis are consistent with earlier studies but also
indicate that time is now of the essence. Specifically, we note that initiatives identified by ESAI
(e.g. shift from rail to marine for iron ore movements, increased usage of marine for finished
product movements) are expected to occur in the short-term (i.e. within the next four to five
years), while the potential for chromite ore movements is linked to the development of the Ring
of Fire initiative, which could potentially commence operations as early as 2017. With the
requirement for approximately two years for implementation and construction, there is a risk
that the proposed harbour expansion may not be completed in time to meet these short-term
initiatives, with the result being either (i) the additional displacement of existing harbour users
by ESAI as it seeks to satisfy its own marine capacity requirements; or (ii) the use of other
transportation routes for commodities that could otherwise be moved through an expanded
Sault Ste. Marie harbour, albeit at a potentially higher cost to users (impacting the
competitiveness of the Sault Ste. Marie region). Accordingly, consideration should be given to
redirecting the communitys efforts away from feasibility-type exercises to actual
implementation activities.
76
kpmg