SAULT STE. MARIE MULTI-MODAL INITIATIVE Phase I Market Assessment Final Report

January 10, 2007

January 10, 2007 Sault Ste. Marie Multi-Modal Initiative Phase I Market Assessment Table of Contents

Table of Contents

Executive Summary 1

Project Overview I Background to the Report ...... 10 1.1 Multi-modal defined ...... 10 1.2 Overview of the Sault Ste. Marie concept ...... 12 1.3 Study requirements ...... 16 1.4 Acknowledgements ...... 17 II Study Overview ...... 18 2.1 Phase I study methodology ...... 18 2.2 Sources of information ...... 19 2.3 Data verification procedures ...... 24 2.4 Congruence with terms of reference ...... 27

Demonstrating the Potential and Challenges III Case Studies in Transportation Opportunities ...... 30 3.1 Introduction to the case studies ...... 30 3.2 Mirabel Airport ...... 31 3.3 Port of Montana ...... 35 3.4 Elko County, Nevada ...... 37 3.5 Niagara Falls and Fort Erie, Ontario ...... 39 3.6 Key findings from the case studies ...... 44 3.7 Implementation lessons for the case studies ...... 45

U.S. Trade Flows IV Overview of U.S. Trade Patterns ...... 46 4.1 Import and export levels ...... 46 4.2 Major trading regions ...... 47 4.3 Major trading partners ...... 50 4.4 Expected outlook ...... 51 V Overview of Upper U.S. Great Lakes Region ...... 53 5.1 Overview of the U.S. Upper Great Lakes region ...... 53 5.2 Economic outlook ...... 55 5.3 Implications for the initiative ...... 58

Transportation Opportunities by Mode VI The Transportation of U.S. Imports and Exports ...... 59 6.1 Analysis of U.S. imports by mode ...... 59 6.2 Analysis of U.S. exports by mode ...... 61

Sault Ste. Marie Multi-Modal Initiative Phase I Market Assessment Table of Contents

VII Air Cargo Opportunities ...... 63 7.1 Characteristics of air cargo shipments ...... 63 7.2 Analysis of air cargo opportunities ...... 69 7.3 Overall conclusions concerning air cargo ...... 72 VIII Great Lakes Marine Freight Opportunities ...... 74 8.1 Characteristics of Great Lakes marine shipments ...... 74 8.2 Competitive position of Sault Ste. Marie ...... 78 8.3 Overall conclusions concerning Great Lakes marine transportation .... 80 IX Canada-U.S. Surface Trade Opportunities ...... 81 9.1 Characteristics of surface cargo shipments ...... 81 9.2 Analysis of surface transportation opportunities ...... 89 9.3 Overall conclusions concerning surface transportation ...... 97 X Opportunities From Overseas Freight Movement ...... 98 10.1Characteristics of oceangoing marine shipments ...... 98 10.2 Analysis of opportunities ...... 109 10.3 Analysis of resultant benefits ...... 114 10.4 Competitive strengths and weaknesses ...... 116 10.5 Overall conclusions concerning oceangoing transportation ...... 119

Market Support XI Market Interest ...... 121 11.1 Supply chain participants...... 121 11.2 Consultation participants ...... 122 11.3 Interview methodology ...... 123 11.4 End customer interview results...... 124 11.5 Logistics company interviews ...... 126 11.6 Shipping company interviews...... 128 11.7 Rail company interviews ...... 129 11.8 Other transportations company interviews...... 129 11.9 Overall conclusions ...... 130 XII The Sufficiency of Demand...... 131 12.1 Current and future market potential...... 131 12.2 Sufficiency of indicated demand...... 132 XIII Backhaul Opportunities ...... 134 13.1 U.S. Upper Great Lakes export levels ...... 134 13.2 Major trading partners ...... 136 13.3 Exports by commodity ...... 137 13.4 Implications of container imbalance ...... 138

Recommendations and Next Steps XIV Recommendations and Key Findings ...... 140 14.1 Summary of key findings and recommendations ...... 140 14.2 Factors influencing infrastructure requirements and design ...... 142

Sault Ste. Marie Multi-Modal Initiative Phase I Market Assessment Table of Contents

Figure Listing 1. The strategic position of Sault Ste. Marie 1 2. Volume of shipments to the U.S. by mode (in millions of tons) 3 3. Significant Great Lakes marine movements by volume 4 4. The opportunities for bulk Canada-U.S. surface movements 4 5. The opportunities for container movements into the U.S. Upper Great Lakes region (2003) 5 6. Overview of the container opportunity for Sault Ste. Marie 8 7. Container traffic in Canadian and U.S. ports (foreign and domestic trade) 11 8. Number of southbound trucks at major Ontario-U.S. border crossings ( 12 9. Intended service area of Sault Ste. Marie 13 10. Current and proposed routings for marine containers 13 11. Current and proposed air cargo routings 14 12. Sault Ste. Marie as a marine transportation gateway 14 13. Phased planning approach adopted by Destiny 16 14. Case studies 30 15. Mirabel airport facility 32 16. Proposed Elko County rail port site 37 17. Border crossing facilities – Niagara Falls and Fort Erie 39 18. Total volume of imports to the U.S. over the International Rail Bridge 41 19. CSX Frontier Yard layout 42 20. U.S. foreign trade (in millions of dollars) 46 21. U.S. foreign trade (in millions of dollars) and annual change in GDP 47 22. U.S. imports and exports by region – 2005 48 23. Imports to the U.S. by major trading region – 1997 to 2005 48 24. Exports from the U.S. by major trading region – 1997 to 2005 49 25. Top 25 U.S. trading partners by region and value of total trade ( 50 26. Projected import levels based on extrapolation of historical growth rates 52 27. Estimated population – 1960 to 2005 53 28. U.S. gross domestic product by region – 2005 54 29. Summary of change in GDP (all sectors) – 2000 to 2005 56 30. Summary of change in GDP (automotive sector) – 2000 to 2005 57 31. Summary of Michigan mass layoff events – 1996 to 2005 58 32. Distribution of value of imports to the U.S. by mode of transportation – 1997 to 2003 59 33. Distribution of weight of U.S. imports by mode – 2003 60 34. Distribution of value of exports fro the U.S. by mode of transportation – 1997 to 2003 61 35. Distribution of weight of exports from the U.S. by mode – 2003 62 36. Summary of major U.S. air cargo gateways by value of total trade (imports and exports) 63 37. Summary of foreign airports by volume of trade (imports and exports) 66 38. Summary of air cargo by commodity type 68 39. Summary of shipments to and from U.S. Great Lakes ports 74 40. Summary of Great Lakes ports by trade volume (Canada-U.S. only) 75 41. Estimated distance from Montreal (in miles) 80 42. Major U.S. surface gateways by value of imports from Canada to the U.S. 82 43. Major U.S. surface gateways by volume of imports from Canada to the U.S. 82 44. Summary of cross-border surface trade flows (Canada-U.S.) by mode 83 45. CN Rail and CP Rail networks 89 46. Current and proposed routings for potential diversion flows 91 47. Opportunity no. 1 – Western Canadian shipments crossing at Southern Ontario border crossings 92 48. Opportunity no. 2 – Northern Ontario shipments crossing at Southern Ontario border crossings 93 49. Peak demand – 1998 and 2010 95 50. CN Rail and CP Rail network densities 96 51. U.S. seaports by value of total trade (imports and exports) 99

Sault Ste. Marie Multi-Modal Initiative Phase I Market Assessment Table of Contents

Figure Listing (continued) 52. U.S. seaports by volume of total trade (imports and exports) 99 53. Distribution of TEU’s by port 102 54. Summary of foreign ports by volume of imports to the U.S. 103 55. Summary of foreign ports by volume of exports from the U.S. 104 56. Summary of major marine carriers by TEU capacity 108 57. Summary of westbound container shipments to the U.S. Upper Great Lakes region 110 58. Inbound container shipments to U.S. West Coast ports (2003) 111 59. Container shipments to U.S. Upper Great Lakes region from West Coast ports (2003) 112 60. Summary of estimated market for container shipments 113 61. Overview of the opportunity – why is it a priority 120 62. Summary of the supply chain 121 63. Summary of container shipments to U.S. West Coast ports 131 64. Summary of U.S. exports by state 134 65. Summary of total exports – U.S. and selected states 135 66. Port of Vancouver laden versus empty container traffic, 2005 139

Table Listing 1. Summary of total traffic volumes – 2003 to 2006 41 2. Analysis of transportation and equipment operator employment – Fort Erie, Niagara Falls and Ontario 43 3. Imports to the U.S. by major trading region – 1997 to 2005 49 4. Exports from the U.S. by major trading region – 1997 to 2005 50 5. Top 25 U.S. trading partners 51 6. Estimated population – 1960 to 2005 54 7. Durable goods manufacturing in the U.S. – Top 10 states by GDP 55 8. Value of imports to the U.S. by mode of transportation – 1997 to 2003 60 9. Distribution of weight of imports o the U.S. by mode 61 10. Value of exports from the U.S. by mode of transportation – 1997 to 2003 62 11. Summary of value to weight ratios by transportation modes – imports 63 12. Top 30 airports by value 64 13. Summary of air cargo imports and exports by foreign pairing 65 14. Summary of foreign airports by volume of trade (imports and exports) 67 15. Analysis of air cargo volumes (import and export) by carrier type 69 16. Summary of existing airports within the proposed service area with air cargo trade in excess of $50 million annually 70 17. Comparison of air cargo and passenger rankings for major U.S. airports 71 18. Top 20 Great Lakes ports by volume of shipments 18 19. Summary of shipments to U.S. Great Lakes ports by commodity 76 20. Summary of shipments from U.S. Great Lakes ports by commodity 76 21. Summary of shipments to U.S. Great Lakes ports by country of origin 77 22. Summary of shipments to U.S. Great Lakes ports by port of origin 77 23. Summary of shipments from U.S. Great Lakes ports by port of destination 78 24. Comparison of St. Lawrence Seaway capacity and container ship sizes 79 25. Top 15 surface gateways by value of imports from Canada to the U.S. 83 26. Summary of imports from Canada to the U.S. by value and surface mode of transportation 84 27. Summary of imports from Canada to the U.S. by weight and surface mode of transportation 84 28. Summary of surface imports to the U.S. from Canada by commodity group 85 29. Summary of surface exports from the U.S. to Canada by commodity group 85 30. Summary of surface transportation flows by Province 86 31. Value of U.S. imports from Canada by region 87 32. Volume of U.S. imports from Canada by region 87 33. Value of U.S. exports to Canada by region 87 34. Largest trucking companies in Canada, by fleet size 88

Sault Ste. Marie Multi-Modal Initiative Phase I Market Assessment Table of Contents

Table Listing (continued) 35. Comparison of CN Rail, CP Rail and other railways 89 36. Potential market size – shipments from Western Canada that cross at Ontario gateways 91 37. Potential market size – shipments from Northern Ontario that cross at Ontario gateways 92 38. Summary of estimated distance for selected routings 94 39. Summary of average and 95th percentile crossing times 94 40. Summary of estimated market – shipments of Northern Ontario commodities 97 41. Summary of estimated market – shipments from Western Canada 97 42. Top 30 seaports by value 100 43. Top 30 seaports by volume 101 44. Container movements by U.S. seaport (2003) 102 45. International origin and destination ports ranked by volume of trade 105 46. Summary of top 30 maritime trading partners, by total trade value and volume 106 47. Summary of marine imports to the U.S. by commodity group 107 48. Summary of marine exports from the U.S. by commodity group 107 49. Summary of potential diversion opportunity by region 114 50. Summary of estimated economic impact – revenue generated 114 51. Summary of estimated benefit from proposed Sault Ste. Marie routing 117 52. Summary of estimated diversion opportunity – 2005 and 2015 132 53. Summary of estimated required market share 133 54. Summary of top 15 U.S. exporting states by value – 2005 135 55. Summary of exports by state – 2005 136 56. Summary of MIO State exports by Province of destination 136 57. Summary of exports from MIO States to Asia – 2005 137 58. Summary of exports from MIO States to Canada – 2005 138 59. Container shipments by commodity groupings 141

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Executive Summary

Our country is uniquely positioned to capitalize on the spectacular growth that is occurring in the Asia-Pacific region. Our fundamental competitive advantage is geography. Yet in spite of this advantage, and the huge cost savings it represents for shippers, Canada today only handles 9% of West Coast container traffic. And even though we have excellent rail, road and air links from the coast to most major markets in the United States, only 9% of our current container traffic serves U.S. markets. That is just not good enough. Canada should be the crossroads between the massive engine of the United States and the burgeoning economies of Asia. We can and must do better.

Prime Minister Stephen Harper October 11, 2006 The Concept For more than 10 years, various groups within Sault Ste. Marie have advanced initiatives involving transportation-related activities. Paramount to these efforts is the recognition of the strategic advantage that the community’s geographical location brings. Situated at the junction of three Figure 1 – The Strategic Position of Sault Ste. Marie Great Lakes, Sault Ste Marie is within one day’s driving time of the major population centres of the U.S. Upper Great Lakes region. With transportation access provided by the International Bridge, direct and immediate linkages to U.S. Interstate I-75 and rail U.S. Upper Great Lakes Region connections to both trans- Canada railways and the U.S. Total population 55 million rail network, Sault Ste. Marie Total GDP $2.2 trillion is ideally suited to accommodate higher volumes of freight traffic and position itself as a major component of the supply chain network serving the Northeastern United States and its manufacturing economy. During this period, a number of initiatives have been undertaken to evaluate and promote this perceived opportunity and as a result of these efforts, success has certainly been achieved. The establishment in 2006 of Purvis Marine’s intermodal facility and the recent development of the truck corridor by the City of Sault Ste. Marie are perhaps the best examples of local commitment to transportation as an engine for economic development.

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Notwithstanding these initiatives, the development of transportation opportunities in the community have not been well focused and organized at times. Accordingly, a concerted and coordinated approach to planning, evaluating and developing transportation-related initiatives from a community-wide standpoint was required. In light of this view and in keeping with its role as a leader in economic development for Northern Ontario, FedNor commissioned a multi-modal management plan in early 2005. This plan, completed in June 2005 outlined the basis for moving transportation initiatives forward, including the requirement for: A comprehensive research approach for determining the potential market demand, infrastructure costs and the benefits relating to the development of Sault Ste. Marie as a major transportation gateway Consolidating responsibility for the management of the planning process within a non-political community-based organization, a role that was ultimately assigned to Destiny Sault Ste. Marie (“Destiny”) Following the establishment of a multi-modal task force comprised of government, industry and community representatives (the “Multi-modal Task Force”), Destiny commissioned a study to examine and, if appropriate, develop multi-modal opportunities. Supported by all levels of government, the study consisted of four distinct phases: Phase I – a comprehensive assessment of the potential market for Sault Ste. Marie with the goal of providing an indication as to whether there is sufficient demand to support further study into the opportunity Phase II – an analysis of the infrastructure requirements to support the development of the transportation gateway and an initial feasibility study to determine whether the concept is financially viable Phase III – the quantification of potential benefits for transportation companies that could result from the development of Sault Ste. Marie as a transportation gateway and the development of terms of reference for private sector involvement Phase IV – the development of a critical path for project implementation Following the completion of each phase of the study, the Multi-modal Task Force will recommend whether to proceed to the next phase of the study.

Destiny selected the team of KPMG LLP, Marshall Macklin Monaghan Inc. and RGF Consultants to undertake the study. This report addresses the key requirements of Phase I, including: Developing a market assessment and demand model in a manner that clearly identifies Sault Ste. Marie’s competitive and comparative position with respect to four modes of transportation (air, marine, road and rail). Determining as to whether there is sufficient and sustainable real or potential market demand for a commercially viable, multi-modal initiative in Sault Ste. Marie for any or all modes of transportation and whether the level of demand is sufficient to justify the serious consideration of the development of such an initiative. Demonstrating and prioritizing the community’s greatest opportunities that will lead to Multi- modal Task Force to make a recommendation to proceed, modify or abandon the project.

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The Phase I Study Approach Multi-modal transportation has a high profile within the community of Sault Ste. Marie. In recognition of this, Destiny clearly required all recommendations stemming from the Phase I study to be comprehensively researched and supported – a message that was communicated by Destiny to the consulting team on a number of different occasions. In keeping with this direction, our approach to the Phase I study combined independent research of trade and transportation patterns and consultation with industry representatives of logistics companies, shipping lines, railways, end customers and other relevant parties. The research approach was applied consistently to all four modes of transportation – air, marine, road and rail – so that a comprehensive assessment of potential opportunities in all four modes could be made. The Phase I study involved an iterative research approach, where initial study findings were presented to the Multi-modal Task Force throughout the study period. This allowed us to confirm the results of our research, adjust our workplan as necessary and ensure that our results were consistent with Destiny’s expectations. The Market Potential – Modes with Limited Opportunities

Air – While air cargo has been at Figure 2 - Volume of shipments to the U.S. the forefront of recent efforts in by mode (in millions of tons) Sault Ste. Marie, we do not consider Air this mode to have significant market Surface 5 potential. The reality of the air cargo 222 industry is that while the value of the freight shipped is high, the market itself (in terms of volume) is extremely small. This, combined with fierce competition Marine and a high degree of dependency on 848 passenger air service volumes argue against the establishment of the community as an air cargo distribution centre. While individual organizations may still wish to pursue air cargo opportunities, we do not believe that this mode represents a priority for Sault Ste. Marie at this time. Great Lakes marine freight – Sault Ste. Marie currently enjoys the position of being the fourth busiest Canadian port on the Great Lakes and the 26th busiest port in the world from the standpoint of the volume of shipments received from the United States, due in large part to the presence of Algoma Steel and its need for U.S. raw materials. Despite this position, additional opportunities stemming from marine movements are extremely limited based on the fact that the majority of Canadian-U.S. marine movements on the Great Lake are between ports on Lake Erie. In this situation, the geographical location of Sault Ste. Marie is actually a disadvantage as the community is simply “too far from the action” to be able to expand its involvement in marine transportation flows.

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Figure 3 – Significant Great Lakes marine movements by volume

The Market Potential – Modes with Immediate Opportunities Canada-U.S. surface trade opportunities – On an annual basis, more than 13,000 trucks carrying bulk freight (i.e. non-containerized) originating in Western Canada and destined for the U.S. Upper Great Lakes region cross the border in Southern Ontario. Sault Ste. Marie’s geographical location allows it to position itself as an alterative to these existing traffic patterns, although there are both benefits and challenges associated with a routing through Sault Ste. Marie. Similarly, over half of the wood, pulp and paper that is produced in Northern Ontario and shipped to U.S. Upper Great Lakes region crosses at Southern Ontario border crossings. We consider these two areas to be opportunities for the community (Figure 4), albeit secondary in nature due to the overall small size of the potential markets and the challenges facing Sault Ste. Marie.

Figure 4 - The opportunities for bulk Canada-U.S. surface movements

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Overseas freight movements – Since 1997, shipments from China to the United States have increased by almost 300%. This growth, combined with increases in shipments from other countries has placed considerable strain on the capacity of the U.S. transportation network. Sault Ste. Marie’s proximity to major markets in Michigan, Ohio and Indiana, combined with plans to increase container handling capacities at Canadian West Coast ports, provides the potential to capitalize on the growth of trade from Asia by establishing itself as a distribution point for southeast-bound containers (Figure 5).

Figure 5 - The opportunities for container movements into the U.S. Upper Great Lakes region (2003)

Containers currently landed in New York 50,000 Containers currently landed in Montreal 55,000

Containers currently landed in U.S. West Coast ports 515,000 Containers currently landed in Vancouver 10,000

Transporting containers from Asian countries to Canadian ports, sending them by rail to Sault Ste. Marie and distributing them into Michigan, Ohio and Indiana by truck, could potentially reduce transit times by up to four days. For large customers, who typically ship high value items and/or use time sensitive inventory management systems (e.g. just-in-time), reductions in shipping times translate into cost savings. For these customers, the routing of containers through Sault Ste. Marie could provide significant cost savings, making this type of routing a viable alternative to already congested ports and railyards in the United States. This market, which amounted to 630,000 containers in 2003, now represents approximately 700,000 containers annually (increasing to 1.1 million containers within 10 years).

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Views Of Logistics Companies And Their Customers Within Sault Ste. Marie, the community’s potential with respect to transportation-related activities has generated considerable interest and discussion. While a number of local groups recognize the benefits that could be achieved by routing freight through Sault Ste. Marie, the real question is whether industry participants share this view. The answer is yes – and decidedly so. The strong interest on the part of the logistics companies and their customers contacted during the Phase I study is best indicated by the following: Three logistics companies indicated a willingness to work with Destiny in advancing the concept One logistics company is planning to move freight through Sault Ste. Marie on a test basis to assess the potential benefits provided by the community One logistics company indicated a strong interest in establishing Sault Ste. Marie as its distribution centre for Eastern Canada and the Northeastern U.S. One end user offered to second a staff member to assist Destiny with the analysis of the opportunity During the course of the Phase I study, we discussed the potential opportunities with logistics companies and their customers to gain an understanding of their views of existing transportation networks, the benefits that could be attained by directing cargo traffic through Sault Ste. Marie and their interest in further investigating the concept. These interviews yielded a consistent message in support of Sault Ste. Marie’s efforts: There are significant concerns surrounding congestion (both existing and in the future) affecting transportation routes and the impact that this congestion has on delivery times and costs. There is a strong interest in investigating alternative transportation networks that would alleviate these concerns, including a routing through Sault Ste. Marie. If sufficient benefits can be demonstrated, logistics companies and their customers would be willing to commit relatively large volumes of traffic towards the community. While our study involved discussions with only a few logistics companies and end customers, even this limited consultation identified an existing sizeable market share of upwards of 60,000 containers per year, increasing by upwards of 50% within three years. Logistics companies view the availability of an alternative routing through Sault Ste. Marie as a significant competitive advantage that they would be willing to market to their broader customer base, thereby increasing the overall level of industry within the transportation sector. In addition to routing freight through Sault Ste. Marie, interest also exists in establishing distribution centres and other transportation-related activities within the community, generating additional economic and employment benefits.

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Views Of Shipping Lines, Rail Companies And Other Common Carriers While logistics companies and their customers represent an important component of the overall management of the supply chain process, they are not the only parties that determine the routes that goods follow between the supplier and the end customer. Shipping lines and railways are critical to routing decisions – so much so that they exercise significant (in some cases almost complete control) over the choice of routings for freight shipments. Our consultations with these stakeholders indicates that they are more reserved than logistics companies and their customers with respect to the opportunity, reflecting their perceptions as to the challenges that will be faced by the community. While these challenges are significant, some companies also appreciated the potential benefits that could result from a Sault Ste. Marie routing and a number (including one major railway) have stated that if sufficient demand were dedicated towards the initiative, their level of interest would increase accordingly. Ultimately, the participation of shipping companies and railways is contingent upon the level and sustainability of demand that is committed by end customers towards a Sault Ste. Marie routing and the extent to which it is large enough to convince them to establish the community as a new transportation gateway. Recommendation The original goal of the Phase I study was to determine whether there is sufficient demand to support further research into infrastructure issues and the financial feasibility of a multi-modal initiative in Sault Ste. Marie (Phase II). Based on the strong level of support expressed by certain logistics companies and their customers, and notwithstanding the lower level of interest on the part of shipping lines and railways, we believe that this condition has been met and therefore recommend that Destiny consider proceeding with Phase II of the study. This recommendation also reflects the potential economic benefits that could accrue from a successful development of the potential markets, which we believe could be as high as $95 million in annual economic activity and almost 500 direct and indirect positions (see Figure 6). These employment and economic benefits, while substantial, will not be wholly realized until the initiative is fully established, which may require a period of several years. We also recommend that future research phases be on the rail to road markets identified as priorities, both primary and secondary. Once again, we do not consider either air or marine transportation to represent priorities for Sault Ste. Marie due to limited market size and the inability of the community to muster tangible competitive strengths in the face of industry key success factors.

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Figure 6 – Overview of the container opportunity for Sault Ste. Marie

The Market 700,000 containers annually

The Expectation 140,000 containers diverted to Sault Ste. Marie per year (20% of the current estimated market)

The Opportunity 1 train per day to Sault Ste Marie

The Benefits Incremental revenues of $95 million annually Incremental GDP of $31 million annually 275 direct employment positions, 200 indirect and induced positions Stability benefits for Northern Ontario Alleviation of congestion on existing transportation networks Enhanced North American business efficiency

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Concluding Comments While the ultimate success or failure of the multi-modal initiative is contingent upon a number of factors yet to be addressed, the initial results should be viewed as both extremely positive and encouraging. While success is by no means assured, our investigations indicate strong potential for this initiative. A view that is supported by the significant interest expressed by a number of end customers and logistics companies. Their view that the current transportation network is challenged to meet the demands of today and tomorrow mirrors the comments made in a recent speech by the President and Chief Executive Officer of the Canadian Pacific Railway

Does our collective infrastructure have the quality and capacity to ensure that we can capitalize on the economic growth opportunities we see coming in the next five, 10 or 20 years? No, I don’t believe it does. Far more important than my opinion is what I hear from some of our Asian customers. They are wondering if Canada is really open for business. For Canada to compete effectively on the international stage, we must ensure that the movement of goods between Canada and the United States is seamless and fluid … Many of the goods that flow through our ports in Vancouver, Montreal and elsewhere either originate from or are destined for the United States. This means – of course – that we have to create and seize every opportunity to improve efficiencies at the Canada – U.S. border… I believe creating uniquely secure transportation corridors can be a source of competitive advantage for Canada’s trade. The Canada we live in today was built on bold visions. We were, we are and we will be a trading nation. I would like to see us again have the boldness to say ‘this is how we want our Port and transportation infrastructure to be 10, 25, 50 years from now’ – and then have the conviction to follow through – with urgency.

Sault Ste. Marie is well positioned to be an important contributor to Canada’s road and rail corridors. The success of this initiative will make the community an integral part of the North American transportation network.

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I Background to the Report

For over a decade, the concept of a transportation-related initiative in Sault Ste. Marie has been seen as a potential contributor to the community’s local economy. This study represents the most recent step in the planning stage for such an initiative and in this chapter; we highlight the context of our study by examining the concept, its history and the purpose of the report.

1.1 Multi-modal defined Multi-modal transportation involves the shipment of goods over distances through the use of two or more methods of transportation, which may include trucks, rail, ships or aircraft. The use of multi-modal transportation systems is intended to capitalize on the inherent cost advantages and suitability provided by each of the transportation modes. Multi-modal transportation is most often viewed in the context of container movements, which could involve any number of different modes of transportation: Container ships deliver containers from an overseas destination to a seaport At the seaport, containers are offloaded directly onto railcars for transportation inland to a regional hub Upon arrival at the regional hub, the containers are unloaded onto trucks for delivery to the customer It is important to recognize, however, that multi-modal transportation is also utilized for non- containerized cargo as well. For example, nickel concentrate from Xstrata’s (formerly Falconbridge) Raglan operations in Northern Quebec are transported by ship to Quebec City, where the concentrate is offloaded into pipelines for delivery by railcar to Sudbury. This multi- modal movement of non-containerized cargo also involves two distinct modes of transportation. Multi-modal transportation is a relatively new concept and while the use of shipping containers date as far back as the late 1800’s, the first true examples of large-scale multi-modal transportation emerged in the 1950’s. In 1952, CP Rail became the first major North American railway to introduce piggyback rail service, where truck trailers are transported on railcars.1 In 1956, the Ideal-X, a converted oil tanker, transported 58 containers from Newark, New Jersey to Houston, Texas, representing the first large-scale commercial shipment of containers in North America2.

1 CP Rail Archives 2 The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger, Marc Levinson

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Since its original introduction, multi-modal transportation through the use of containers has grown significantly. During 2005, U.S. and Canadian ports handled a total of 46.1 million twenty-foot equivalent units (“TEU’s) of containers, representing a 400% increase since 1980 and a 40% increase since 2000. As noted in Figure 7, the bulk of this growth has been experienced predominantly in Canadian and U.S. West Coast ports.

Figure 7 - Container Traffic in Canadian and U.S. Ports (foreign and domestic trade) – millions of TEU’s3

Canada 35

U.S. 30

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 (millions of TEU’s) 1980 1985 1990 1995 2000 2005 Canada Atlantic and Great Lakes ports 0.5 0.9 1.1 1.2 1.7 2.0 Pacific ports 0.1 0.2 0.4 0.5 1.2 2.1 Total 0.6 1.1 1.5 1.7 2.9 4.1

U.S. Atlantic and Great Lakes ports 4.3 5.5 6.6 9.7 13.0 16.8 Pacific ports 3.5 5.4 8.2 11.4 15.7 23.0 Gulf ports 0.6 0.8 0.8 1.2 1.7 2.2 Total 8.4 11.7 15.6 22.3 30.4 42.0

3 American Association of Port Authorities

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1.2 Overview of the Sault Ste. Marie concept Since its opening on October 31, 1962, the Sault Ste. Marie International Bridge has provided ready access, via Interstate Highway I-75, to Detroit and other major U.S. centres in the Upper Great Lakes region. Currently, the volume of trucks that transit through the Sault Ste. Marie transportation gateway makes the community the 101st largest gateway for shipments to and from the United States by value, with just under $2 billion of freight moving across the International Bridge in 20034. This volume of traffic, while significant and supplemented by the community’s port activities, is substantially less than that moved across other gateways in Southern Ontario (see Figure 8).

Figure 8 - Number of Southbound Trucks at Major Ontario-U.S. Border Crossings (in thousands)5

2,000 1,800 1,600 Windsor 1,400 1,200 Fort Erie 1,000

800 Sarnia

600

400

200 Sault Ste. Marie - 1999 2000 2001 2002 2003

1999 2000 2001 2002 2003 Percentage of Total Windsor – Detroit 1,759 1,769 1,642 1,671 1,634 43% Fort Erie – Buffalo 1,188 1,198 1,124 1,208 1,163 31% Sarnia – Port Huron 791 839 829 908 928 24% Sault Ste. Marie 70 67 64 63 63 2% Total 3,808 3,873 3,659 3,850 3,788 100%

Recognizing the potential to move significantly higher amounts of cargo through Sault Ste. Marie, both through its land gateway to the U.S. as well as by air and ship, several individuals and organizations have advanced the concept of developing the community into a major transportation hub servicing the area within one-day’s travel from Sault Ste. Marie, which translates into the U.S. states of Michigan, Ohio, Indiana, Illinois, Iowa, Wisconsin and Minnesota (see Figure 9).

4 U.S. Department of Transportation 5 U.S. Department of Transportation

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Figure 9 - Intended service area of Sault Ste. Marie

Distances from Sault Ste. Marie to:

Detroit 550 km Chicago 760 km Cleveland 800 km Gary 720 km Minneapolis 890 km Milwaukee 640 km Cedar Rapids 940 km Indianapolis 860 km

Over the last 10 years, a number of studies have been commissioned concerning transportation- related opportunities in Sault Ste. Marie that have considered a number of different modes, including road, rail, marine and air. Despite the diverse nature of the opportunities identified, we understand that the primary focus of the community’s multi-modal efforts are now focused primarily on three initiatives: 1. The establishment of Sault Ste. Marie as a rail-road intermodal gateway. Containers shipped from Asia to West Coast ports (both in the U.S. and Canada) that are destined for the U.S. Great Lakes region would be shipped to the Port of Vancouver and sent by rail to Sault Ste. Marie, with the containers then loaded onto trucks for distribution further south. In selecting this routing, it is anticipated that customers will realize reductions in shipping times due to a more direct routing Ii.e. less kilometres travelled – assuming a first port of call in Vancouver) and the avoidance of congestion at U.S. West Coast ports (primarily Los Angeles and Long Beach), Chicago and Southern Ontario border crossings (see Figures 10(a) and 10(b)).

Figure 10(a) – Current routings for marine containers Figure 10(b) – Proposed routing for marine containers

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2. The establishment of the community as an air cargo hub, with cargo planes (including flights from Asia using polar routes) landing in Sault Ste. Marie and offloading cargos for distribution into the United States and Canada (see Figures 11(a) and 11(b)). This concept anticipates that costs associated with air transportation can be significantly reduced by routing air cargo flights to Sault Ste. Marie, with cargo then distributed by truck to customers in Ontario and the United States.

Figure 11(a) – Current air cargo routings Figure 11(b) – Proposed air cargo routing

3. The development of Sault Ste. Marie into a major marine distribution point for the movement of goods by ship between Northern Ontario and Canadian and U.S. Great Lakes ports (see Figure 12).

Figure 12 – Sault Ste. Marie as a marine transportation gateway

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Notwithstanding the level of support for transportation-related initiatives within Sault Ste. Marie, we understand that there was a sense in the community that the planning efforts were disjointed and as such, a concerted and coordinated approach was required if the concept was to be realized. In light of these concerns, and in keeping with its role as a leader in economic development for Northern Ontario, FedNor commissioned a management plan for multi-modal initiatives in early 2005. Encompassing a review of the work accomplished to date, the management plan was completed in June 2005 and outlined an approach to researching and implementing a transportation-related initiative for the community. In addition, and in response to concerns surrounding political influence of the process, the management action plan also recommended that an independent community organization be selected to act as the champion of the process. Following the preparation of the management action plan, Destiny was chosen to assume the responsibility for the planning process. Based on this mandate, Destiny issued an initial request for expression of interest in August 2005, followed by a formal request for proposal later that year.

Upon completion of selection process, Destiny selected the team of KPMG LLP, Marshall Macklin Monaghan Inc. and RGF Consultants to undertake Phase I of the study.

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1.3 Study requirements The request for proposal issued by Destiny reflects a four phase approach to investigating the viability of, and the implementation approach for, a multi-modal transportation initiative in Sault Ste. Marie. In dividing the study into four components, Destiny recognized that key decision points would arise during the process that would effectively determine whether subsequent research into the initiative was merited. A summary of the phased approach to planning for the multi-modal initiative is outlined below (see Figure 13).

Figure 13 – Phased planning approach adopted by Destiny

The intended outcome of the Phase I market Phase I assessment is to determine whether sufficient

Market Assessment potential demand exists for the initiative. In the absence of demand, the initiative would be unviable and further research unwarranted.

In the event that perceived demand did exist, the next phase seeks to address the extent of the Phase II infrastructure investment required to support the Feasibility/Infrastructure initiative and the degree to which this could be Assessment obtained. In the absence of the funds necessary to support this investment, the initiative would have little

chance of success.

The third phase of the study involves an analysis of the Phase III potential benefits that would arise from the initiative, which would be used to gain support from both the Business Case private and public sector. In the event that a viable business case could not be developed, further work on the initiative would be discontinued.

The last phase of the study involves the development

Phase IV of an implementation strategy, including the establishment of a critical path and the assignment of Implementation Strategy responsibilities. Clearly, these items would only be required if the likelihood of success was deemed sufficient.

Work on subsequent phases of the study will only proceed based on the results of the preceding stage. This report summarizes the results of our findings for the Phase I Market Assessment. The specific requirements included in assessing the total potential market demand for the initiative consist of:

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Determining the potential market (both current and future) for the initiative in terms of each mode of transportation. Included in the market determination aspect of the study is an assessment of: The origin and destination of freight that could potentially be routed through Sault Ste. Marie The type and volumes of the potentially divertible freight The nature and characteristics of this freight, including specific shippers and receivers, transportation companies and logistics firms The transportation networks and inter-modal facilities currently used to move the freight Identifying the current and future strengths and weaknesses of the community Assessing potential market interest in the development of Sault Ste. Marie as a multi- modal centre, including the views of major end customers who ship and receive freight as well transportation and logistics companies Analyzing of the market factors that would influence the design and development of the infrastructure supporting the initiative Assessing the availability and impact of backhaul opportunities Identifying major industry players and determining their level of interest in the initiative Determining the best method of developing and promoting the opportunity

1.4 Acknowledgements The project team would like to take this opportunity to recognize the contributions of the members of the Destiny Sault Ste. Marie Multi-Modal Task Force towards the development of this report and the advancement of this initiative as a whole.

Mr. Rob Bergevin (resource) Mr. Tom Hernden (resource) Transport Canada Ministry of Northern Development and Mines Mr. Ed Bumbacco Mr. Dan Hollingsworth (resource) Algoma Steel Inc. Industry Canada – FedNor Mr. Tom Dodds (resource) Ms. Susie Lauzon Industry Canada – FedNor Destiny Sault Ste. Marie Mr. Jerry Dolcetti Mr. Don Mitchell City of Sault Ste. Marie Sault Ste. Marie Chamber of Commerce Mr. Marc Dubé Mr. Bill Therriault St. Marys Paper Ltd. Destiny Sault Ste. Marie Mr. John Febbraro Development Sault Ste. Marie

Funding for this study was provided by Transport Canada, Industry Canada – FedNor, the Northern Ontario Heritage Fund Corporation and the City of Sault Ste. Marie.

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II Study Overview

Given the initiative’s profile within the community and its potential for significant economic and employment benefits, it is clear that the recommendations stemming from the Phase I need to be based on comprehensive and relevant research. We have listed in this chapter the research steps undertaken during our Phase I study, the information sources relied upon during and the steps undertaken to ensure their reasonableness. In addition, we have cross-referenced our report and procedures with the original terms of reference to demonstrate accomplishment of the required deliverables.

2.1 Phase I study methodology In formulating our observations, conclusions and recommendations concerning the transportation industry and the initiative, we have undertaken the following major worksteps: We have discussed the nature of the initiative and study with the Multi-Modal Task Force and confirmed our understanding of the concept, its intended service area (and primary focus on transportation flows to the United States) and the worksteps to be undertaken. We have identified, reviewed and summarized sources of information concerning transportation flows to gain an understanding as to the general movement of freight to and from the United States. We have identified and analyzed existing transportation networks utilized to move freight to the intended service area. Included in this analysis is the identification of congestion points and other factors that would support an alternative routing through Sault Ste. Marie. Based on the results of our transportation network analysis, we have identified potential freight flows that could be diverted through Sault Ste. Marie. In identifying potential diversion opportunities, we have considered those instances where Sault Ste. Marie could enjoy a competitive advantage by virtue of a reduction in shipment times, both as a result of shorter geographical distances and the avoidance of major congestion points. Following the identification of potential diversion opportunities, we have quantified the total amount of freight that could potentially be diverted through Sault Ste. Marie, as well as analyzed the general characteristics of this freight.

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We have discussed the initiative with representatives of transportation companies, logistics companies, end customers and other relevant parties to gain a general understanding of their transportation patterns as well as their views on: The competitive strengths and benefits of Sault Ste. Marie as an alternative transportation gateway Their interest in using Sault Ste. Marie as an alternative routing and where interest was expressed, the nature and amount of freight that could be redirected through the community The conditions precedent for realizing the diversion potential Recommended methods of promoting the initiative The potential for additional value-added activity within the community Other matters of relevance to the initiative and our study We have provided four interim study presentations to the Multi-modal Task Force where we have discussed the results of our study procedures and the implications for the initiative We have presented the overall results of our study to the Multi-modal Task Force and sought input on our findings and conclusions

2.2 Sources of Information Our study findings and conclusions are based upon a combination of secondary and primary data sources. Secondary data sources – secondary data sources represent reports, analyses and statistical summaries prepared by third parties and relied upon by ourselves. While we have undertaken certain procedures to ensure the comparability and accuracy of specific data sources in limited circumstances, we have not audited nor otherwise attempted to verify the information contained in the secondary data sources. Primary data sources – Primary data represents information obtained directly by ourselves during the course of the study, primarily through interviews with industry representatives and direct information requests. In certain instances, the primary information provided to us is considered to be proprietary in nature and as such, has been aggregated for presentation purposes to ensure the confidentiality of the information provided. We have summarized below the sources of information that have formed the basis for our report.

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2.2.1 Secondary data sources – general trade information Foreign trade statistics maintained by the U.S. Census Bureau, summarizing U.S. imports and exports by country and commodity for the years 1996 to 2005 Foreign trade statistics maintained by the U.S. Census Bureau, summarizing imports and exports by country and commodity for the following states:

Michigan Minnesota Indiana

Ohio Wisconsin Iowa

Illinois

2.2.2 Secondary data sources – transportation flows and economics Freight Analysis Framework, published by the United States Department of Transportation, summarizing the value and weight of imports into and exports from the United States, as well as domestic freight movements, by mode, origin, destination, gateway and commodity America’s Freight Transportation Gateways report and supplemental CD, published by the Bureau of Transportation Statistics, summarizing relevant trade information for major U.S. transportation gateways Information concerning U.S. imports for major seaports and airports, obtained from U.S. Trade Online, maintained by the U.S. Census Bureau Transborder Freight Database, maintained by the Bureau of Transportation Statistics, summarizing the value and weight of U.S. imports from and exports to Canada and Mexico by mode, origin, destination, gateway, commodity and containerization The 2002 Commodity Flow Survey, published by the Bureau of Transportation Statistics, summarizing domestic freight movements between U.S. states Freight in America, published by the Bureau of Transportation Statistics, summarizing domestic freight movements between U.S. states by mode Transportation Statistics Annual Report, published by the Bureau of Transportation Statistics, summarizing key transportation indicators for the U.S. passenger and freight transportation system Equipment Type, Size and Ownership Data File, 2005, maintained by the Intermodal Association of North America, summarizing container and trailer movements by region and type of container within the United States and Canada

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Intermodal Market Trends and Statistics, published by the Intermodal Association of North America, summarizing container and trailer movements by region and type of container within Canada and the United States Waterborne Transportation Public Domain Database, maintained by the U.S. Commerce Statistics Centre, summarizing waterborne freight movements by region within the United States Air Charter Statistics, Catalogue no. 51-207-XIB, published by Statistics Canada, summarizing Canadian passenger and freight air charter flights Shipping in Canada, Catalogue no. 54-205-XIE, published by Statistics Canada, summarizing marine shipments destined to and originating from Canada Rail in Canada, Catalogue no. 52-216-XIE, published by Statistics Canada, summarizing rail movements in Canada Trucking in Canada, Catalogue no. 53-222-XIB, published by Statistics Canada, summarizing cargo movements by truck in Canada U.S./Canada Container Traffic in TEU’s, published by the American Association of Port Authorities, summarizing container movements in Canada and the U.S. by port for the years 1980 to 2005 Information concerning container movements to and from the ports of Los Angeles and Long Beach, provided by California Marine and Intermodal Transportation System Advisory Council Highway traffic data provided by the Ontario Ministry of Transportation Airports Council International 2004 Worldwide Airport Traffic Report IATA Freight Forecasts, 2005 Edition Air Carrier Traffic at Canadian Airports, 2004, Statistics Canada Catalogue no. 51-203-XIB

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2.2.3 Primary data sources During the course of our study, we have consulted with the following individuals.

Transportation Companies Logistics Companies

Mr. Paul Kerry Mr. Bill Scroggie Manager, Business Development Vice President of Operations CP Rail Penske Logistics Mr. Cliff Carson Mr. Frank Hesseltine Vice President, Commercial Development Vice President of Freight Management CN Rail Penske Logistics

Mr. Mark Hallman Mr. Hatem Madkour Director of Communications and Media – Senior Manager – Integrated Solutions Eastern Region Group CN Rail CH Robinson Worldwide Mr. Bill Sclater Mr. Ryan Gentz Vice President, Sales and Marketing CH Robinson Worldwide Genesee and Wyoming Canada Inc. Mr. Rick Thomas Mr. Gordon Smith Director of Managed Transport President TNT Logistics Manitoulin Transport Mr. Tom Woodward Mr. Gerry Simpson Inbound Air Freight Supervisor Manager of Cargo Marketing, Sales TNT Logistics Planning and Support Mr. Scott Richter Air Canada Vice President, Global Supply Chain Mr. Ronald Buschman Solutions Sales Representative Associated Global Systems Aerodyne Aviation Sevices Mr. David Mabon Senior Vice President of Sales and Shipping Lines Marketing Kuehne and Nagel Mr. David Watson President Mr. Tony Vassalo Orient Overseas Container Line Vice President, Transportation Operations Kuehne and Nagel Mr. Jim Fairweather Vice President Mr. Gino Ferroni Greer Shipping Agency Kuehne and Nagel Mr. Mike Radak Mr. Bernie Dumas General Manager of Sales and Marketing Senior Vice President, Operations China Shipping Agency Hanjin Logistics

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End Customers Port Authorities

Mr. Richard Granata Mr. Peter Xotta Manager of North American Logistics Senior Manager, Business Development

Design and Analysis Vancouver Port Authority Ford Motor Company Mr. Normand Fillion Mr. Steven Alsboro Vice President, Marketing and Senior Manager, Global Transportation Development

Services and Supply Chain Management Montreal Port Authority Whirlpool Corporation Mr. Patrick Bohan Ms. Barbara Giacomelli Manager, Business Development Manager of International Logistics Halifax Port Authority Thomson Group Mr. Michael Bednarz Mr. Ben Higgins Manager, Air Cargo Business Superintendent of Global Procurement and Development Supply Chain Management Port Authority of New York-New Jersey INCO Limited Government Agencies Mr. Stephen Deville

INCO Limited Mayor John Roswell Mr. Ed Bumbacco City of Sault Ste. Marie Corporate Logistics Manager Mr. Phil Becker Algoma Steel General Manager

Mr. Marc Dubé Sault Ste. Marie International Bridge

External Affairs Manager Mr. Devin Chamberlain St. Marys Paper Port Director U.S. Customs and Border Protection

Case Studies Ms. Shelly Jamieson

Deputy Minister Ms. Eileen Barkdull Ministry of Transportation Executive Director Elko County Economic Development Ms. Sue Herbert Authority Deputy Ministry Ministry of Northern Development and Mr. Michael Kerns Mines Operations Manager

Port of Montana Ms. Christine Kaszycki Assistant Deputy Minister Mr. George Paul Ministry of Northern Development and General Manager Mines Port of Montana Mr. Kevin Sprague Mr. Daniel Boileau Director, Locks Operations Branch Mirabel Airport U.S. Army Corps of Engineers Mr. Jamie Joon Economic Development Officer Fort Erie Economic Development

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Government Agencies (continued) Government Agencies (continued)

Mr. Al Klein Mr. Jim Haslinger Regional Director Business Consultant U.S. Army Corps of Engineers Northwest Michigan Council of Governments Mr. Peter Petainen Chief Financial Officer Ms. Denise Hoffmeyer International Bridge Administration Program Manager Northeast Michigan Consortium Mr. Mark Gill Supervisor, Vessel Traffic Service Mr. William Morris U.S. Coast Guard President Monroe County Industrial Development Mr. Tom Maguire Corporation Vice President of Global Marketing U.S. Department of Commerce Other Organizations Mr. Peter Cambier Mr. Bob Armstrong Vice President, Lower Michigan President Northern Initiative Atlas Trade and Logistics Group Mr. Joe Boyle Mr. Don Trottier Manufacturing Consultant President

Northern Initiative North Shore Industrial Wheel Manufacturing Ms. Deb Donovan Procurement Assistance Centre Mr. Jack Purvis Mr. Phil Musser President Executive Director Purvis Marine

Kiwanah Mr. Mike Prpich Sr. Ms. Janet Clark Mr. Mike Prpich Jr. Director, Trade Services Mr. Jim Prpich State of Michigan Economic Prpich Forestry Product Development Corporation

2.3 Data verification procedures In the U.S. and Canada, no single agency is responsible for the collection, analysis and distribution of the necessary information to develop a comprehensive origin and destination analysis for international freight movements. As such, our origin and destination analysis considers multiple sources of information from different governmental agencies, primarily the U.S. Department of Transportation and the Bureau of Transportation Statistics. While we have not audited nor otherwise attempted to verify the accuracy of all of the information relied upon during the course of the Phase I study, we have undertaken limited procedures to ensure the overall comparability of the primary data sources used. Despite the fact that we have identified some differences between the sources of information utilized in our report, the magnitude of these differences is small and we do not consider them to be material to the overall conclusions. We have summarized on the following pages the results of the procedures undertaken to ensure the comparability and accuracy of the information utilized in the Phase I study.

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2.3.1 Comparability of overall import information Value of imports based on America’s $1,259 billion Freight Transportation Gateways report and supplemental CD Value of imports based on U.S. Census Department $1,257 billion 2.3.2 Comparability of overall export information Value of exports based on America’s $724 billion Freight Transportation Gateways report and supplemental CD Value of imports based on U.S. Census Department $713 billion 2.3.3 Comparability of value of port-level imports and exports

Los Angeles Seattle Long Beach Tacoma

Value of imports based on Freight Analysis Framework database $212.1 billion $39.5 billion

Value of imports based on America’s Freight Transportation $200.8 billion $38.5 billion Gateways report and supplemental CD

Difference $11.3 billion (5%) $1.0 billion (3%)

Value of exports based on Freight Analysis Framework database $34.5 billion $10.3 billion

Value of exports based on America’s Freight Transportation $34.5 billion $10.9 billion Gateways report and supplemental CD

Difference Nil $0.6 billion (6%)

2.3.4 Comparability of volume of port-level imports and exports

Los Angeles Seattle Long Beach Tacoma

Volume of imports based on Freight Analysis Framework database 70 million tons 13 million tons

Volume of imports based on America’s Freight Transportation 66 million tons 12 million tons Gateways report and supplemental CD

Difference 4 million tons (5%) 1 million tons (7%)

Volume of exports based on Freight Analysis Framework database 28 million tons 15 million tons

Volume of exports based on America’s Freight Transportation 27 million tons 16 million tons Gateways report and supplemental CD

Difference 1 million tons (4%) 1 million tons (7%)

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2.3.5 Comparability of value of border crossing imports and exports

Detroit Port Huron

Value of imports based on Transborder Freight database $47.3 billion $39.6 billion

Value of imports based on America’s Freight Transportation $47.3 billion $39.6 billion Gateways report and supplemental CD

Difference Nil Nil

Value of exports based on Transborder Freight database $54.5 billion $22.7 billion

Value of exports based on America’s Freight Transportation $54.5 billion $22.7 billion Gateways report and supplemental CD

Difference Nil Nil

2.3.6 Comparability of volume of border crossing imports

Detroit Port Huron

Value of imports based on Transborder Freight database 19.7 million tons 29.2 million tons

Value of imports based on America’s Freight Transportation 19.8 million tons 29.3 million tons Gateways report and supplemental CD

Difference 0.1 million tons (1%) 0.1 million tons (1%)

Analysis of the above-noted data sources indicates that different basis years were used for the purposes of collecting the information (2002 vs. 2003) and as such, some portion of these differences may be due to timing. In addition, the Freight Analysis Framework database will contain information for smaller ports located in close proximity to the larger ports noted above. As these smaller ports will not be included in the figures taken from America’s Freight Transportation Gateways report and supplemental CD, some level of difference is expected. In light of these possible explanations and the relatively small size of the differences noted, we consider the information sources utilized during our study to be comparable

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2.4 Congruence with terms of reference The terms of reference for our study are based on the deliverables outlined in the original request for proposal dated December 12, 2005 (see page 13 of the request for proposal). Specifically we have: Developed a market assessment and demand model in a report that clearly identifies Sault Ste. Marie’s competitive and comparative position with respect to the four modes of transportation. Determined if there is a sufficient and sustainable real or potential market demand for a commercially viable, inter-modal transfer facility(ies) in Sault Ste. Marie for any or all modes of transportation to justify the serious consideration of the development of such a facility. Demonstrated and prioritized the community’s greatest opportunities that will lead the MultiModal Task Force to make recommendations to proceed, modify or abandon the project. In developing the above-noted deliverables, Destiny requested that our study approach focus on a number of key questions. We have summarized below the questions listed in the request for proposal document (pages 11 to 13) and the sections of our report where these are addressed. Key study questions

Question Relevant Report Section

What is the potential market (current and future) for The overall market for each mode of transportation is a multi-modal initiative in terms of each mode of discussed in Chapter VII (air), Chapter VIII (Great transportation? Lakes marine), Chapter IX (Canada-U.S. surface) and Chapter X (overseas freight, combining marine with road and rail).

What are the current and future strengths and Included in the market assessments noted above is weaknesses, significant strategic advantages as an analysis of Sault Ste. Marie’s competitive position, well as the current and future limitations and strengths and weaknesses. opportunities for Sault Ste. Marie as the site of an Air – Section 7.2.2 inter-modal initiative? Great Lakes marine – Section 8.2

Canada-U.S. surface trade – Section 9.2.2

Overseas freight – Section 10.4

What do the major companies who ship and The level of interest among major companies who receive freight, and could potentially have a ship and receive freight is presented in Chapter XI. competitive advantage from a Sault Ste. Marie facility think of the concept?

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Key study questions (continued)

Question Relevant Report Section

What do the major transportation and logistics The level of interest among major transportation and companies think of Sault Ste. Marie in this regard. logistics companies is presented in Chapter XI. Would they be interested in participating in this future development or do they know organizations that might be?

What are the market factors (i.e. type of freight, A discussion of market factors influencing the design handling requirements, weight considerations or and development of supporting infrastructure is other factors or considerations) that would included in Section 14.2 influence the design and development of the supporting infrastructure?

What are the backhaul considerations for freight Our analysis of backhaul considerations is included in and containers as they relate to the market? Are Chapter XIII. there any significant limitations in this regard?

Who are the players in the national and Our recommendations concerning potential partners international logistics world that the MultiModal is included in Section 14.1. Task Force would be well served by discussing this opportunity with and why?

What do the major players who ship and receive The level of industry interest is presented in Chapter freight, and could potentially have a competitive XI. advantage from a Sault Ste. Marie routing, think of the concept?

What are the best means to communicate a good Our comments concerning communication strategies understanding of the market to others? are included in Chapter XI.

In developing the answers to the above-noted questions, Destiny required specific procedures to be undertaken and we have summarized on the following page the extent to which we met these requirements.

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Required project procedures

Requirement Procedures Performed

Development of a detailed origin and destination Included in the analysis of the market by each mode analysis that summarizes transportation flows by of transportation is an overview of: mode and type of cargo (both containerized and Commodities bulk cargo by commodity) that could potentially be diverted to the proposed facility in Sault Ste. Marie Gateway ports, airports and border crossings Origin and destination ports, airports and countries

Transportation routes

Consultation with key players within the In developing our conclusions and recommendations, transportation industry to determine their views on we have relied upon input provided by: the initiative and their potential interest in Six logistics companies participating in/utilizing a multi-modal facility in Sault Three shipping companies Ste. Marie, including consultation with 10 logistics Three rail companies and transportation companies. Two air service providers One trucking company Subsequent to the acceptance of our proposal, Six end customers of transportation services Destiny requested consultations with five end (three Northern Ontario customers, three U.S. users of transportation services to obtain their customers) insight into the initiative.

Consultation with government agencies to Our study incorporates discussions held with various determine their views on the initiative and their government agencies, as identified earlier in our potential interest in and requirements for report. supporting the project.

The development of three to five case studies Our report includes four case studies involving outlining the establishment of similar initiatives transportation initiatives located in other communities. elsewhere in Canada and the United States.

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III Case Studies in Transportation Opportunities

It is not the case of “If you build it, they will come”. Like retail developments, an intermodal terminal needs one or more anchor tenants to be financially successful. The countryside is littered with failed intermodal terminals where the original developers misread the marketplace.

Elko County Economic Diversification Authority Preliminary Transload Facility Analysis – Phase I Railroad Industries Incorporated May 12, 2006

3.1 Introduction to the case studies Economic development initiatives centered on transportation opportunities are not new – a number of communities have attempted to create economic and employment benefits through similar projects in the past. To a large extent, the experience of other communities that have pursued transportation-related economic development activities can be meaningful to Sault Ste. Marie as it proceeds with this initiative. Through an analysis of the challenges faced by other communities, Sault Ste. Marie can identify in advance potential obstacles and develop strategies for overcoming them. In addition, the demonstrated success of other communities allows Sault Ste. Marie to gain a real-world indication as to the potential benefits that could accrue from an expanded transportation gateway in the community. In selecting the comparator communities for analysis, we have attempted to select initiatives that had differing degrees of success, as well as initiatives that were in different stages of implementation and have presented four case studies that we believe are relevant to the community and its efforts (see Figure 14).

Figure 14 – Case studies

Port of Montana Mirabel Airport Elko County, Nevada Niagara Falls and Fort Erie

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3.2 Mirabel Airport During the 1960s, there was a growing need for the Canadian government to develop new airports in order to relieve pressure on Montréal-Pierre Elliott Trudeau International Airport (“Trudeau Airport”), then known as Dorval Airport, and Toronto Pearson International Airport, and to move air traffic away from areas that had become heavily built up. In Montreal, the original plan was for the new airport to be placed in the southwest region of the city which was well connected by existing road and rail routes, as well as being close enough to serve the population of the city. The airport was also intended to serve as the gateway to Ottawa. Controversy between the Federal and Provincial Governments erupted over this issue, which in the end, resulted in a compromise which located the airport at the current Mirabel Airport location. In this location, the airport was relatively isolated and had limited access routes. Although multimodal expansion plans had been discussed, the Federal, Provincial, and municipal governments never managed to find enough funding to move the ambitious and expensive plans beyond the drawing board. Thus, Mirabel was forced to cope with an inadequate road system and non-existent rail transit, supplemented only by express buses run by Société de transport de la communauté urbaine de Montréal (STCUM), now know as Société de transport de Montréal (STM). Mirabel Airport opened for business on October 4, 1975, in time for the 1976 Summer Olympics. The Olympics put Montreal in the world's spotlight, and Mirabel saw special services for the Games. At the time when Mirabel was planned, Montreal was an important stopover point for refuelling. Government studies had shown that Dorval Airport would be saturated by 1985. However, with the introduction of long range jets in the 1980’s, refuelling of trans-atlantic flights in Montreal was no longer necessary. This dramatically reduced the amount of air traffic into Dorval Airport and as a result Mirabel Airport was no longer needed. To ensure the airport's survival, all international flights for Montreal were assigned to Mirabel Airport for many years. This created resentment among travellers who were forced to travel far out of town for their flights, and to take long bus rides for connections from domestic to international flights. Government studies had projected that Dorval Airport would be completely saturated by 1985 and that 20 million passengers would be passing through Montreal's airports annually, with 17 million through Mirabel. That projection did not materialize. By 1991 Mirabel and Dorval Airports handled a total of 8 million passengers and 112,000 tons of cargo annually. Mirabel alone never managed to exceed 3 million passengers per year in its existence as a passenger airport. In order to keep Mirabel Airport active, scheduled and charter international passenger traffic was assigned to Mirabel. However, with Dorval Airport having capacity and much closer to Montreal, Mirabel Airport represented an unattractive and expensive option to travellers and airlines. For travellers, Mirabel Airport is 60 km. from downtown. Access by road is poor and rail linkage is absent. Funding for expanded transportation never materialized. For airlines and other operators, it was costly to have split operations in two airports. In 1997, scheduled international passenger traffic was transferred back to Dorval Airport, leaving only charter passenger service at Mirabel. In 2004, charter passenger service was also transferred to Dorval Airport.

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Since 2004, Dorval (Trudeau) Airport has been assigned to handle all passenger traffic of the Montreal airport system. Mirabel is dedicated to all-cargo flights and industrial development. 3.2.1 Airport Facility

Figure 15 – Mirabel Airport facility Mirabel Airport is built on about 88,000 acres (356 km²) of land making Mirabel one of the world's largest airports by property area (see Figure 15). The airport's operations zone, which encompassed what was eventually built plus expansion room, amounted to only 17,000 acres (69 km²), or about 19% of the total area of the airport. The Federal government planned to use the excess land as a noise buffer and as an industrial development zone. Mirabel was designed to be expanded to six runways as well as six terminal buildings, which was supposed to occur in a number of phases and be completed by 2025. However, the airport never moved beyond the first phase of construction which included two runways and a lone terminal. By October 2005 runway 11/29 was closed leaving only runway 06/24 operational. Also constructed was a 5,000 space car park, a 355-room hotel, an eight story office building and train station in the basement. Today the underground train station is used as an employee parking lot. With no passenger traffic handled at Mirabel, various facilities become redundant. These include a 100,000 sq. m. passenger terminal, 500,000 sq. m. of apron, car parking facility, and an administrative building. The Montreal Airport Authority had launched a Request for Proposal (RFP) process to pursue alternative use of the land. The winning proposal was selected in January 2006.

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The winning proposal was put forward by I-Parks Creative Industries, a French firm that specializes in the creation of urban tourist attractions, and Oger International SA, a global engineering company, to turn Mirabel Airport into a theme park. The proposed concept of the park is based on the theme of water and outer space and will be built within the main terminal. The hotel, administrative tower and parking lot, originally constructed will also be utilized by the park. Negotiation of leases and change in land use plans are underway. 3.2.2 Key Players Today, Mirabel Airport is used exclusively for cargo flights, with passenger operations having ceased on October 31, 2004, twenty-nine years after the airport's opening and after many years of limited, primarily charter service. Currently, primary transport users of Mirabel are:

Aer Aran Cubana

Aeroflot Fed Ex

Gemini First Air

Kelowna Flightcraft Air Georgian

Cargo Jet Morningstar Air Express

Aerobridge

Also on site are a number of other services which are crucial contributors to the survival of Mirabel, particularly ground handling and cargo operators and major end users.

Ground handling and cargo operators End users

CargoZone Bombardier Aerospace

Handlex Bell Helicopter

Mercury Air Cargo Mecachrome

Techniair 2000 Turbomecca

Cargo Zone Inc. G-Elano Canada Inc.

Excel Cargo Inc. Technicolour

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3.2.3 Cargo traffic volume The volume of air cargo processed at Montréal’s two airports in 2005 reached 263,300 tonnes, an overall increase of 4.6% as compared to 2004. Of this amount, 117,800 tonnes transited through Mirabel, 3.7% more than in 2004. Total volume processed at Trudeau Airport was 145,500 tonnes, up 5.2% from 2004. Based on the above, Mirabel handled approximately 45% of the cargo of the Montreal Airport system. The remainder of the cargo is handled mostly by passenger aircraft flying into and out of Dorval Airport. In 2005, Mirabel Airport served as an air base for several large-scale humanitarian operations, in addition to attracting all-cargo charter flights. The continued growth of active integrators at Montréal-Mirabel was also a contributing factor to the growth in traffic. 3.2.4 Cargo marketing and development Based on discussions with Mirabel Airport management, the following have been identified as contributing factors for attracting cargo traffic and marketing approaches used by the Airport: It is important to have a strong business case for using the airport. The air cargo industry is highly competitive and there needs to be a compelling case for time and/or cost savings for using the airport. Identifying the right people to speak with is also important. For example, in Mirabel’s experience, much success has been achieved by talking to the flight schedulers as opposed to operators. Understanding the air rights locally and abroad is also key to promoting cargo services. A joint committee of representatives from the airport and cargo carriers can be helpful. The committee can serve as a forum for discussion and to foster industry development that is in the best interest of both parties. In the past Mirabel Airport has been successful using advertisements in magazines and specialized newspaper to market their service. However the message must be clear and air cargo specific. Ultimately it is the market base and not just operating cost that is key to attracting cargo traffic. For example, Toronto International Airport has landing fees four times higher than Mirabel, but because of the opportunity that exists in Toronto, planes keep flying to that airport. It was indicated that for an all-cargo airport, revenues from landing fees may not be sufficient to sustain operations. Revenues from industrial tenants such as those in warehousing, cargo handling, and trucking are needed. Mirabel has been quite successful in developing a local industrial market onsite and achieving a critical mass as a base to attract new business. Bombardier for example has a large production facility on site which requires constant shipments of airplane parts from overseas. These parts would be too large or too inefficient to carry on a truck to another location, so having the production facility on site provides a win-win situation for both the airport and Bombardier.

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3.3 Port of Montana In 1973, the City of Butte, Montana, seeking to capitalize on its proximity to major road and rail networks in the Northwestern United States, established the Port of Montana. Initially located at the intersection of Interstates I-90 and I-15 and located near transnational rail lines for both the Union Pacific (“UP”) and Burlington Northern Santa Fe (“BNSF”) railroads6, the Port of Montana was intended to be a major road-to-rail, rail-to-rail and rail-to-road transload facility servicing the State of Montana. Since its inception, the Port of Montana has demonstrated significant successes in achieving its intended goal. The Port acts as the sole distribution point for General Motors dealerships in the State of Montana, and is also active in the shipment of lumber, fertilizers and minerals. The Port now receives daily rail service from both UP and BNSF, with as many as 180 rail cars and 20 trucks entering its facilities on a given day. In addition, the Port also forms the base for the Port of Montana Business Development District, an industrial park located adjacent to the Port’s facilities. 3.3.1 Organizational structure The Port is owned and operated by the Montana Port Authority, which was established by the City of Butte in 1973. Members of the Port Authority’s board are selected by the Mayor of Butte and serve five year terms. Despite its close relationship with the City, the Port Authority enjoys a relatively high degree of autonomy from the City, with no perceived political influence in its operations. However, the Port and the City do collaborate on economic development initiatives, including the attraction of new industrial activity to the City and the retention of existing businesses. 3.3.2 Facilities The Port is located on a 47-acre site located approximately one mile from Interstates I-90 and I-15. Rail access to the Port is achieved through secondary rail lines from the UP and BNSF as the Port is not located on the main transnational rail lines. The Port maintains an 84,000 sq. ft. warehouse that can accommodate up to five railcars at a given time within the loading bays, with up to four railcars unloaded or loaded at once. In addition, trucks have the ability to pass completely through the warehouse facility, allowing for indoor loading of trailers. In addition to this main warehouse, the Port’s infrastructure also includes:

Heated maintenance shop Weigh scales for trucks and rail cars

Three-story administrative building Two railroad locomotives for the movement of rail cars Secure storage area for bonded goods A loading system for fertilizers capable of Secure automotive storage area handling 2,000 tons of fertilizer daily 500,000 gallon tank farm for liquid magnesium chloride and associated rail loading facilities

The total cost of the Port’s infrastructure was $6.5 million, the majority of which ($5 million) was funded by the Federal and State governments. Overall, approximately 18 months was required to secure the necessary funding for the initiative.

6 The facility was relocated in 1989 to a site that was closer to the interstate highways and rail lines.

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3.3.3 Operations Currently, the Port receives a relatively high level of rail service from both UP and BNSF, with 6- day per week train service from UP and 5-day per week train service from BNSF. While the Port does not receive unit trains, between 125 and 180 rail cars enter the Port on a daily basis. Further, up to 20 trucks enter the Port on a daily basis, primarily for the transportation of bulk commodities. Despite this level of activity, the Port is not financially self-sufficient and relies on the City of Butte for operating funds. We were not provided with details concerning the annual amount of the municipal contribution. The operations of the Port are overseen by a general manager, a full-time employee who reports directly to the Board of the Port Authority and is responsible for the day-to-day operations. The general manager is assisted in this capacity by the Port’s operations manager, who oversees the Port’s rail, truck and warehousing operations. Overall, a total of 11 individuals are employed by the Port. 3.3.4 Commodities The largest and most consistent component of the Port’s activity relates to its role as the distribution hub for General Motors vehicles for the State of Montana, where all General Motors vehicles to be sold in Montana are shipped by rail to the Port for distribution to dealerships by truck. The Port is also active in the transportation of regional commodities. Specifically, the Port is a major transload facility for lumber, fertilizer, and minerals and experiences seasonal fluctuations depending on the nature of the commodity. While the Port’s current commodities are limited to bulk cargos, it was involved in the movement of containers in the past. Prior to the discontinuance of container service in 2000 by BNSF, approximately 150 to 200 containers per month (either 20 foot or 40 foot international containers) were shipped by rail to the Port from Seattle for distribution throughout Montana. With the discontinuance of container service to the Port, we understand that shipments of containers to Montana no longer involves direct rail service to the state. Rather, train shipments are sent to major centres outside of the state (primarily Salt Lake City), with further distribution by truck. 3.3.5 The Port of Montana Business Development District In addition to its role as a transload facility, the Port also value-added economic activities undertaken at the Port of Montana Business Development District (“BDD”), an adjacent industrial park. The BDD is currently home to a number of businesses involved in the handling and further processing of commodities that are handled through the Port, including: A silicon plant that processes silica ore into silicon for glass manufacturing A grain terminal that handles wheat, corn and other agricultural products from the Northwestern U.S. A fertilizer distribution centre A steel casting operation

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To varying degrees, all of the businesses located in the BDD were attracted by the presence of the Port and the access to commodities that it provided. As well, the BDD is classified as a tax increment finance district, allowing it to provide financial incentives to businesses locating to the industrial park. 3.3.6 Future plans and challenges At the present time, the focus of the Port is to maintain its service levels for existing customers and actively promote the industrial park. Accomplishing this, however, requires the Port to address its largest perceived challenge – maintaining Class I rail service. On a number of occasions (most recently in 2004), both UP and BNSF have announced their intentions to sell their secondary lines to Class II railroad companies and the Port has invested significant efforts in discouraging this move. In the Port’s view, the absence of Class I rail service will hinder the quality and frequency of its rail service, with a corresponding detrimental impact on its overall operations.

3.4 Elko County, Nevada Elko County is located in the extreme Northeastern corner of the State of Nevada and is home to a number of large mining companies. In addition, the main UP East-West rail line and Interstate I-80 traverse the County, providing it with ready access to Class I rail service and the national highway network. In 2004, representatives of the Elko County Economic Development Authority (“ECEDA”) attended a conference on rail transportation. During discussions with representatives of UP, the concept of a transload facility in the community emerged as a potential economic development initiative. Since that initial meeting, the ECEDA has proceeding with the planning for the development of a road-to-rail, rail-to-rail, rail-to-road transload facility servicing Northeastern Nevada and parts of the neighbouring states of Idaho and Utah. 3.4.1 The Concept The concept of the Northeastern Nevada Regional Rail Port (the “Rail Port”) involves a 60 acre site located adjacent to the main UP rail line that would provide transload services focused on commodities used by major industrial players in the local economy, primarily mining (see Figure 16). Figure 16 - Proposed Rail Port site In identifying its intended focus, the Rail Port recognizes that established competitors exist for certain commodities and as such, the Rail Port does not intend to initially service these markets, which include: Containers, which are currently handled by major facilities in Salt Lake City and Reno. Chemical products, which are not viewed as a priority commodity due to the presence of a “chemical alley” three hours south of Elko County.

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It is anticipated that as a transload facility, the Rail Port will reduce transportation costs for local businesses, thereby improving the overall competitiveness of the region with respect to attracting and retaining industrial activity. In addition to transportation costs, the Rail Port also seeks to address another constraint to economic development in the region, a lack of serviced industrial land, by establishing an industrial park adjacent to the Rail Port. When completed, the ECEDA anticipates that a number of value-added economic activities, including fuel distribution, steel recycling, freight distribution and light to medium manufacturing, will be attracted to the industrial park. 3.4.2 The Approach The development of the proposed Rail Port is being undertaken by a committee that includes representation from the ECEDA, Elko Country, UP and the State of Nevada, with the ECEDA assuming the direct role as project champion. At the present time, the initiative has received $1 million in funding from the State of Nevada to support the planning and design activities associated with the Rail Port, with a further $2.1 million provided by Elko County to finance land acquisitions. It is anticipated that an additional $3.5 million will be provided by the County to fund further infrastructure acquisitions. Unlike the Port of Montana, which was established and is currently operated by a community organization, the Rail Port has a significant level of private-sector involvement. Currently in the design phase, the ECEDA has retained Transystem, a private sector designer of transportation facilities to design the facility. In addition, the ECEDA has issued requests for statement of qualifications for private sector developers and operators of the transload facility. While Elko County anticipates funding the cost of fencing, lighting, spur rail lines and switches, additional facilities and infrastructure will be the responsibility of the selected private sector partner, who will operate the facility pursuant to the terms of a 30-year lease. The high level of private sector involvement in the initiative extends to the industrial park as well, which has been sold to a private sector company for development, and reflects the view that the planning, construction and operation of a transportation facility does not fall within either the mandate or the core competencies of a municipal organization. It is anticipated that all infrastructure improvements, estimated at $6.5 million in total, as well as a lease with the private sector operator, will be in place by the fall of 2007.

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3.5 Niagara Falls and Fort Erie, Ontario The Niagara Falls and Fort Erie border crossing represents the fourth busiest surface gateway to the United States (after Windsor, Sarnia and Laredo, Texas) and the ninth leading gateway of all three categories of transportation (air, marine and surface). Overall, a total of US$59.4 million of imports and exports moved through the gateway during 2003, with imports into the U.S. accounting for approximately 54% of the total value of shipments. In total, 20.1 million tons of freight was imported to the U.S. through the gateway during 2003, of which 11.4 million tons moved by truck. Rail shipments into the U.S. accounted for 6.1 million tons (or 30% of total imports by weight), with pipeline and other shipment modes accounting for the remainder. 3.5.1 Border crossing infrastructure The Niagara Falls and Fort Erie gateway is actually comprised of five distinct border crossing points, of which two have little or no commercial traffic (see Figure 17). 1. Peace Bridge 2. International Railroad Bridge 3. Rainbow Bridge (very little commercial truck traffic) 4. Whirlpool Rapids Bridge (no commercial truck traffic) 5. Queenston-Lewiston Bridge

Figure 17 – Border crossing facilities – Niagara Falls and Fort Erie

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3.5.2 Peace Bridge The Peace Bridge is located near the center of downtown Buffalo, New York and Fort Erie, Ontario, where it crosses the Niagara River. The bridge is 5,800 feet long with three lanes, including a reversible center lane allowing two-lane operations in one direction during peak traffic hours. In addition to providing a link for passenger car traffic, the Peace Bridge is a vital link to long distance, interstate travel and international trade. On the New York side, Interstate 190 has a direct northbound off-ramp (Exit 9) onto the Peace Bridge. On the Ontario side, the Queen Elizabeth Way begins after Canadian Customs. After new toll facilities were installed on the Canadian side in 2005, the Peace Bridge became the first (and at present the only) E-ZPass facility outside the United States. The Peace Bridge is owned and maintained by the Buffalo and Fort Erie Public Bridge Authority (the “Authority”). The Authority is governed by a ten-member Board consisting of five members from New York State and five members from Canada. Two members are appointed by the Governor of the State, with the advice and consent of the Senate of the State, to serve two-year terms. The three remaining New York members are the chairman of the Niagara Frontier Transportation Authority (the “NFTA”), the Commissioner of Transportation and the Attorney General of the State. The five Canadian members are appointed by the Governor in Council (Government of Canada) to hold office at pleasure. The Chairman and Vice-Chairman of the Board are each elected annually and both offices alternate annually between the United States and Canadian members. The members of the Authority may appoint other officers. The Peace Bridge was completed and officially opened to traffic in June 1927. Under the enabling legislation, which became law in 1934, the Authority is the successor in interest to the original international company. Capital improvements and operating expenses are funded by tolls and rental income generated from Authority owned properties and buildings, rather than public funds. In accordance with its legislation, the Authority operates without share capital; all current and future surpluses are committed to capital projects and repayment of any outstanding bonds. 3.5.3 International Railway Bridge The International Railway Bridge carries rail lines across the Niagara River between Fort Erie, Ontario and Buffalo, New York. The bridge consists of three sections and is 3,700 feet (1.1 km) in length. The bridge was built in November, 1873 for the International Bridge Company. In 1900, the superstructure of the bridge was redesigned. The pedestrian walkway was removed to allow room for another rail bed. In February, 1993, the International Railway Bridge was closed temporarily because of structural problems, with $2 million in refurbishing and reinforcing the piers (caissons) on which the superstructure rests. The bridge is jointly owned by CN Rail and CP Rail.

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3.5.4 Queenston-Lewiston Bridge The Queenston-Lewiston Bridge crosses the Niagara River gorge just south of the Niagara Escarpment, connecting Queenston, Ontario and Lewiston, New York. It has a total length abutment to abutment of 500 m (1,600 ft) and carries five reversible lanes for vehicular traffic. This allows traffic across the span to be configured according to whichever direction has the heaviest volume. The Queenston-Lewiston Bridge (along with the Whirlpool Rapid Bridge and the Rainbow Bridge) are owned and maintained by the Niagara Bridge Falls Commission (the “NFBC”). Canada and the U.S. are equally represented on the NFBC. The eight-member Board of Commissioners consists of four appointees by the Ontario Premier and four by the New York State Governor. The bridge was officially opened in November, 1962. It replaced an old suspension bridge called the Queenston-Lewiston Bridge which was the largest suspension bridge in the world when it opened in 1851 but was destroyed by wind in 1864. 3.5.5 Traffic volumes Over the last four years, the volume of traffic over the Peace Bridge and Queensway-Lewiston Bridge (both total traffic and commercial vehicles) has remained fairly consistent. It is projected that more than 11 million vehicles will cross both bridges during 2006, of which approximately 2.3 million will be commercial vehicles (see Table 1).

Table 1 – Summary of total traffic volumes – 2003 to 2006 (projected) Total Traffic (millions of vehicles) Commercial Truck Traffic (millions of trucks) Peace Lewiston Total Peace Lewiston Total 2003 7.25 4.02 11.27 1.31 1.02 2.33 2004 6.93 3.92 10.85 1.30 0.96 2.26 2005 6.90 4.07 10.97 1.29 0.97 2.26 2006 (projected) 6.96 4.13 11.09 1.32 1.02 2.34

With respect to traffic volumes over the International Rail Bridge, imports to the U.S. have ranged from 5.5 million to 6.5 million tons in recent years (see Figure 18).

Figure 18 – Total volume of imports to the U.S. over the International Rail Bridge (in millions on tons)

7.0 6.0

5.0 4.0

3.0

2.0 1.0

0.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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3.5.6 Rail infrastructure The Niagara Falls and Fort Erie gateway is second busiest rail border crossing between Ontario and the U.S. by weight (Sarnia is ranked first). As such, the region is home to a considerable investment in rail infrastructure in addition to the actual International Railway Bridge. Access to the gateway for CN Rail is provided by its Grimsby line, which extends from Hamilton to Niagara Falls and provides access to the U.S. via the Whirlpool Rapids Bridge and a connection with CSX’s rail system. The Grimsby line is rated for 60 miles per hour for the portion from Hamilton to Niagara Falls, with the maximum allowable speed reduced for bridge crossings over the Welland Canal (25 mph maximum) and the Whirlpool Rapids Bridge (10 mph maximum). The Grimsby line also connects with CN Rail’s Stamford line, which provides rail access to Fort Erie and further to the U.S. via the International Rail Bridge and a connection with CSX and Norfolk Southern railways. The Stamford line, with a total length of 31.6 track miles, is rated for a maximum speed of 60 mph, although this is reduced to 10 mph when crossing the International Rail Bridge and Erie Canal. CP maintains similar connections between Niagara Falls, Fort Erie and its Hamilton line. The U.S. and Canadian sides of the border are home to several large rail yards with inter-modal capabilities operated by CP Rail, CN Rails, CSX and Norfolk Southern. The larger railyards have between 35,000 and 40,000 feet of trackage each, allowing them to handle multiple large trains. In order to gauge the perspective of the size of these terminals, we have included below a schematic drawing of the Frontier rail yard, which is operated by CSX (see Figure 19).

Figure 19 – CSX Frontier Yard layout

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3.5.7 Economic benefits As a result of the volume of traffic crossing the Canada-U.S. border, Fort Erie has experienced considerable economic and employment benefits from the transportation sector. For example, more than 45 logistics and freight forwarding companies have established operations in the community, including several of the largest North American logistics companies (Kuehne and Nagel, Livingston International, Panalpina, PBB Global Logistics and Schenker of Canada). Representatives of the Fort Erie Economic Development Commission estimate that more than 500 direct and indirect employment positions have been created as a result of the community’s location on the Canada-U.S. border. To a certain extent, the importance of transportation to the communities of Fort Erie and Niagara Falls can be demonstrated through an analysis of employment within the communities. Specifically, information provided by Statistics Canada indicates that the percentage of the labour force in Fort Erie and Niagara Falls that is employed in transportation and equipment operator positions is higher than both the Provincial average. As noted below, the number of individuals employed in trade, transportation and equipment operator positions is approximately 2% higher than the Provincial average, representing just under 900 employment positions (see Table 2).

Table 2 – Analysis of transportation and equipment operator employment – Fort Erie, Niagara Falls and Ontario Fort Erie Niagara Falls Ontario Total labour force 13,840 40,540 5,992,765 Trade, transport and equipment operators 2,230 6,320 845,130 Percentage of total labour force 16.1% 15.6% 14.1% Differential from Provincial average 275 610

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3.6 Key findings from the case studies Based on the information presented in the case, there are a number of key findings that we believe have the potential for significant impact on the ultimate success of the initiative. The importance of rail – As the Port of Montana case study clearly demonstrates, the ability of any facility to attract container traffic rests with its ability to obtain the support of rail companies. The loss of container service to the Port is due in large part to its presence on secondary rail lines (as opposed to main lines), which corresponds with the general trend in the rail industry – a movement towards a fewer and larger intermodal facilities strategically located along the rail network in close proximity to major population centres. In Sault Ste. Marie, the ability to attract rail service will be a key determinant in the initiative’s success.

The issue of rail service is further compounded by the findings of the Fort Erie case study, which indicates that rail access to border crossing points should be capable of accommodating high speeds (thereby increasing total capacity). While an analysis of the state of the rail infrastructure connecting Sault Ste. Marie to the main trans-national rail network is the subject of future research, this would indicate that the extent of infrastructure investment required may be significant. Air cargo follows passengers – The experience of Mirabel airport is consistent with our general analysis of the air cargo industry – absent a significant air cargo or courier service, the ability to support significant air cargo operations is contingent upon high levels of passenger volumes. This is especially true given that a significant portion of air cargo is transported in passenger planes. Success in air cargo for Sault Ste. Marie rests with its ability to overcome the fact that it is a small market airport. Passenger volume is a key indicator of the strength of the underlying market. In terms of attracting a significant cargo/courier operator, it iwill not be easy to relocate cargo airlines and integrators with their established networks and investment in facilities. Economic impacts can be substantial – The community of Fort Erie, with a total population of 28,000 individuals, is home to more than 45 logistics and freight forwarding companies. The disproportionate representation of transportation related companies in Fort Erie (when compared to other communities that are not located on the Canada-U.S. border) is a telling indicator of the significant economic benefits that could accrue as a result of the successful implementation of transportation-related initiatives.

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3.7 Implementation lessons from the case studies In addition to the key findings noted above, the case studies provide insight into implementation approaches adopted by other communities when pursuing transportation-related initiatives that for the most part validate the planning approach utilized in Sault Ste. Marie. A strong business case that can be verified is critical to success – The Mirabel case study highlights clearly the impact of an unrealistic business case. Based on projections that were in hindsight unachievable, a significant investment was made in infrastructure for which there was insufficient demand. In light of the desire to avoid this experience, the approach taken by Destiny, which involves a staged approach to assessing the market, infrastructure requirements, benefits and overall business case, appears sound. Private sector involvement can be valuable – The implementation approach adopted by Destiny anticipates the eventual transference of responsibility to a private-sector third party that will be responsible for the establishment of the facility. This mirrors the approach utilized in Elko County which ensures that the appropriate skill sets are available to support the initiative. The biggest benefits come from associated economic activities – All of the case studies identified significant economic activities that resulted from the establishment of the transportation initiative. Ranging from transportation-related activities (e.g. fuel farms) to value-added operations (e.g. manufacturing), the case studies demonstrate that the true benefits associated with a transportation initiative will not stem from the initiative itself, but rather the activities that are supported by the presence of goods within the community. In the absence of inherent natural strengths, the long-term potential for the initiative is questionable – In support of its efforts to develop transportation-related initiatives, Sault Ste. Marie possesses several inherent natural strengths, including its strategic geographic location and proximity to major markets in the U.S. Upper Great Lakes region as well as the available capacity to accommodate higher traffic volumes on the International Bridge. These natural strengths differentiate Sault Ste. Marie from its potential competitors and as the Mirabel and Port of Montana case studies indicate, natural strengths are difficult if not impossible to establish. While both Mirabel (air cargo) and the Port of Montana (container movements) were able to sustain their intended operations for a short period of time, the market demand ultimately declined to a point where the initiatives were no longer sustainable.

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IV Overview of U.S. Trade Patterns

Given its location on the Canada-U.S. border, its proximity to major U.S. population centres and its distance from major population centres in Canada, it is evident that the best chance of success for Sault Ste. Marie rests with a focus on the United States. Inherent in this is the reliance on global trade with the U.S. and in this chapter, we provide an indication as to how changes in global trade levels and patterns are supportive of the Sault Ste. Marie initiative. In the next chapter, we discuss the economic performance and outlook for the U.S. Upper Great Lakes region.

4.1 Import and export levels Over the last decade, trade between the United States and the rest of the world has grown by more than 65% over the last 10 years, driven in large part by imports, which increased over 90% during the same period. As summarized in Figure 20, U.S. imports, while relatively stagnant during the period 2000 to 2003, have experienced significant growth in recent years. Figure 20 – U.S. Foreign Trade (in millions of dollars)7

1,800,000

Imports 1,600,000 Exports 2003 to 2005 – 30% 1,400,000

1,200,000

1,000,000

800,000

600,000 1997 1998 1999 2000 2001 2002 2003 2004 2005

1997 1998 1999 2000 2001 2002 2003 2004 2005 Imports to 869,704 911,896 1,024,618 1,218,022 1,140,999 1,161,366 1,257,121 1,469,704 1,673,455 U.S. Exports from 678,366 670,416 683,965 771,994 718,712 682,422 713,415 807,516 894,631 U.S. Total trade 1,548,070 1,582,312 1,708,583 1,990,016 1,859,711 1,843,788 1,970,536 2,277,220 2,568,086

7 U.S. Census Bureau, Department of Foreign Trade Statistics

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To a large extent, U.S. trade activity fluctuates in relation to the country’s gross domestic product. While U.S. GDP has consistently grown since 1997, the decreases in imports and exports correspond with the periods of lowest growth (see Figure 21). Accordingly, trade levels in future years can be expected to continue increasing if the U.S. economy continues to expand.

Figure 21 – U.S. Foreign Trade (in millions of dollars) and Annual Change in GDP8

1,800,000 5.00%

1,600,000 4.00% Imports 1,400,000 Exports 3.00% GDP Growth 1,200,000

2.00% 1,000,000

1.00% 800,000

600,000 0.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005

1997 1998 1999 2000 2001 2002 2003 2004 2005

Annual change 4.5% 4.2% 4.5% 3.7% 0.8% 1.6% 2.5% 3.9% 3.2%

4.2 Major trading regions U.S. involvement in global trade is extensive, with over 220 countries reporting some level of trade with the U.S. during 2005. Asia represents the largest single trading bloc with the United States, with total trade during 2005 amounting to almost $900 billion (see Figure 22 on the following page).

8 U.S. Census Bureau, Department of Foreign Trade Statistics and Bureau of Economic Analysis, Department of Commerce.

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Figure 22 – U.S. Imports and Exports by Region (in millions of dollars) - 20059

Europe Canada Imports 355,248 Imports 290,384 Exports 211,254 Exports 211,899 Total trade 566,502 Total trade 502,283 Asia Mexico Imports 600,873 Imports 170,109 Exports 216,152 Exports 120,365 Total trade 817,025 Total trade 290,474 Australia Central and South America Imports 7,342 Imports 122,873 Exports 15,828 Exports 72,413 Total trade 23,170 Total trade 195,286

Africa Middle East Imports 65,212 Imports 61,414 Exports 15,547 Exports 31,173 Total trade 80,759 Total trade 92,587

Over the last 10 years, all of the major trade regions have experienced growth in imports ranging from 75% to 130%. However, in absolute dollars, Asia recorded the largest increase in imports, with 2005 import levels approximately $265 billion higher than 1997 levels (see Figure 23 and Table 3).

Figure 23 – Imports to the U.S. by Major Trading Region – 1997 to 2005 (in millions of dollars)29

700,000 Asia Canada 600,000 Europe Latin and South America 500,000 Mexico

400,000

300,000

200,000

100,000

- 1997 1998 1999 2000 2001 2002 2003 2004 2005

9 U.S. Census Bureau, Department of Foreign Trade Statistics

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Table 3– Imports to the U.S. by Major Trading Region – 1997 to 2005 (in millions of dollars)10 Latin and Middle Asia Canada Europe Mexico South Africa Australia East America 1997 336,627 167,234 181,440 85,938 53,697 19,924 4,602 20,242 1998 351,132 173,256 202,874 109,721 50,266 15,825 5,387 18,528 1999 385,584 198,711 224,790 109,721 58,465 16,990 5,280 25,078 2000 448,850 230,838 256,766 135,926 73,348 27,641 6,438 38,214 2001 404,710 216,268 253,777 131,338 67,370 25,431 6,478 35,627 2002 425,215 209,088 260,866 134,616 69,503 22,100 6,479 33,500 2003 454,824 221,595 284,597 138,060 78,829 32,021 6,414 40,781 2004 533,659 256,360 321,431 155,902 98,648 45,636 7,546 50,523 2005 600,874 290,384 355,248 170,109 122,873 65,212 7,342 61,414 Percentage change 79% 74% 96% 98% 129% 227% 60% 204% – 1997 to 2005 As noted in Table 3, the regions experiencing the highest growth rates in imports were Latin and South America, Africa and the Middle East. For the most part, these increases can be attributed to the increased value of petroleum imports from these regions (Venezuela, Nigeria and the Middle Eastern OPEC countries). While export levels have also grown over the last 10 years, the rate of increase is significantly lower than imports (see Figure 24 and Table 4).

Figure 24 – Exports from the U.S. by Major Trading Region – 1997 to 2005 (in millions of dollars)11

250,000

200,000

150,000

100,000

50,000

Asia Canada Europe Latin and South America Mexico

- 1997 1998 1999 2000 2001 2002 2003 2004 2005

10 U.S. Census Bureau, Department of Foreign Trade Statistics. 11 U.S. Census Bureau, Department of Foreign Trade Statistics

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Table 4 – Exports from the U.S. by Major Trading Region – 1997 to 2005 (in millions of dollars)12

Latin and Middle Asia Canada Europe Mexico South Africa Australia East America

1997 185,278 151,767 163,273 71,389 63,020 11,389 12,063 20,188

1998 155,524 156,604 170,008 78,773 63,395 11,167 11,918 23,028

1999 161,565 166,600 171,834 86,909 55,153 9,880 11,818 20,206

2000 193,375 178,941 187,448 111,349 59,283 10,966 12,482 18,150

2001 172,828 163,424 181,529 101,297 58,156 12,119 10,931 18,429

2002 167,233 160,923 163,626 97,470 51,551 10,663 13,085 17,871

2003 178,921 169,924 173,063 97,412 51,946 10,613 13,088 18,449

2004 201,758 189,880 193,253 110,835 61,465 13,328 14,225 22,773

2005 216,153 211,899 211,254 120,365 72,413 15,547 15,828 31,173

Percentage change – 1997 to 2005 17% 40% 29% 69% 15% 37% 31% 54%

4.3 Major trading partners In 2005, total trade between the U.S. and its top 25 trading partners (measured in terms of total trade – imports and exports) amounted to just under $2.2 trillion, or 85% of all U.S.-global trade. Over the last 10 years, Canada has remained the U.S.’s largest trading partner, with two-way trade in 2005 amounting to $499 billion, or 19% of total U.S.-global trade. Of the remaining top 25 trading partners, nine are from Asia and eight are from Europe (see Figure 25 and Table 5 on the following page).

Figure 25 – Top 25 U.S. trading partners by region and value of total trade (in billions of dollars)13

Europe $442.1

Latin and South America $80.2 Asia $766.2 Other $109.5

Mexico $290.2

Canada

$499.3

12 U.S. Census Bureau, Department of Foreign Trade Statistics 13 U.S. Census Bureau, Department of Foreign Trade Statistics

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Table 5 - Top 25 U.S. trading partners in millions of dollars14 Rank Country Total Trade – 2005 Total Imports Change Imports Exports Total 1997 1997 – 2005 1 Canada 287,870 211,420 499,290 167,234 72% 2 Mexico 170,198 120,049 290,247 85,938 98% 3 China 243,462 41,837 285,299 62,558 289% 4 Japan 138,091 55,410 193,501 121,663 14% 5 Germany 84,813 34,149 118,962 43,121 97% 6 United Kingdom 51,063 38,629 89,692 32,659 56% 7 South Korea 43,779 27,670 71,449 23,173 89% 8 Taiwan 34,838 22,050 56,888 32,629 7% 9 France 33,847 22,402 56,249 20,636 64% 10 Malaysia 33,703 10,451 44,154 18,027 87% 11 Italy 31,008 11,512 42,520 19,408 60% 12 Netherlands 14,861 26,496 41,357 7,293 104% 13 Venezuela 33,965 6,408 40,373 13,477 152% 14 Brazil 24,437 15,345 39,782 9,625 154% 15 Ireland 28,621 9,335 37,956 5,867 388% 16 Singapore 15,118 20,646 35,764 20,075 (25%) 17 Saudi Arabia 27,228 6,830 34,058 9,365 191% 18 Belgium 13,016 18,605 31,621 7,912 65% 19 Thailand 19,892 7,233 27,125 12,601 58% 20 India 18,807 7,958 26,765 7,323 157% 21 Israel 16,875 9,732 26,607 7,326 130% 22 Nigeria 24,188 1,615 25,803 6,349 281% 23 Hong Kong 8,893 16,323 25,216 10,288 (14%) 24 Switzerland 12,989 10,740 23,729 8,405 55% 25 Australia 7,340 15,771 23,111 4,602 59% As noted in Table 5, the most significance advance from an import perspective has been achieved by China, which has attained a growth in total imports of more than $180 billion since 1997.

4.4 Expected outlook The general consensus concerning the U.S. economy is that it should continue to grow in the mid- term future, with GDP growth expected to be in the range of 3% to 4% until 200715. Some longer term economic forecasts, while obviously less reliable due to the time frame involved, anticipate continued economic growth in the United States, conditional upon its ability to avoid major shocks. For example, the Conference Board of Canada expects the average growth in U.S. GDP to be 2.4% annually between the near term and 2025. As demonstrated earlier in our report, there is a direct relationship between U.S. GDP growth and the level of imports and as long as the U.S. economy experiences continued growth, import levels rise in the long-term. A simple extrapolation of the historical growth in U.S. imports indicates that by 2020, total imports into the United States will be approximately $2.9 trillion, or representing an average annual growth rate of 5% (Figure 26).

14 U.S. Census Bureau, Department of Foreign Trade Statistics 15 Conference Board of Canada and analyst research reports.

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Figure 26 – Projected import levels based on extrapolation of historical growth rates (in billions of dollars)

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000 1997 1999 2001 2003 2005 2020

To a certain extent, support does exist for forecasted import increases of 5% annually over the long-term: As noted earlier in our report, container activity in the ports of Los Angeles and Long Beach are expected to increase from the current level of 14 million TEU’s to 36 million TEU’s by 2020, representing an average annual increase of 10%. The U.S. Department of Transportation anticipates that total imports will grow by 5% annually during the period 1998 to 2010, with average annual growth of 4% expected for the period 2010 to 2020. The Panama Canal Authority expects that total container traffic transiting the Canal, the majority of which is destined for the Eastern United States, will increase by5.6% annually (representing the most probable scenario) during the period 2006 to 2025. The U.S. Conference Board projects imports to grow at an average rate of 4.9% per annum from 2006 to 2015. Deutsche Bank expects annual container shipments to grow by 9% annually until 2015.

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V Overview of the U.S. Upper Great Lakes Region

The overall growth in U.S. trade levels is an important factor in the overall success for the Sault Ste. Marie initiative. As trade levels increase, the pressure on established transportation networks rises as well, enhancing the attractiveness of alternatives such as Sault Ste. Marie. However, it is also important to recognize that the Sault Ste. Marie initiative is focused only on those states within one day’s travel time from the community. Given that much of the growth of in U.S. international trade involves states outside of this region, it may not necessarily be indicative of the true outlook for the initiative. In this chapter, we discuss the historical and forecasted outlook of the intended service area of Sault Ste. Marie – the U.S. Upper Great Lakes region – and the implications for the initiative.

5.1 Overview of the U.S. Upper Great Lakes region With more than 54 million residents, the seven states of the U.S. Upper Great Lakes region (Michigan, Ohio, Illinois, Indiana, Iowa, Minnesota and Wisconsin) account for almost 20% of the total population of the United States. Since 1960, the total population of the region has increased by 28%, which is less than half of the total growth in the U.S. population (Figure 27 and Table 6).

Figure 27 - Estimated population – 1960 to 2005 (in thousands) 16

60,000

50,000

Upper Great Lakes Region 40,000 Eastern Great Lakes Region

30,000

20,000 1960 1970 1980 1990 2000 2005

16 U.S. Census Bureau population estimates

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Table 6 - Estimated population – 1960 to 2005 (in thousands) 17 United States Upper Great Lakes Region Michigan, Ohio and Indiana Population Change from Population Change from Population Change from Prior Period Prior Period Prior Period 1960 179,323 42,396 22,191 1970 217,563 21% 46,892 11% 24,733 11% 1980 226,545 4% 48,669 4% 25,549 3% 1990 248,790 10% 49,158 1% 25,686 1% 2000 281,422 13% 53,001 8% 27,372 7% 2005 296,410 5% 54,255 2% 27,857 2% From an economic perspective, the region represents the 4th largest economic sub-region within the United States. The total GDP of the U.S. Upper Great Lakes region was $2.18 trillion in 2005, representing 18% of the total national GDP (Figure 28). The three eastern states of the region – Indiana, Michigan and Ohio – had a combined GDP of $1.1 trillion, or 50% of the regional total and 9% of the overall U.S. economy.

Figure 28 - U.S. gross domestic product by region – 2005 18

Interior Region Total GDP - $0.86 trillion 7% of total Upper Great Lakes Region Total GDP - $2.18 trillion 18% of total

Pacific Coast Region Total GDP - $2.24 trillion Northeast Region 18% of total Total GDP - $2.95 trillion 24% of total

Southeast Region Total GDP - $2.79 trillion 22% of total

Southwest Region Total GDP - $1.40 trillion 11% of total

17 U.S. Census Bureau population estimates 18 U.S. Bureau of Economic Analysis

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Consistent with its legacy of manufacturing, particularly in the automotive sector, the region accounts for a disproportionate amount of the value of durable goods produced in the United States. In 2005, the GDP of durable goods manufactured in the region amounted to $261.1 billion, or 30% of the U.S. total, with durable goods production in the eastern portion of the region (Michigan, Ohio and Indiana) totaling $156.3 billion. Overall, the states of Ohio, Michigan and Indiana are ranked third, fourth and fifth respectively in terms of the value of durable goods manufacturing and five of the top ten states are located within the region (Table 7).

Table 7 - Durable goods manufacturing in the U.S. – Top 10 states by GDP (in billions)19 State Total Cumulative Total GDP Percentage of Total GDP Percentage of Total California $95.6 11.0% $95.6 11.0% Texas $64.1 7.4% $159.7 18.4% Ohio $57.1 6.6% $216.8 25.0% Michigan $54.8 6.3% $271.6 31.3% Indiana $44.4 5.1% $316.0 36.4% Illinois $43.0 5.0% $359.0 41.4% Pennsylvania $36.8 4.2% $395.8 45.6% New York $28.8 3.3% $424.6 48.9% Wisconsin $26.9 3.1% $451.5 52.0% Tennessee $25.2 2.9% $476.7 54.9% Remaining $391.7 45.1% $391.7 45.1% Total $868.4 100.0% $868.4 100.0%

5.2 Economic outlook During the period 1997 to 2005, the overall economy of the region grew at an average annual rate of 4%, with growth rates among the individual states relatively consistent.. While positive, the growth in GDP in the region was lower than the remainder of the U.S., with southern and western states experiencing GDP growth in the range of 6% to 8% over the same period (Figure 29 on the following page).

19 U.S. Bureau of Economic Analysis

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Figure 29 - Summary of change in GDP (all sectors) – 2000 to 2005

To a large extent, the lower growth in the region is reflective of the challenges impacting the U.S. automotive industry in recent years. While the value of automotive processing in the region has grown in recent years, the U.S. automotive industry as a whole has experienced significantly lower growth than the overall economy as a whole, with certain states experiencing industry declines in excess of 25% (Figure 30).

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Figure 30 - Summary of change in GDP (automotive sector) – 2000 to 2004

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Currently, the economy of the region, particularly the states of Michigan and Ohio, are experiencing difficulties. Restructuring within the automotive sector has resulted in significant job losses in Michigan, where the number of mass layoff events (defined as layoffs involving more than 50 employees) has increased by 70% since 2003 (Figure 31).

Figure 31 - Summary of Michigan mass layoff events – 1996 to 200520

1,600 250 Events 1,400 Employees 200 1,200

1,000 150

800 Events 100 600

400 Employees (thousands) 50 200 - 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

An analysis of industry reports indicates that the current cycle of job losses in the automotive and other manufacturing sectors is expected to continue for the foreseeable future, with net employment losses in Michigan expected to be experienced until 2008, although the magnitude of losses is expected to diminish as time progresses. For the region as a whole, one forecast expects that the overall economy will continue to expand until 2010 at which time a recessionary period is expected to start in 2011 and last until 2013. The regional economy is then expected to recover and grow until 2020, followed by another mild recessionary period.

5.3 Implications for the initiative An analysis of the economic performance of the region (both past and forecasted) yields a number of opportunities and challenges for the initiative. From a positive perspective, the overall magnitude of the regional economy is significant, with the combined economies of Michigan and Ohio larger than any other individual U.S. state with the exception of California, Texas and New York. As a result, Sault Ste. Marie’s strategic position provides it with access to a significant market. This market potential is further strengthened by the concentration of durable goods manufacturing in the region, which requires the constant movement of parts, supplies and finished goods – all of which support a transportation-related initiative21. Lastly, the current round of job losses and industry restructuring, while reducing the overall market potential, is not expected to continue indefinitely. Upon its completion, the manufacturing industries of the region, which are the primary focus of this initiative, will still represent a significant market to Sault Ste. Marie.

20 U.S. Department of Labour. 21 An analysis of the commodities shipped to and from the U.S. Upper Great Lakes region is including in Chapters VII to XI.

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VI The Transportation of U.S. Imports and Exports

U.S. imports and exports flow through a number of gateways, including airports, seaports and land crossings (both rail and highway). In this chapter, we provide an overview as to how foreign trade moves into and out of the United States. In the next chapter, we highlight the estimate of those cargo flows that could potentially be diverted through the Sault Ste. Marie gateway. In 2003, the United States conducted just under $2 trillion in trade with countries throughout the world, approximately two- thirds of which consisted of imports22.

6.1 Analysis of U.S. imports by mode Overall, just under half of imports (by value) arrived in the U.S. by ship, with remaining value of imports arriving by surface modes (road and rail), air and other means23. As noted in Figure 32 and Table 8, the distribution of imports by value by mode has remained relatively constant since 1997.

Figure 32 - Distribution of value of imports to the U.S. by mode of transportation (in millions of dollars) – 1997 to 200324

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000 Marine Surface Air Other

- 1997 1998 1999 2000 2001 2002 2003

22 For the purpose of our analysis, we have utilized 2003 as the base year as this is the most recent year for which transportation information is available (except for specific instances as noted later in our report). 23 Other means include cargo carried by individuals entering or leaving the U.S., aircraft and other vehicles traveling under their own power from the manufacturer to the end customer, items shipped by pipeline and ferry movements. 24 Bureau of Transportation Statistics, U.S. Department of Transportation

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Table 8 - Value of imports to the U.S. by mode of transportation – 1997 to 2003 (in millions of dollars)25

1997 1998 1999 2000 2001 2002 2003

Marine 400,859 413,492 449,344 540,895 519,607 538,065 604,881

Surface 227,838 243,826 278,747 323,707 312,724 309,201 322,291

Air 212,753 224,482 258,883 308,642 267,107 273,176 287,741

Other 28,424 32,085 37,792 43,644 42,521 43,106 44,483

Total 869,874 913,885 1,024,766 1,216,888 1,141,959 1,163,548 1,259,396

When analyzed in terms of weight, the majority (79%) of U.S. imports arrive in the country by ship, with land shipments (road and rail) accounting for virtually all other imports by weight (Figure 33 and Table 9). The weight of imports that enters the U.S. by air is relatively insignificant (approximately 0.5% of total imports by weight) and this distribution of weight by mode is consistent with the general nature of the commodities being imported. Bulk commodities, including minerals, aggregates, petroleum products and raw materials tend to enter the country either by ship or surface mode (primarily rail). These commodities tend to have a low value to weight ratio and as such, represent a larger share of the weight of imports and a smaller share of the value of imports. Air cargo is typically used for commodities with a higher value to weight ratio, thereby resulting in a lower share of imports by weight entering the country through airports.

Figure 33 - Distribution of weight of imports to the U.S. by mode – 200336

Air 0.5% Surface 20.6%

Marine 78.9%

25 Bureau of Transportation Statistics, U.S. Department of Transportation.

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Table 9 - Distribution of weight of imports to the U.S. by mode – 200336

Weight of Imports Mode (thousands of tons) Percentage of Total

Marine 848,002 78.9%

Surface 221,927 20.6%

Air 5,021 0.5%

Total 1,074,950 100.0%

6.2 Analysis of U.S. exports by mode Unlike imports, where marine shipments account for half of the value, the distribution of U.S. exports by mode is much more evenly divided between the three primary modes of transportation, with air and surface modes each accounting for a third of the value of exports from the U.S. in 2003 (Figures 34, 35 and Table 10).

Figure 34 - Distribution of value of exports from the U.S. by mode of transportation – 1997 to 2003 (millions of dollars)26

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000 Marine Surface Air Other

- 1997 1998 1999 2000 2001 2002 2003

26 Bureau of Transportation Statistics, U.S. Department of Transportation

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Table 10 - Value of exports from the U.S. by mode of transportation – 1997 to 2003 (in millions of dollars)27

1997 1998 1999 2000 2001 2002 2003

Marine 219,751 217,583 236,649 284,356 251,494 225,322 235,602

Surface 224,717 200,997 182,211 199,069 198,841 191,062 206,205

Air 198,140 207,910 222,503 252,006 234,588 231,593 240,486

Other 44,991 53,984 51,457 44,987 46,103 45,280 41,451

Total 687,599 680,474 692,820 780,418 731,026 693,257 723,744

Notwithstanding the relatively even distribution of exports by value among the various modes, from a weight perspective, exports are predominantly moved by marine and surface modes, with air exports once again representing less than 1% of exports by weight.

Figure 35 - Distribution of weight of exports from the U.S. by mode – 200338 Air 1%

Surface

45%

Marine 54%

Weight of Exports Mode (thousands of tons) Percentage of Total

Marine 363,478 54.1%

Surface28 304,638 45.4%

Air 3,371 0.5%

Total 671,487 100.0%

27 Bureau of Transportation Statistics, U.S. Department of Transportation. 28 Weight of exports shipped by surface modes has been estimated based on the value of exports by surface modes as this information is not maintained by the U.S. Government.

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VII Air Cargo Opportunities

In recent years, considerable focus has been placed on developing Sault Ste. Marie into an air cargo distribution hub, particularly through the establishment of polar air routings. In this chapter, we analyze the potential opportunities and challenges with respect to this mode of transportation.

7.1 Characteristics of air cargo shipments Air transportation represents an important and integral part of the U.S. import/export network. Despite representing less than 1% of U.S. imports and exports by weight, the value of the commodities transported by air represent 20% of U.S. imports and over 30% of U.S. exports. In terms of value to weight ratio, air cargo clearly outweighs all other transportation modes (Table 11).

Table 11 - Summary of value to weight ratios by transportation modes – imports (2005) Transportation Mode Value Volume Value to weight ratio (millions of dollars) (thousands of tons) (dollars per ton of freight) Air 287,741 5,021 57,308 Marine 604,881 848,002 713 Truck (Canada only) 143,695 71,647 2,006 Rail (Canada only) 60,511 82,387 734 Pipeline and other (Canada only) 48,766 80,996 602 All modes excluding air 857,853 1,083,032 792 In the U.S., the existence of an extensive airport network provides a number of access points for air cargo flights (and passenger flights carrying cargo) to and from foreign destinations. We have summarized in Figure 36 and Table 12 the largest U.S. air cargo gateways.

Figure 36 - Summary of major U.S. air cargo gateways by value of total trade (imports and exports)29

Over $100 million

$50 million to $100 million

$15 million to $50 million

$5 million to $15 million

29 U.S. Department of Transportation

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Table 12 - Top 30 airports by value (in millions of dollars)30

Rank Airport Imports to Exports Total U.S. from U.S. 1 John F. Kennedy International Airport, New York 65,306 46,621 111,927 2 Los Angeles International Airport, California 31,248 32,590 63,838 3 Chicago, Illinois 33,737 20,597 54,334 4 San Francisco, California 26,055 20,570 46,625 5 New Orleans, Louisiana31 13,678 13,692 27,370 6 Dallas-Fort Worth, Texas 12,170 11,391 23,561 7 Miami, Florida 8,753 13,971 22,724 8 Anchorage, Alaska 16,486 5,638 22,124 9 Cleveland, Ohio 9,050 9,535 18,585 10 Atlanta, Georgia 9,890 8,297 18,187 11 Newark, New Jersey 10,363 2,606 12,969 12 San Juan, Puerto Rico 7,035 5,185 12,220 13 Boston, Massachusetts 3,485 5,694 9,179 14 Philadelphia, Pennsylvania 4,013 4,676 8,689 15 Seattle-Tacoma, Washington 3,137 4,119 7,256 16 Houston, Texas 2,833 4,263 7,096 17 Washington, DC 4,001 2,209 6,210 18 Nashville, Tennessee 4,022 196 4,218 19 Oakland, California 94 3,250 3,344 20 Minneapolis-St. Paul, Minnesota 1,864 1,432 3,296 21 Indianapolis, Indiana 27 2,603 2,630 22 Cincinnati-Lawrenceburg, Ohio 1,205 1,372 2,577 23 Huntsville, Alabama 1,270 1,181 2,451 24 Philadelphia, Pennsylvania 2,316 108 2,424 25 Memphis, Tennessee 1,571 804 2,375 26 Honolulu, Hawaii 2,030 307 2,337 27 Aguadilla, Puerto Rico 55 1,715 1,770 28 Orlando, Florida 1,205 319 1,524 29 Detroit, Michigan 1,077 363 1,440 30 Phoenix, Arizona 1,020 377 1,397 Subtotal – top 30 U.S. airports 278,996 225,681 504,677 Remaining airports 8,745 9,921 18,666 Total 287,741 235,602 523,343 Consistent with other modes of transportation, there is a significant degree of concentration within the air cargo sector. Overall, the top five airports account for approximately 60% of all air imports and exports by value, with the top 15 airports accounting for 87% of all air transportation into and from the U.S. by value. A few large airports handle the bulk of air imports and exports by weight. The three largest airports by volume (Anchorage, Miami and JFK) handle 52% of all air cargo traffic by weight, with 75% of air cargo handled by the eight largest airports.

30 U.S. Department of Transportation. 31 Includes Federal Express facilities in Memphis, Tennessee.

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7.1.1 Air cargo origins and destinations by airport and country From an international perspective, U.S. airports primarily transport freight to and from airports located in Asia, Europe and South and Central America. On the following pages, we have summarized the largest airports for air cargo shipments to and from the United States (Figure 37 and Table 14). Japan represents the largest trading partner for air cargo shipments with more than 1 million tons of cargo flown between the two countries in 2003. Overall, foreign pairings for U.S. air cargo ships are heavily concentrated, with the top 10 countries accounting for approximately 70% of all air cargo imports and exports. Air cargo shipments are also focused primarily on trade with Asia and Europe, with eight of the top 10 countries located in these continents (Table 13)

Table 13 - Summary of air cargo imports and exports by foreign pairing32 Country Imports to U.S. Exports from U.S. Total Percentage of Total Percentage of (thousands of total (thousands of total tons) tons) Japan 638 12.7% 486 14.4% South Korea 601 12.0% 220 6.5% United Kingdom 451 9.0% 454 13.5% Taiwan 436 8.7% 196 5.8% China 349 7.0% 72 2.1% Germany 340 6.8% 256 7.6% France 204 4.1% 153 4.5% Netherlands 202 4.0% 125 3.7% Mexico 143 2.8% 161 4.8% Canada 161 3.2% 175 5.2% Remainder of world 1,496 29.7% 1,072 31.9% Total 5,021 100.0% 3,370 100.0%

32 U.S. Department of Transportation

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Figure 37 - Summary of foreign airports by volume of trade (imports and exports)33

Over 500,000 tons

200,000 to 500,000 tons

100,000 to 200,000 tons

50,000 to 100,000 tons

33 Bureau of Transportation Statistics, U.S. Department of Transportation

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Table 14 - Summary of foreign airports by volume of trade (imports and exports)34 Ranked by Volume of Imports to U.S. (thousands of tons) Ranked by Volume of Exports from U.S. (thousands of tons) Rank Airport Country Imports Rank Airport Country Exports 1 Seoul Korea 600 1 Tokyo Japan 413 2 Tokyo Japan 454 2 London United Kingdom 324 3 Taipei Taiwan 436 3 Seoul Korea 214 4 London United Kingdom 375 4 Taipei Taiwan 193 5 Frankfurt Germany 252 5 Frankfurt Germany 179 6 Bogota Columbia 228 6 Paris France 152 7 Paris France 203 7 Amsterdam Netherlands 125 8 Amsterdam Netherlands 202 8 Brussels Belgium 96 9 Hong Kong Hong Kong 198 9 Mexico City Mexico 88 10 Osaka Japan 168 10 Bogota Columbia 73 11 Lima Peru 89 11 Glasgow United Kingdom 73 12 Santiago Chile 85 12 Hong Kong Hong Kong 73 13 Guayquil Ecuador 85 13 Osaka Japan 67 14 Sao Paulo Brazil 84 14 Sao Paulo Brazil 67 15 Brussels Belgium 79 15 Toronto Canada 63 16 Luxembourg Luxembourg 76 16 Milan Italy 47 17 Shanghai China 76 17 Beijing China 40 18 Toronto Canada 55 18 Bonn Germany 39 19 Mexico City Mexico 54 19 Sydney Australia 36 20 Medellin Columbia 48 20 Guadalajara Mexico 35 21 Milan Italy 48 21 Zurich Switzerland 34 22 Panama City Panama 45 22 East Midlands United Kingdom 32 23 Zurich Switzerland 44 23 Montreal Canada 31 24 Guadalajara Mexico 43 24 Luxembourg Luxembourg 31 25 Beijing China 42 25 Vancouver Canada 27 26 San Jose Costa Rica 40 26 Shannon Ireland 27 27 Bonn Germany 40 27 Madrid Spain 24 28 Liege Belgium 39 28 Manaus Brazil 24 29 Santo Domingo Dominican Rep. 38 29 Manchester United Kingdom 23 30 East Midlands United Kingdom 33 30 Lima Peru 23 Subtotal – top 25 foreign airports 4,260 2,673 Remaining airports 761 697 Total 5,021 3,370

34 Bureau of Transportation Statistics, U.S. Department of Transportation

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7.1.2 Air cargo commodities As noted earlier, air cargo has a high value to weight ratio due to the fact that it is typically used to transport items that are either very light or high value. As summarized in Figure 38, clothing and related apparel accounts for approximately 30% of all air cargo by value, with machinery and electronic equipment representing 20% of air cargo.

Figure 38 - Summary of air cargo by commodity type35 Woven apparel

Other

Machinery

Knit apparel Leather goods Vegetables Electrical machinery Plastics Footwear Optics and medical Fish and seafood instruments

7.1.3 Major air cargo carriers Generally speaking, there are three broad categories of operators that provide air cargo services – integrators, non-integrators and passenger carriers. Integrators are dedicated air cargo service providers which own or exclusively control all of the assets, people and information systems necessary to move a shipment from point of sale to final delivery. In other words they provide a complete freight transportation service from point of origin to point of arrival. Integrators generally deal with end customers directly instead of through agents and brokers. In the air cargo industry, integrators are the global express carriers and include Fedex, UPS, TNT and DHL. Non-integrated providers include companies who offer less than a complete door-to-door solution. Air cargo companies that are non-integrators are typically retained by freight forwarders or logistics companies to form one component of the overall logistics and supply chain. Passenger carriers are national and private airlines that carry a mix of passengers and freight. While certain passenger carriers do operate all-cargo aircraft, their overall business operations differ from integrators and non-integrators in that the their business operations include passenger movements as well.

35 New York-New Jersey Port Authority report on air cargo operations.

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During 2003, a total of 240 airlines were involved in the movement of goods to and from the United States and we have summarized in Table 15 those carriers with total air cargo movements in excess of 100,000 tons.

Table 15 - Analysis of air cargo volumes (imports and exports) by carrier type (in thousands of tons)36 Carrier Classification Classification Integrator Non- Passenger integrator and cargo Federal Express All cargo (integrator) 369 Atlas Air All cargo (non-integrator) 286 Korean Airlines Passenger and cargo 285 United Parcel Service All cargo (integrator) 282 America West Passenger and cargo 224 Lufthansa German Airlines Passenger and cargo 224 Northwest Airlines Passenger and cargo 180 Eva Airways Passenger and cargo 179 China Airlines Passenger and cargo 165 Polar Air Cargo All cargo (non-integrator) 154 Japan Airlines Passenger and cargo 143 British Airways Passenger and cargo 140 United Airlines Passenger and cargo 137 Singapore Airlines Passenger and cargo 110 Asiana Airlines Passenger and cargo 110 Delta Airlines Passenger and cargo 103 Gemini Air Cargo All cargo (non-integrator) 103 Total cargo 651 543 2,000 Percentage of total 20% 17% 63%

7.2 Analysis of air cargo opportunities Our conclusions concerning the potential for Sault Ste. Marie to divert air cargo shipments destined for the United States to the community is based on our analysis of the following factors: The size of the potential market The competitive strengths and weaknesses of Sault Ste. Marie as compared to existing routes

36 U.S. Department of Transportation

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7.2.1 Potential market size Based on information provided by the U.S. Department of Transportation, we understand that approximately 80% of air cargo shipments are destined for the region within one hour’s travel time (by truck) from the destination airport. Accordingly, the majority of air cargo shipments that are ultimately destined for the U.S. Upper Great Lakes region land at airports within the region itself and as summarized in Table 16, total air cargo shipments into the region amounted to approximately 417,000 tons with a total value of $48 million. Of this amount, approximately 330,000 tons (80% of 417,000 tons) with a total value of $38 million, remained within the region.

Table 16 - Summary of existing airports within the proposed service area with air cargo trade in excess of $50 million annually37 Airport Rank Air Cargo Imports to U.S. (air cargo) Value (millions of dollars) Volume (thousands of tons) Chicago, Illinois 3 33,737 277 Cleveland, Ohio 9 9,050 9 Minneapolis-St. Paul, Minnesota 20 1,864 13 Indianapolis, Indiana 21 27 6 Cincinnati, Ohio 22 1,205 30 Detroit, Michigan 29 1,487 36 Toledo, Ohio 34 8 8 Milwaukee, Wisconsin 40 541 15 Dayton, Ohio 42 44 12 Port Huron, Michigan 49 156 6 Columbus, Ohio 54 148 5 Total 48,267 417

7.2.2 Competitive strengths and challenges of Sault Ste. Marie With respect to air cargo, we have noted a number of factors that will likely limit the overall competitiveness of the community in its efforts to attract air cargo. Limited number of air passengers – As noted in Table 15, approximately 63% of air cargo transported by large carriers (in excess of 100,000 tons annually) is moved by passenger carriers. Accordingly, successfully diverting significant amounts of air cargo will require a sufficient passenger base to attract the passenger airlines. This requirement is demonstrated by an analysis of major U.S. airports, ranked both in terms of passengers and the value of air cargo (see Table 17 on the following page). The consistency of the rankings for both categories supports the contention that air cargo operations are generally related to passenger volumes (although exceptions do exist).

37 U.S. Department of Transportation

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Table 17 - Comparison of air cargo and passenger rankings for major U.S. airports Airport Cargo Passengers Value Rank International Rank (millions of Passengers dollars) (millions) John F. Kennedy International Airport, New York 111,927 1 19.1 1 Los Angeles International Airport, California 63,838 2 17.5 2 Chicago, Illinois 54,334 3 11.4 4 San Francisco, California 46,625 4 8.1 5 Dallas-Fort Worth, Texas 23,561 6 5.7 8 Miami, Florida 22,724 7 14.2 3 Atlanta, Georgia 18,187 10 6.7 7 In Sault Ste. Marie, 131,000 domestic passengers enplaned and deplaned during 2003, making it the 34th largest airport (in terms of domestic passenger levels) in Canada. Given the relatively small volume of passenger traffic in the community, it will likely be difficult to attract passenger airlines. Distance from major markets – While air cargo is primarily used for low weight commodities, it is also an important transportation mode for expedited freight, particularly for perishable goods or just-in-time shipments. As Sault Ste. Marie is located at least one day’s travel from major U.S. centres, its attractiveness as an air cargo destination serving the U.S. Upper Great Lakes region is diminished (see page 13 for a summary of distances from Sault Ste. Marie to major U.S. centres). Competition – As noted earlier, there are a number of large airports with well developed air cargo operations with the initiative’s intended service area, increasing the potential for competition for Sault Ste. Marie. Further, the Kinross Airforce Base, located just south of Sault Ste. Marie in Michigan, may provide even greater competitive pressures as carriers who are convinced to shift their operations from existing airports may chose Kinross in order to gain the benefit of avoiding issues relating to Canada-U.S. border crossing at the expense of what we understand to be only a few minutes flying time. Geographic location in relation to the origin of shipments - To a large extent, the interest in air cargo opportunities for Sault Ste. Marie stems from its potential as a destination for polar routings from Asia. While polar routings do reduce the total distance travelled by air, we note that 78% of air cargo shipments to Chicago and Detroit originate from Europe, with a further 4% originating from Canada, Mexico or South America38. As a result, the total potential polar air cargo market for Sault Ste. Marie is limited to that portion that originates from Asia, which is 18% of all air cargo imports or approximately 75,000 tons annually.

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7.3 Overall conclusions concerning air cargo In light of the factors noted above, particularly: The relatively small size of the air cargo market and lack of significant growth, especially when compared to other modes of transportation. As noted in Table 8, air cargo imports have been relatively stagnant since 2000, compared to marine imports which have increased by approximately 12% during the same period. The significant competition that would arise from existing airports The community’s distance from major market, which would preclude its suitability as a destination point for perishable or expedited freight the absence of sufficient passenger volumes to attract passenger carriers We do not believe that air cargo represents a significant opportunity for Sault Ste. Marie. As summarized below, we estimate that these factors reduced the total potential available air cargo market to 28,000 tons, before consideration of competition and commodity considerations. A 10% share of this potential market translates into less than 1 truck per day, indicating the relatively small size of the opportunity for Sault Ste. Marie.

Estimated size of divertible air cargo flows

Total shipments to U.S. Upper Great Lakes airports 417,000 tons (Table 16)

82% of air cargo from Europe, Canada or Latin America 342,000 tons

18% of air cargo originates from Asia Non-divertible due to 75,000 tons geographic location

63% of air cargo travels in passenger airlines (Table 15)

47,000 tons

Total potential market Non-divertible due to absence of 28,000 tons significant passenger levels

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While air cargo opportunities may emerge if Sault Ste. Marie is successful in developing other transportation-related initiatives, these would be secondary to other modes of transportation. We recommend that further stages of the project (e.g. infrastructure assessment, business case development) do not include an air cargo component.

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VIII Great Lakes Marine Freight Opportunities

While we have identified ocean marine freight as a primary market opportunity for Sault Ste. Marie, the community may also be able to capitalize on its position at the junction of Lake Superior, Lake Huron and Lake Michigan to further its activities in Great Lakes shipping. This section evaluates opportunities associated with Great Lakes marine movements.

8.1 Characteristics of Great Lakes marine shipments There are just under 50 Great Lakes ports in the U.S. and in total, these ports handle in excess of 55 million tons of cargo per year. Unlike U.S. ocean ports, which handle twice as many imports into the U.S. than exports from the U.S., the flow of trade at U.S. Great Lakes ports are much more balanced between imports and exports (Figure 39).

Figure 39 - Summary of shipments to and from U.S. Great Lakes ports (in millions of fons)39 900

800

700

600 Shipments to port 500 Shipments from port

400

300

200

100

- Great Lakes Ports Ocean Ports As with other modes of transportation, Great Lakes marine transportation is heavily concentrated, with the 10 largest ports handling almost 80% of total trade flows and the 20 largest ports handling over 90% of total trade flows (Figure 40 and Table 18)

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Figure 40 - Summary of Great Lakes ports by trade volume (Canada-U.S. only)

Over 10 million tons 5 million to 10 million tons 2 million to 5 million tons 1 million to 2 million tons

Table 18 - Top 20 Great Lakes ports by volume of shipments (thousands of tons)40 Port State Imports Exports Total Cumulative To Port From Port Trade Percentage of Total Duluth-Superior Wisconsin 529 12,554 13,083 23% Toledo Ohio 4,243 3,452 7,695 37% Ashtabula Ohio 960 4,878 5,838 48% Detroit Michigan 3,492 389 3,881 55% Conneaut Ohio 178 2,939 3,117 60% Cleveland Ohio 2,696 404 3,100 66% Sandusky Ohio 73 2,586 2,659 70% Chicago Illinois 1,057 677 1,734 73% Burns Waterway Harbor Indiana 1,270 385 1,655 76% Albany New York 1,326 318 1,644 79% Milwaukee Wisconsin 1,119 325 1,444 82% Presque Isle Michigan - 1,144 1,144 84% Oswego New York 715 - 715 85% Manistee Michigan 196 515 712 87% Marblehead Ohio 16 604 619 88% Marysville Michigan 584 - 584 89% Calcite Michigan 70 509 579 90% Gary Indiana 394 179 573 91% Fairport Harbor Ohio 258 157 414 92% Buffalo New York 402 - 402 92% Total – 20 largest ports 19,578 32,015 51,592 92% Remaining Great Lakes ports 3,201 1,138 4,340 8% Total 22,779 33,153 55,932 100%

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8.1.1 Great Lakes marine movements by commodity Consistent with the suitability of marine transportation for transporting high volume, low value products, substantially all of shipments to and from U.S. Great Lakes ports involve the movement of bulk commodities such as coal, ores and aggregates and agricultural products. We have summarized in Tables 19 and 20 the ten largest commodity groups shipped to and from U.S. Great Lakes ports.

Table 19 - Summary of shipments to U.S. Great Lakes ports by commodity41 Commodity Group Volume Percentage (thousands of tons) of total Chemical products 6,095 27% Metallic ores 3,318 15% Base metals 3,118 14% Non-metallic mineral products 2,887 13% Natural sands 2,556 11% Coal 1,032 5% Waste and scrap materials 980 4% Fertilizers 277 1% Cereal grains 164 1% Logs 163 1% Subtotal – top 10 commodity groups 20,590 92% All other commodity groups 2,189 8% Total 22,779 100%

Table 20 - Summary of shipments from U.S. Great Lakes ports by commodity42 Commodity Group Volume Percentage (thousands of tons) of total Coal 18,264 55% Metallic ores 5,132 15% Cereal grains 3,784 11% Natural sands 3,342 10% Chemical products 1,823 5% Non-metallic mineral products 225 1% Animal feed 113 0% Waste and scrap materials 113 0% Base metals 113 0% Non-metallic minerals 71 0% Subtotal – top 10 commodity groups 32,980 97% All other commodity groups 173 3% Total 33,153 100%

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8.1.2 The origin and destination of Great Lakes marine movements For the most part, marine movements to and from U.S. Great Lakes ports involve trade with Canada. As summarized in Table 21, Canadian trade accounts for 93% of all shipments to and from U.S. Great Lakes ports.

Table 21 - Summary of shipments from U.S. Great Lakes ports by country of origin43 Trading region Total Trade Percentage of Total Imports Exports Total Imports Exports Total Canada 21,114 30,820 51,934 92.7% 93.0% 92.9% Europe 1,376 1,857 3,233 6.0% 5.6% 5.8% Africa 142 378 520 0.7% 1.0% 0.8% Latin and South America 119 22 141 0.5% 0.1% 0.3% Asia 28 56 84 0.1% 0.2% 0.2% Mexico – 20 20 – 0.1% – Australia and other – – – – – – Total 22,779 33,153 55,932 100.0% 100.0% 100.0% With respect to individual ports, the top 10 ports, both from an origin and destination perspective, are all located in Canada with the majority located in Ontario (Table 22). To a large extent, we believe that the ports of origin for shipments to the U.S. are a reflection of the type of commodity being shipped. For example, the largest single port of origin for shipments to U.S. Great Lakes ports is Meldrum Bay, Ontario, which is the site of a major limestone quarrying operation. Similarly, shipments from other ports also reflect the origin and type of commodity being transported: Goderich – salt for industrial and consumer use Sault Ste. Marie – steel Sarnia – chemical products

Table 22 - Summary of shipments to U.S. Great Lakes ports by port of origin44 Port of Origin Volume Percentage (thousands of tons) of total Meldrum Bay, Ontario 3,121 14% Goderich, Ontario 2,547 11% Seven Islands, Quebec 3,219 14% Windsor, Ontario 1,741 8% Bowmanville, Ontario 1,310 6% Port Arthur, Ontario 949 4% Port Cartier, Quebec 924 4% Sarnia, Ontario 884 4% Sault Ste. Marie, Ontario 586 3% Picton, Ontario 576 3% Subtotal – top 10 ports 15,857 71% All other ports 6,922 29% Total 22,779 100%

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With respect to shipments from U.S. Great Lakes ports, the largest ports of destination are located primarily in Southern Ontario, with the Port of Nanticoke (located on Lake Erie) representing the single largest port of destination for shipments from U.S. Great Lakes ports (Table 23). The significance of Southern Ontario ports is a reflection of the level of trade between Southern Ontario and the United States. We noted that Sault Ste. Marie is the fourth largest destination port by volume for shipments from U.S. Great Lakes ports, due primarily to the shipment of raw materials from U.S. states for use by Algoma Steel.

Table 23 - Summary of shipments from U.S. Great Lakes ports by port of destination45 Port of Destination Volume Percentage (thousands of tons) of total Nanticoke, Ontario 12,689 38% Hamilton, Ontario 4,203 13% Lampton, Ontario 3,206 10% Sault Ste. Marie, Ontario 2,285 7% Windsor, Ontario 1,288 4% Port Credit, Ontario 1,103 3% Quebec City, Quebec 805 2% Comeau Bay, Quebec 574 2% Amherstburg, Ontario 528 2% Port Cartier, Quebec 325 1% Subtotal – top 10 ports 27,006 82% All other ports 6,147 18% Total 33,153 100% 8.1.3 Great Lakes marine container movements At the present time, there is very little container movement to or from Great Lakes ports in either the United States or Canada. During 2005, 63,000 TEU’s of containers were handled by Great Lakes ports, the majority of which (57,000 TEU’s) were handled by Toronto46. We further note that ports west of Toronto did not have any reported container traffic during 2005.

8.2 Competitive position of Sault Ste. Marie In analyzing potential opportunities relating to the market for Great Lakes marine transportation, we have considered the transportation of both bulk commodities and containerized freight. 8.2.1 Potential market size – bulk commodities At the present time, Sault Ste. Marie is home to active bulk commodity port operations, primarily due to the presence of Algoma Steel. While the community could potentially offer itself as an alternative marine routing port for current Great Lakes marine shipments, we believe the overall diversion potential for both shipments to and from the U.S. is limited due to the fact that Great Lakes marine shipment patterns already reflect the most direct routing for bulk commodities. As noted on page 77, the largest ports of origin for shipments to U.S. Great Lakes ports are already near the source of supply for the commodity being transported. Accordingly, transporting these goods to Sault Ste. Marie for further shipment to the U.S. would not provide the most efficient routing. Similarly, shipments from Quebec ports of origin could not reasonably be expected to be diverted to Sault Ste. Marie as the shipments are either:

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Destined for U.S. ports east of Sault Ste. Marie; or Are already on ships if they are bound for ports west of Sault Ste. Marie With respect to shipments from U.S. Great Lakes ports, the ability of Sault Ste. Marie to divert additional transportation flows would be difficult as the majority of these shipments are destined for Southern Ontario. Accordingly, the routing of these shipments to Sault Ste. Marie would not represent a competitive alternative. 8.2.2 Potential market size – containers As noted on pages 11 and 102, the volume of container shipments to U.S. and Canadian Great Lakes ports is almost non-existent, with almost all international container shipments offloaded at ocean ports. While the potential may exist for Sault Ste. Marie to establish itself as a destination point for oceangoing container shipments (with further distribution to the U.S. and Canada by truck), we note that there are a number of factors that would present significant challenges. In its current state, the St. Lawrence Seaway is incapable of handling even small ocean-going container vessels. As noted in Table 24, the size of all but the smallest containerships exceeds the capacity of the Seaway. As such, the movement of containers by ship to Sault Ste. Marie would necessitate the transfer of containers from ocean-going vessels to smaller vessels, thereby increasing the cost and time involved in the routing (and thereby eroding the competitive advantage of Sault Ste. Marie).

Table 24 - Comparison of St. Lawrence Seaway capacity and container ship sizes47 Shipping Line TEU Beam (m) Draft Seaway Capacity Capable St. Lawrence Seaway maximum 23.7 8.08 Container ships Odense type 12500 (on order) Maersk 13,460 56.4 15.0 No Hanjin Copenhagen Hanjin 5,774 40.3 14.0 No Cap San Marco Hamburg-Sud 3,739 32.2 12.5 No Ever Giant Evergreen 2,728 32.2 11.6 No Xiang He COSCO 1,686 28.7 10.4 No Based on the Port of Montreal as a starting point, the distance to major population centres in the intended service area is greater by ship than by rail (Figure 41). As such, the concept of transporting containers by ship to Sault Ste. Marie with further distribution to major centres would involve more distance than existing rail routes, which would likely translate into higher transit times and costs.

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Figure 41 - Estimated distance from Montreal (in miles)48

1,400

1,200 Railway Vessel 1,000

800

600

400

200

- Montreal to Toronto Montreal to Detroit Montreal to Chicago

The St. Lawrence Seaway experiences shutdowns due to winter ice and as such, the possibility of year-round container service to Sault Ste. Marie is remote. Accordingly, shippers would be required to find a seasonal solution to compensate for the inability to transport containers during the winter months, which would likely increase the overall cost of the concept. In light of these challenges, we do not believe that the transportation of containers or other cargos directly to Sault Ste. Marie by ship represents a potential opportunity.

8.3 Overall conclusions concerning Great Lakes marine transportation In light of the factors noted above, particularly: The efficiency of existing Great Lakes marine routes and inability for Sault Ste. Marie to establish itself as a competitive alternative for current bulk commodity marine shipments The challenges and competitive disadvantages associated with transporting containers to Sault Ste. Marie We do not believe that Great Lakes marine cargo represents a significant opportunity for the Sault Ste. Marie. While the community will continue to represent a major port of origin and destination for shipments to the U.S., this is due almost exclusively to the presence of Algoma Steel. Despite the fact that additional marine shipment volumes may emerge if Sault Ste. Marie is successful in developing other transportation-related initiatives, these would be secondary to other modes of transportation. We recommend that further stages of the project (e.g. infrastructure assessment, business case development) do not include a marine component.

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IX Canada-U.S. Surface Trade Opportunities

Canada represents the largest single trading partner of the U.S. in terms of both imports and exports. This integrated nature of the two national economies has given rise to significant cross-border flows and in this chapter, we analyze the potential opportunities that could exist for Sault Ste. Marie with respect to rail and road transportation between Canada and the United States. Opportunities relating to Canada-U.S. trade by air are addressed in Chapter VII, while water transportation between the two countries on the Great Lakes is dealt with in Chapter VIII.

9.1 Characteristics of surface cargo shipments The movement of goods between the United States and Canada by surface modes (rail and road) is highly concentrated in a few large gateways. During 2005, a total of 235 million tons of goods, with a total value of $265.4 billion, were imported from Canada into the United States. The top three surface gateways (Detroit, Port Huron and Buffalo) accounted for just under 55% of all U.S. imports from Canada by value, while the top 15 gateways accounted more than 60% of imports by value (Table 25). From a volume perspective, the degree of concentration of imports to the U.S. from Canada is less pronounced, with the top three surface gateways accountin g for just over 32% of total imports by volume (Table 25). We believe this discrepancy in the degree of concentration of value and volume of imports from Canada to the U.S. can be attributed to the fact that the majority of imports through gateways in Southern Ontario involve manufactured goods, which tend to have a higher value to volume ratio than bulk commodities. The transportation pattern for exports from the U.S. to Canada demonstrates a higher degree of concentration than imports, with 65% of all exports (by value) transported through the three largest land gateways49. Once again, we attribute this to the high value nature of the commodities exported from the United States to Ontario. The major surface gateways by value and volume of imports to the U.S. from Canada is presented in Figures 42 and 43.

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Figure 42 - Major U.S. surface gateways by value of imports from Canada to the U.S.50

Over $50 billion

$30 billion to $50 billion

$10 billion to $30 billion

$5 billion to $10 billion

Figure 43 - Major U.S. surface gateways by volume of imports from Canada to the U.S.51

Over 20,000 tons

15,000 to 20,000 tons

10,000 to 15,000 tons

5,000 to 10,000 tons

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Table 25 - Top 15 surface gateways by value of imports from Canada to the U.S.

Rank Gateway Value Volume (in (in millions of thousands of dollars) tons) 1 Detroit, Michigan 61,529 21,442 2 Port Huron, Michigan 44,593 30,473 3 Buffalo-Niagara Falls, New York 37,886 19,942 4 Champlain-Rouses Point, New York 11,542 7,557 5 Alexandria Bay, New York 7,260 3,320 6 Eastport, Idaho 6,487 5,568 7 Great Falls, Montana 6,330 4,666 8 International Falls, Minnesota 5,791 15,175 9 Pembina, North Dakota 5,539 2,899 10 Sweetgrass, Montana 5,091 8,333 11 Highgate Springs-Alburg, Vermont 4,851 2,699 12 Portal, North Dakota 4,557 10,436 13 Ogsdenburg, New York 3,974 889 14 Burlington, Vermont 3,458 3,123 15 Calais, Maine 2,649 1,121 Subtotal – top 15 gateways 168,797 211,537 Remainder of gateways 96,605 23,493 Total 265,402 235,030 9.1.1 Surface movements by individual mode On the basis of weight, imports from Canada into the United States are fairly evenly distributed between the various surface modes of transportation (truck, rail and pipeline). As noted in Figure 42 and Table 27, each of these modes accounts for between 30% and 35% of the total weight of imports to the United States from Canada. However, trucking is used to ship 55% of the imports into the U.S. from a value standpoint (Figure 42 and Table 26), reflecting once again the relatively high value to volume ratio for commodities shipped by truck as opposed to rail or pipeline. For exports to Canada from the U.S., the dominance of trucking as the preferred mode is even more pronounced. Overall, trucking accounts for 78% of exports to Canada on a value basis, with rail amounting to only 10% of the value of total exports (Figure 44).

Figure 44 - Summary of cross-border surface trade flows (Canada – U.S.) by mode - 200552

150,000

100,000 Truck Rail Pipeline and other

50,000

- Imports to U.S. (value) Imports to U.S. (weight) Exports from U.S. (value)

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Table 26 - Summary of imports from Canada to the U.S. by value and surface mode of transportation - 200553 Gateway Truck Rail Pipeline and Total Other Detroit, Michigan 48,098 13,327 104 61,529 Port Huron, Michigan 19,897 19,433 5,263 44,593 Buffalo-Niagara Falls, New York 24,922 7,052 5,912 37,886 Champlain-Rouses Point, New York 8,701 1,972 869 11,542 Alexandria Bay, New York 7,258 – 2 7,260 Eastport, Idaho 736 1,281 4,470 6,487 Great Falls, Montana 1 – 6,329 6,330 International Falls, Minnesota 251 5,511 29 5,791 Pembina, North Dakota 5,024 1 514 5,539 Sweetgrass, Montana 3,311 658 1,122 5,091 Highgate Springs-Alburg, Vermont 4,118 686 47 4,851 Portal, North Dakota 1,656 2,825 76 4,557 Ogsdenburg, New York 1,185 – 2,789 3,974 Burlington, Vermont 94 – 3,364 3,458 Calais, Maine 201 919 1,529 2,649 Subtotal 125,453 53,665 32,419 211,537 All others 18,242 6,846 16,347 53,865 Total 143,695 60,511 48,766 265,402

Table 27 - Summary of imports from Canada to the U.S. by weight and surface mode of transportation - 200554 Gateway Truck Rail Pipeline and Total Other Detroit, Michigan 14,447 4,846 2,149 21,442 Port Huron, Michigan 8,870 13,173 8,430 30,473 Buffalo-Niagara Falls, New York 10,125 5,145 4,672 19,942 Champlain-Rouses Point, New York 3,837 3,031 689 7,557 Alexandria Bay, New York 3,017 – 303 3,320 Eastport, Idaho 720 4,341 507 5,568 Great Falls, Montana – – 4,666 4,666 International Falls, Minnesota 373 13,355 1,447 15,175 Pembina, North Dakota 2,600 – 298 2,899 Sweetgrass, Montana 1,859 1,955 4,519 8,333 Highgate Springs-Alburg, Vermont 1,336 1,117 246 2,699 Portal, North Dakota 1,002 8,399 1,035 10,436 Ogsdenburg, New York 807 – 82 889 Burlington, Vermont 2 – 3,121 3,123 Calais, Maine – – 1,121 1,121 Subtotal – top 15 gateways 48,995 55,363 33,285 137,643 All others 22,652 27,024 47,711 97,387 Total 71,647 82,387 80,996 235,030

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9.1.2 Surface movements by commodity To a large extent, imports from Canada into the United States are reflective of the general nature of the Canadian economy, consisting of significant amounts of raw or semi-finished natural resources as well as products with a high degree of value-add, including electronics, equipment parts and vehicles. Trade flows between the two countries are also indicative of the close degree of collaboration between the national economies. We have summarized in Tables 28 and 29 the major commodity groupings of U.S. imports and exports.

Table 28 - Summary of surface imports to the U.S. from Canada by commodity group55 Commodity Group Value Volume Cumulative Percentage (millions of (thousands of Value Volume dollars) tons) Vehicles and vehicle parts 61,679 12,295 23% 5% Mineral fuel oils 54,894 83,303 44% 41% Nuclear parts, boilers and generators 18,108 2,436 51% 42% Wood and wood products 13,813 28,917 56% 54% Plastics and articles thereof 10,446 5,897 60% 57% Pulp, paper and related products 10,089 13,023 64% 62% Electrical equipment and components 8,466 511 67% 62% Aluminum and articles made thereof 6,739 2,948 69% 64% Aircraft and associated parts 5,763 9,923 72% 68% Furniture and bedding 5,734 1,332 74% 68% Subtotal – Top 10 commodities 195,731 160,585 74% 68% All other commodity groups 69,671 74,445 26% 32% Total 265,402 235,030 100% 100%

Table 29 - Summary of surface exports from the U.S. to Canada by commodity group56 Commodity Group Value Cumulative (millions of Percentage dollars) Vehicles and vehicle parts 42,566 22% Nuclear parts, boilers and generators 34,604 40% Electrical equipment and components 17,490 49% Plastics and articles thereof 9,717 54% Mineral fuel oils 5,667 57% Articles of iron or steel 4,738 60% Iron and steel 4,664 62% Pulp, paper and related products 4,539 64% Optical and photographic equipment, surgical and medical equipment 4,844 67% Furniture and bedding 3,461 69% Subtotal – top 10 commodity groups 132,290 69% All other commodity groups 60,617 31% Total 192,907 100%

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9.1.3 Origin and destination of surface transportation flows An analysis of U.S. trade activity with Canada indicates that Ontario is the largest Provincial trading partner of the U.S., accounting for half the value of total U.S. imports from Canada and 70% of exports from the U.S. to Canada (Table 30)

Table 30 - Summary of surface transportation flows by Province (in millions of dollars for value and thousands of tons for volume)57 Origin (for imports) Value of Value of Total Volume of Percentage of total Destination (for Imports Exports Trade Imports Imports Exports Imports exports) to U.S. from U.S. (value) (value) (volume) Ontario 130,842 132,983 263,825 58,796 49% 69% 25% Quebec 41,614 12,573 54,187 28,733 16% 7% 12% Alberta 54,528 8,916 63,444 92,002 21% 5% 39% British Columbia 15,785 10,598 26,383 21,996 6% 5% 9% Saskatchewan 4,285 4,185 8,470 17,556 2% 2% 7% Manitoba 6,485 7,924 14,409 9,109 2% 4% 4% Atlantic Provinces 6,996 1,952 8,948 6,837 3% 1% 3% Other and unknown 4,867 13,776 18,643 1 2% 7% 0% Total 265,402 192,907 458,309 235,030 100% 100% 100% With respect to the destination of surface imports from Canada to the U.S., the largest single trading partner with Canada is the state of Michigan, which received just under $50 billion in imports from Canada during 2005. Michigan also represents the largest origin point of exports from the U.S. to Canada, with $22 billion of goods flowing into Canada during 2005. We have included in Tables 31 to 33 a summary of cross-border surface trade at the regional level. For the purposes of our report, we have divided the U.S. into six regions, as summarized below, as well as an “other” category, which includes Alaska and unidentified commodity flows.

Northwestern region Great Lakes region

Central region Northeastern region

Southwestern region

Southeastern region

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Table 31 - Value of U.S. imports from Canada by region (millions of dollars)58 Destination Region Imports from Ontario Quebec Alberta British Manitoba Atlantic Territories & Total Columbia Saskatchewan Provinces unknown Great Lakes region 67,939 8,791 22,631 2,807 5,637 816 1 108,622 Northeastern region 25,297 20,636 9,909 1,197 884 4,565 – 62,488 Southeastern region 18,750 8,270 5,828 2,164 1,322 1,250 – 37,584 Central region 1,759 829 5,050 609 1,598 44 – 9,889 Southwestern region 15,455 2,408 1,738 2,707 554 243 – 23,105 Northwestern region 1,485 611 9,283 6,228 759 61 – 18,427 Total 130,842 41,614 54,528 15,785 10,770 6,996 4,867 265,402

Table 32 - Volume of U.S. imports from Canada by region(thousands of tons) Destination Region Imports from Ontario Quebec Alberta British Manitoba Atlantic Territories & Total Columbia Saskatchewan Provinces unknown Great Lakes region 988 417 16,377 1,276 3,169 56 – 22,283 Northeastern region 29,697 6,394 50,298 4,484 15,869 966 1 107,709 Southeastern region 15,179 15,688 5,728 1,802 1,449 4,024 – 43,870 Central region 671 231 13,452 6,464 3,134 36 – 23,988 Southwestern region 9,083 5,155 3,359 4,227 2,066 1,575 – 25,465 Northwestern region 3,141 834 2,720 3,692 967 169 – 11,523 Total 58,796 28,733 92,002 21,996 26,665 6,837 1 235,030

Table 33 - Value of U.S. exports to Canada by region (millions of dollars) Origin Region Exports to Ontario Quebec Alberta British Manitoba Atlantic Territories & Total Columbia Saskatchewan Provinces unknown Great Lakes region 2,598 100 485 378 827 22 – 4,410 Northeastern region 57,624 1,336 2,002 1,276 5,925 277 – 68,440 Southeastern region 28,019 7,241 626 793 1,579 879 – 39,137 Central region 1,296 159 1,143 4,206 181 68 – 7,053 Southwestern region 32,161 2,526 3,435 1,394 3,241 652 – 43,409 Northwestern region 7,262 463 1,184 2,551 327 42 – 11,829 Total 132,983 12,573 8,916 10,598 12,109 1,952 13,776 192,907

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9.1.4 Major trucking companies The Canadian trucking industry can typically be divided into three broad categories: For-hire trucking companies, which provide transportation services to third party customers. There are approximately 10,800 for-hire carriers in Canada, accounting for just over 45% of total industry revenues59. Private trucking companies, which are involved in the provision of transportation of its own goods. For example, a major retail chain may have its own private trucking company. In Canada, the total number of private carriers amounts to 500 companies and they represent approximately 44% of total industry revenues59. Courier companies, including local delivery services. The for-hire trucking segment is comprised of a mix of large publicly held companies, medium sized privately held corporations and small, owner-managed businesses and we have summarized below the 25 largest for-hire carriers in Canada, based on fleet size (trucks, tractors and trailers).

Table 34 - Largest trucking carriers in Canada, by fleet size59 Company Province Fleet Size Trucks Tractors Trailers Total Transforce Quebec – 3,359 8,824 12,183 Trimac Transportation Services Alberta – 2,692 6,111 8,803 Vitran Corporation Ontario – 1,190 5,492 6,682 TransX Manitoba 38 903 3,757 4,698 SLH Transport Ontario 2 445 4,175 4,622 Challenger Motor Freight Ontario 6 1,190 3,392 4,588 Group Robert Quebec 10 1,175 3,100 4,285 Mullen Transportation Alberta 226 1,122 2,678 4,026 Paul’s Hauling Group Manitoba 88 952 2,905 3,945 Contrans Income Fund Ontario – 1,300 2,100 3,400 Day & Ross Transportation Group New Brunswick 410 1,121 1,826 3,357 Armour Transportation Systems New Brunswick 90 747 2,127 2,964 Kindersley Transport Group Saskatchewan 42 749 2,023 2,814 Bison Transport Manitoba – 805 1,726 2,531 Schneider National Carriers Ontario – 515 2,000 2,515 Clarke Ontario 35 1,027 1,424 2,486 Highland Transport Ontario – 750 1,600 2,350 UPS Ontario 1862 105 332 2,299 Reimer Express Lines Manitoba 30 485 1,462 1,977 Allied Systems Canada Ontario – 917 965 1,882 Yanke Group of Companies Saskatchewan – 488 1,328 1,816 XTL Group Ontario 25 485 1,275 1,785 Manitoulin Transport Ontario 67 564 1,133 1,764 Transfreight Ontario – 238 1,513 1,751 Wilson’s Truck Lines Ontario 3 503 1,234 1,740

59 Canadian Trucking Association

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9.1.5 Major rail companies In Canada, the rail industry is dominated by the two Class I railways – CN Rail and CP Rail, which jointly account for 90% of total rail revenues in Canada (Table 35). Of the two Class I railways, CN Rail is the largest, both in terms of total revenues and length of track operated.

Table 35 - Comparison of CN Rail, CP Rail and other railways (revenue amounts in millions of dollars)60 CN Rail CP Rail Regional Railways Total Percentage Total Percentage Total Percentage of Total of Total of Total Freight revenues 4,004 50.9% 3,098 39.4% 768 9.7% Total revenues 4,275 50.7% 3,263 38.7% 897 10.6% Track length (kms) 30,853 42.9% 22,193 30.9% 18,832 26.2% With respect to shipments from Canadian origins (including Canadian ports that receive U.S. destined goods from overseas) to the U.S., the rail networks of CP Rail and CN Rail are similar (Figure 45(a) and 45(b)) Shipments destined for the U.S. Upper Great Lakes region from western origins generally cross the Canada-U.S. border in Western Canada. Shipments destined for the U.S. Upper Great Lakes region from eastern origins generally cross the Canada-U.S. border in Southern Ontario.

Figure 45(a) - CN Rail network Figure 45(b) - CP Rail network (includes Huron Central Railway)

9.2 Analysis of surface transportation opportunities Consistent with the approach utilized for other modes, our analysis of opportunities for surface transportation is based on the following factors: The size of the potential market The competitive strengths and weaknesses of Sault Ste. Marie as compared to existing routes

60 Statistics Canada

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9.2.1 Potential market size Sault Ste. Marie’s geographic position provides it with a unique opportunity to potentially position itself as a competitive and viable alternative gateway for bulk surface shipments to the United States. Its ability to attain market share will be contingent upon the benefits that result from a Sault Ste. Marie routing, particularly a reduction in shipment distances and time. To a large extent, Sault Ste. Marie’s potential market is a reflection of the origin of the goods being shipped and the gateway currently being used. For example, goods that originate from Southern Ontario and cross the border at Windsor will not be diverted through Sault Ste. Marie as the Windsor border crossing provides the most direct routing. Similarly, items that originate in Western Canada and cross the border in Western Canada cannot reasonably be expected to be diverted through Sault Ste. Marie. However, we note instances where products that originate in Western Canada and which are bound for Michigan cross the border at Windsor. In these (and similar) situations, a routing through Sault Ste. Marie could provide benefits in the form of reduced distances and associated costs. It could be argued that a Sault Ste. Marie routing would alleviate delays in and around the Chicago area, and as such would provide a basis for diverting shipments originating in Western Canada and destined for points west of Chicago. However, we note that the majority of shipments from Western Canada to the U.S. Upper Great Lakes regions are bulk commodities and as such, are less time sensitive than higher-value products. As such, shipping delays are less likely to be an issue for these shipments, thereby eliminating the competitive advantage of Sault Ste. Marie. In addition to the above, the potential also exists to divert Northern Ontario resources that are exported to the United States through border crossings in Southern Ontario. To a large extent, the flow of Northern Ontario commodities reflects the presence of large distribution and reloading facilities in Southern Ontario (e.g. Fort Erie, which is home to a number of distribution facilities dealing with pulp, paper and lumber from Northern Ontario). Notwithstanding the fact that routing these commodities through Sault Ste. Marie would reduce the total distance traveled, the transportation of goods through Southern Ontario allows producers to take advantage of the existing distribution yards and other logistics infrastructure. In order to capitalize on this opportunity, Sault Ste. Marie would be required to establish a trans-load or reload facility where Northern Ontario commodities would be collected for further distribution into the United States. This concept has been supported by CN Rail, which indicated that they would be willing to assist in the development of such an initiative (see page 129).

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Based on the above, we have identified the following potential diversion opportunities for Sault Ste. Marie with respect to surface freight movements destined for the U.S. Upper Great Lakes region (Figure 46): Shipments that originate in Western Canada which cross the border in Southern Ontario. Shipments that originate in Northern Ontario (specifically pulp, paper and wood products) which cross the border in Southern Ontario. Similar commodities from Northeastern Quebec may also be captured as part of this opportunity.

Figure 46(a) - Current routings for potential diversion flows Figure 46(b) - Proposed routing after diversion

During 2005, a total of 467,000 tons of freight that originated in Western Canada was shipped to the U.S. Upper Great Lakes region through the Windsor and Sarnia border crossings, two-thirds of which is moved by rail (Table 36). Given that rail access from Sault Ste. Marie to the U.S. extends only to the Upper Peninsula of Michigan and the states of Wisconsin, Minnesota and Illinois, its potential market for rail shipments from Western Canada is limited to those states. Based on information provided by the U.S. Department of Transportation, the total volume of rail shipments from Western Canada that pass through Windsor or Sarnia en route to Minnesota, Wisconsin and Illinois is 54,000 tons. The majority of shipments destined for these states cross the border at points west of Sault Ste. Marie.

Table 36 - Potential market size – shipments from Western Canada that cross at Ontario gateways (in tons)61 Province of Origin Windsor Sarnia Total Road Rail Road Rail Road Rail British Columbia 11,075 209 14,501 126,826 25,576 127,035 Alberta 9,543 11,881 74,825 142,259 84,368 154,140 Saskatchewan 3,727 455 5,197 38,824 8,924 39,279 Manitoba 6,258 209 6,701 14,530 12,959 14,739 Total 30,603 12,754 101,224 322,439 131,827 335,193

61 U.S. Department of Transportation

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In addition to the above, an estimated 4.7 million tons of pulp, paper and wood products was shipped to the U.S. Upper Great Lakes region from Ontario during 2005, of which approximately 1.9 million tons was shipped by rail. Once again, the limited rail access south from Sault Ste. Marie to the U.S. Upper Great Lakes region reduces the overall market potential for surface transportation of Northern Ontario commodities to truck shipments (2.8 million tons) and those rail shipments destined for Minnesota, Wisconsin and Illinois (1.1 million tons).

Table 37 - Potential market size – shipments from Northern Ontario that cross at Ontario gateways (in tons)62 Destination Pulp and Paper Wood Products Total Road Rail Road Rail Road Rail Michigan 174,816 83,556 834,120 265,496 1,008,936 349,052 Ohio 216,901 112,155 218,918 155,959 435,819 268,114 Indiana 118,344 18,103 160,781 137,605 279,125 155,708 Illinois 362,231 289,013 85,260 153,161 447,491 442,174 Iowa 106,542 12,827 18,495 41,402 125,037 54,229 Minnesota 140,090 88,713 112,905 95,700 252,995 184,413 Wisconsin 155,326 121,588 135,203 347,186 290,529 468,774 Total 1,274,250 725,955 1,565,682 1,196,509 2,839,932 1,922,464 Less: rail shipments destined for states with no direct rail access from Sault (827,103) Ste. Marie Potential market 2,839,932 1,095,361 Of this amount, a total of 1.1 million tons already moves through Sault Ste. Marie, resulting in a total potential additional market of 2.6 million tons (2.840 million tons + 1.095 million tons – 1.1 million tons). We have summarized in Figures 47 and 48 our analysis of the total potential market for surface transportation from Canada to the United States.

Figure 47 – Opportunity No. 1 – Western Canadian shipments crossing at Southern Ontario border crossings

Western Canada Surface shipments where shipments to U.S. Upper Non-divertible due to Sault Ste. Marie would be lack of southbound rail Great Lakes region the most direct route access 20.8 million tons 467,000 tons Table 32 Table 36

Rail shipments to Michigan, Ohio, Indiana and Iowa Non-divertible due to Surface shipments that follow the most direct 281,000 tons lack of competitive advantage (shipments route 20.3 million tons are already using the most direct route)

Total potential market 186,000 tons

62 U.S. Department of Transportation

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Figure 48 – Opportunity No. 2 – Northern Ontario shipments crossing at Southern Ontario border crossings

Shipment of Northern Ontario commodities to U.S. Upper Great Lakes 4.7 million tons

Commodities already shipped through Sault Ste. Marie 1.1 million tons

Northern Ontario commodities shipped through Southern Ontario crossings 3.6 million tons

Rail shipments to Michigan, Ohio, Indiana Non-divertible due to and Iowa lack of southbound rail 827,000 tons access

Total potential market 2.8 million tons

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9.2.2 Competitive strengths The ability for Sault Ste. Marie to capture a share of the above-noted market will be enhanced by a number of competitive advantages inherent in the community. Reduced shipping distances and costs – Perhaps the greatest competitive strength of Sault Ste. Marie is its ability to reduce overall shipping distances and costs. Depending on the ultimate destination of the shipment, the choice of a Sault Ste. Marie routing could reduce the total distance associated with a shipment by as much as 30% (Table 38).

Table 38 – Summary of estimated distance for selected routings63 Origin Destination Total distance by Gateway Reduction in Distance Sault Ste. Windsor Total Percentage Marie kilometres Winnipeg Detroit 1,870 2,580 710 27.5% Cleveland 2,120 2,850 730 25.6% Chicago 2,080 3,040 960 31.6% Calgary Detroit 3,190 3,760 570 15.2% Cleveland 3,440 4,030 590 14.6% Chicago 3,400 4,220 820 19.4% Timmins Detroit 1,050 1,070 20 1.9% Cleveland 1,300 1,340 40 3.0% Chicago 1,260 1,530 270 17.6% Reduced border crossing times – In addition to reducing the distances travelled, the use of a Sault Ste. Marie routing will allow transportation companies to avoid border crossing delays at Southern Ontario crossing points.

Contrary to popular belief, delay times at Southern Ontario border crossings are not significant, due in large part to measures undertaken by government agencies in both the U.S. and Canada. Notwithstanding the fact that average delay times have been reduced in recent years, the choice of a Sault Ste. Marie routing still represents a competitive alternative as: While average delay times have been reduced, significant variances are still being experienced. As summarized in Table 39, these outliers from the average (based on the 95th percentile of crossing times), indicates that in Sarnia and Windsor, trucks may require up to 80 minutes to reach the U.S. customs inspection point.

Table 39 - Summary of average and 95th percentile crossing times64 Border crossing Average Time 95th Percentile Time Ambassador Bridge (Windsor) 20.4 min 33.9 min Blue Water Bridge (Sarnia) 34.2 min 80.3 min

While border crossing times have been reduced in recent years, the impact of increased traffic flows may result in higher delay times in the future. We note that expansions are proposed for both the Windsor and Fort Erie gateways, which we consider to be indicative of future capacity issues.

63 KPMG analysis 64 U.S. Department of Transportation 2002 analysis. Represents crossing times for inbound truck shipments

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At the present time, the International Bridge Authority, as well as the U.S. and Canadian governments, are reviewing infrastructure requirements for the International Bridge, including the expansion of capacity on both the U.S. and Canadian sides. These organizations are aware of this study and have expressed their interest in integrating the results of the study with their efforts.

We have been advised that the primary focus of the infrastructure review is to assess future truck flows on the International Bridge under a range of scenarios, as well as the supporting infrastructure requirements, in terms of truck plaza area and customs clearing facilities. Accordingly, the results of this study will be relevant to the infrastructure review and we have agreed to the coordination of efforts and sharing of information as both studies progress. Avoidance of highway congestion – At the present time, truck shipments that cross at either Sarnia or Windsor are subject to congestion on the U.S. highway network, particularly along the corridor between Chicago, Detroit and Cleveland. As summarized in Figures 49(a) and 49(b), the level of congestion is expected to increase significantly within the next 15 to 20 years, causing further issues for truck shipments in the U.S. Upper Great Lakes region65.

Figure 49(a) Peak demand -1998 Figure 49(b) - Peak demand - 2010

Areas approaching capacity are denoted in yellow, areas exceeding capacity are shown in red

Through the use of a Sault Ste. Marie routing, shippers would be able to use the relatively uncongested I-75 and other Northern highways to access much of the Upper Great Lakes region.

65 U.S. Department of Transportation. Represents congestion on highways only (no rail)

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9.2.3 Competitive challenges Notwithstanding the apparent benefits associated with a Sault Ste. Marie routing, there are a number of factors that limit its potential advantages with respect to surface transportation. As noted in Table 38, Sault Ste. Marie offers only limited benefits for commodities originating in Northeastern Ontario which are destined for the eastern portion of the U.S. Upper Great Lakes region. Given the presence of significant pulp, paper and forestry operations along the Highway 11 corridor in Northeastern Ontario, a sizeable portion of pulp, paper and wood exports to the U.S. Upper Great Lakes region may not benefit from a Sault Ste. Marie routing. Based on information provided by the Ontario Ministry of Natural Resources, we understand that just over half of all large sawmills (defined as processing more than 50,000 m3 annually) are located in Northeastern and Central Ontario. Accordingly, approximately 50% of forestry exports from Northern Ontario may not benefit from a routing through Sault Ste. Marie. While rail access to Sault Ste. Marie is available from both CN Rail and CP Rail, the community is not located on the trans-national network of either railway, relying instead on secondary lines for rail service. Given that both railways prefer to maximize the usage of their main railines, particularly those accessing the U.S. Upper Great Lakes region from Western Canada border crossings, Sault Ste. Marie will likely face significant difficulties in convincing either rail company to redirect its existing rail service through Sault Ste. Marie. As demonstrated in Figures 50(a) and 50(b), the highest line densities for both CN Rail and CP Rail for lines servicing the U.S. Upper Great Lakes region are between Western Canada and Chicago and Toronto and Michigan.

Figure 50(a) - CN Rail network densities Figure 50(b) - CP Rail network densities

Over 45 million gross tons per mile 30 million to 45 million gross tons per mile 15 million to 30 million gross tons per mile Less than 15 million gross tons per mile or lines with haulage, trackage or marketing rights (CP Rail only)

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9.3 Overall conclusions concerning surface transportation With respect to surface transportation, we have identified two potential markets: The shipment of commodities produced in Northern Ontario and bound for the U.S. Upper Great Lakes region. As summarized in Table 40, we estimate this market to be as much as 245,000 trucks per year (approximately 700 trucks per day) and one train per week carrying Northern Ontario commodities.

Table 40 - Summary of estimated market – shipments of Northern Ontario commodities Truck Rail Rail Shipments from Northern Ontario (Table 37) 2,839,000 1,922,000 4,761,000 Less: Shipments destined for states with no direct rail access – (827,000) (827,000) from Sault Ste. Marie (Table 37) Less: Shipments already routed through Sault Ste. Marie (330,000) (770,000) (1,100,000) Total potential market (in tons) 2,509,000 325,000 2,834,000 Average weight per shipment (in tons) 10.2 5,600 Total potential market – in trucks per year 245,000 Total potential market – in trains per year 58

The shipment of goods from Western Canada to the U.S. Upper Great Lakes region that current cross at Southern Ontario border gateways. As summarized in Table 41, we have estimated this market to be as much as 13,000 trucks per year (30 to 40 trucks per day) and one train per month.

Table 41- Summary of estimated market – shipments from Western Canada Truck Rail Rail Shipments from Western Canada (Table 36) 132,000 335,000 467,000 Less: Shipments destined for states with no direct rail access – (281,000) (281,000) from Sault Ste. Marie (Table 37) Total potential market (in tons) 132,000 54,000 186,000 Average weight per shipment (in tons) 10.2 5,600 Total potential market – in trucks per year 12,900 Total potential market – in trains per year 10 Notwithstanding the significance of this potential market (particularly shipments of Northern Ontario commodities), we consider it to represent a secondary opportunity to Sault Ste. Marie given the competitive challenges faced by the community, including: The inability of Sault Ste. Marie to provide a reduction in transportation distances for natural resource producers in Northeastern Ontario, which may eliminate up to half of the identified potential market; Competition provided by existing distribution centres for wood and paper products situated in Southern Ontario, which are important factors influencing routings; and The preference of rail companies to maximize rail densities, which will result in the use of rail lines other than those transiting through Sault Ste. Marie. In light of these challenges, we recommend that Destiny work with existing stakeholders in the community to advance their efforts in developing transload facilities and other initiatives focused on this potential market.

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X Opportunities From Overseas Freight Movement

Marine shipments from overseas ports represent the largest mode of transportation, both in terms of volume and value, to the United States. Fuelled by growth in trade levels from all regions of the world, ocean freight imports are forecasted to continue growing in the future. In this chapter, we review the nature of ocean freight movements, including an analysis of how goods are moved to the U.S. Upper Great Lakes once off-loaded at U.S. ports, as well as the opportunities available to Sault Ste. Marie.

10.1 Characteristics of oceangoing marine shipments To a large extent, the shipment of goods by sea to and from the United States is highly concentrated, with the top 10 seaports accounting for two-thirds of imports and over 70% of exports by value (Table 41). An analysis of the value and weight of marine shipments to and from U.S. seaports demonstrates the relative specialization that has transformed U.S. seaports into one of two categories: Seaports that handle primarily containers and as such, tend to have a high value to weight ratio; and Seaports that handle primarily bulk cargos, which tend to have a high weight to value ratio. Figures 51 and 52 provide an indication of the largest U.S. seaports by value and volume of imports and exports. In Tables 42 and 43, we summarize the 30 largest U.S. seaports by volume and value.

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Figure 51 - U.S. seaports by value of total trade (imports and exports)66

Over $100 billion

$50 to $100 billion

$20 to $50 billion

$10 to $20 billion

Figure 52 - U.S. seaports by volume of total trade (imports and exports)67

Over 100,000 tons 75,000 to 100,000 tons 50,000 to 75,000 tons 25,000 to 50,000 tons

66 U.S. Department of Transportation 67 U.S. Department of Transportation

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Table 42 - Top 30 seaports by value (in millions of dollars)68 Rank Seaport Imports to Exports Total U.S. from U.S. 1 Los Angeles, California 105,186 16,865 122,051 2 New York, New York 76,873 24,303 101,176 3 Long Beach, California 78,700 17,163 95,863 4 Houston, Texas 28,454 21,439 49,893 5 Charleston, South Carolina 26,000 13,374 39,375 6 Norfolk, Virginia 18,469 11,026 29,495 7 Tacoma, Washington 21,129 5,203 26,332 8 Baltimore, Maryland 20,270 5,686 25,956 9 Oakland, California 17,382 7,762 25,144 10 Seattle, Washington 17,390 5,688 23,078 11 Savannah, Georgia 13,931 7,418 21,349 12 New Orleans, Louisiana 8,174 11,237 19,411 13 Miami, Florida 9,785 6,826 16,610 14 Portland, Oregon 8,844 2,966 11,810 15 Jacksonville, Florida 8,901 2,334 11,235 16 Port Everglades, Florida 6,151 4,348 10,499 17 Philadelphia, Pennsylvania 9,681 634 10,315 18 Morgan City, Louisiana 9,927 181 10,108 19 Corpus Christie, Texas 7,902 1,957 9,859 20 Beaumont, Texas 8,662 954 9,616 21 Texas City, Texas 4,821 1,713 6,534 22 Gramercy, Louisiana 2,111 3,781 5,892 23 Boston, Massachusetts 4,966 715 5,681 24 Port Arthur, Texas 5,141 412 5,553 25 Brunswick, Georgia 4,763 669 5,432 26 Port Hueneme, California 5,222 139 5,362 27 Wilmington, Delaware 4,640 581 5,221 28 Lake Charles, Louisiana 4,616 576 5,192 29 San Juan, Puerto Rico 4,117 1,050 5,167 30 Freeport, Texas 4,039 1,060 5,099 Subtotal – top 30 U.S. seaports 546,249 178,059 724,307 Remaining ports 58,632 57,543 116,176 Total 604,881 235, 602 840,483

68 U.S. Department of Transportation

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Table 43 - Top 30 seaports by volume (in thousands of tons)69

Rank Seaport Imports to Exports Total U.S. from U.S. 1 Houston, Texas 89,853 36,244 126,098 2 South Louisiana, Louisiana 30,807 49,517 80,324 3 New York, New York 69,195 8,739 77,934 4 Beaumont, Texas 63,331 5,415 68,747 5 Corpus Christie, Texas 44,755 8,631 53,386 6 Long Beach, California 37,172 14,176 51,348 7 New Orleans, Louisiana 20,799 27,898 48,697 8 Texas City, Texas 40,185 3,207 43,392 9 Los Angeles, California 29,158 12,682 41,840 10 Lake Charles, Louisiana 27,825 3,937 31,762 11 Freeport, Texas 22,663 2,425 25,089 12 Mobil, Alabama 17,545 7,474 25,019 13 Norfolk Harbor, Virginia 9,142 15,045 24,187 14 Baltimore, Maryland 18,860 5,095 23,955 15 Baton Rouge, Louisiana 18,650 4,446 23,095 16 Savannah, Georgia 13,057 8,211 21,268 17 Pascagoula, Mississippi 17,514 3,269 20,783 18 Plaquemines, Louisiana 8,468 10,450 18,917 19 Philadelphia, Pennsylvania 18,315 166 18,481 20 Port Arthur, Texas 14,259 4,161 18,421 21 Charleston, South Carolina 12,768 5,637 18,405 22 Paulsboro, New Jersey 17,908 310 18,219 23 Tampa, Florida 9,224 8,131 17,345 24 Boston, Massachusetts 15,620 800 16,419 25 Marcus Hook, Pennsylvania 16,077 10 16,087 26 Portland, Oregon 4,387 11,181 15,568 27 Tacoma, Washington 5,490 9,471 14,961 28 Seattle, Washington 6,650 6,758 13,408 29 Duluth-Superior Wisconsin 529 12,554 13,083 30 Richmond, California 10,017 858 10,875 Subtotal – top 30 U.S. seaports 710,223 286,898 997,121 Remaining ports 137,779 76,580 215,359 Total 848,002 363,478 1,212,480

69 U.S. Department of Transportation

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10.1.1 U.S. seaports by container movements As noted earlier, a number of U.S. seaports have specialized into container ports and the degree of concentration with respect to container movements is significant. Overall, the three largest container ports in the U.S. (Los Angeles, Long Beach and New York-New Jersey) handle half of all containers imported to and exported from the U.S., while the 15 busiest container ports handle over 92% of all marine container traffic (Table 44). A summary of container movements by U.S. seaports is provided in Figure 53.

Figure 53 - Distribution of TEU’s by port70

Over 3 million

2 million to 3 million

1 million to 2 million

500,000 to 1 million

Table 44 - Container movements by U.S. seaport (2003)71 Seaport Total Containers (thousands of TEU’s) Percentage Cumulative Imports to Exports Total Percentage U.S. from U.S. Los Angeles, California 3,106 842 3,948 19% 19% Long Beach, California 2,973 838 3,811 18% 37% New York, New York 1,990 821 2,811 13% 50% Charleston, South Carolina 723 522 1,245 6% 56% Savannah, Georgia 603 517 1,121 5% 61% Norfolk, Virginia 636 448 1,084 5% 66% Oakland, California 517 504 1,021 5% 71% Houston, Texas 455 472 927 4% 75% Tacoma, Washington 597 326 923 4% 79% Seattle, Washington 490 315 805 4% 83% Miami, Florida 430 326 756 4% 87% Port Everglades, Florida 187 218 405 2% 89% Baltimore, Maryland 196 110 306 1% 90% New Orleans, Louisiana 97 133 230 1% 91% Portland, Oregon 64 146 210 1% 92% Subtotal – top 15 U.S. containerports 13,064 6538 19,602 92% Remaining seaports 950 564 1,514 8% Total 14,014 7,102 21,116 100%

70 U.S. Department of Transportation 71 U.S. Department of Transportation

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10.1.2 Countries and ports of origin Consistent with their nation’s trade in general, U.S. seaports maintain trade links with a variety of ports throughout the world. Overall, more than 200 countries maintain maritime connections with the United States through a network of seaports throughout the world. By volume, the largest origin seaports for imports into the U.S. are generally involved in the transportation of petroleum products and as such, are predominantly located in Mexico, the Middle East and the Caribbean (Figure 54). From an export perspective, however, the seaports that receive the most shipments from the U.S. are typically located in the Far East and Europe (Figure 55). A summary of major origin and destination seaports is included in Tables 45 and 46.

Figure 54 - Summary of foreign ports by volume of imports to the U.S.72

Imports

Over 20 million tons

10 to 20 million tons

5 to 10 millions tons

2 to 5 million tons 72 Bureau of Transportation Statistics, U.S. Department of Transportation

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Figure 55 - Summary of foreign ports by volume of exports from the U.S.73

Exports

Over 20 million tons

10 to 20 million tons

5 to 10 millions tons

2 to 5 million tons

73 Bureau of Transportation Statistics, U.S. Department of Transportation

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Table 45 – International origin and destination ports ranked by volume of trade 74 Ranked by Volume of Imports to U.S. (thousands of tons) Ranked by Volume of Exports From U.S. (thousands of tons) Total Rank Port Country Rank Port Country Total Exports Imports 1 Cayo Arcas Mexico 38,999 1 Tokyo Japan 20,713 2 Dos Bocas Mexico 28,959 2 Nanticoke Canada 12,688 3 Puerto La Cruz Venezuela 26,285 3 Kao Hsiung Taiwan 11,913 4 Ras Tanura Saudi Arabia 22,124 4 Rotterdam Netherlands 8,360 5 Freeport Bahamas 14,791 5 Hong Kong China 7,950 6 St. Eustatius Dutch Antilles 13,405 6 Veracruz Mexico 7,660 7 Al Juaymah Saudi Arabia 13,368 7 Antwerp Belgium 6,998 8 Whiffen Head Canada 12,359 8 Shanghai China 6,253 9 Covenas Columbia 11,352 9 Pusan South Korea 5,893 10 Hong Kong China 11,171 10 Tuxpan Mexico 5,431 11 Santa Marta Columbia 10,665 11 Singapore Singapore 5,272 12 Point Fortin Trinidad 10,496 12 Inchon South Korea 4,416 13 Arzew Algeria 9,893 13 Hamilton Ontario 4,226 14 Point Tupper Canada 9,809 14 Kobe Japan 4,193 15 Coatzacoalcos Mexico 9,585 15 Yokohama Japan 4,019 16 Antwerp Belgium 9,223 16 Lampton Canada 3,206 17 Mongstad Norway 9,089 17 Dalian China 3,193 18 Pajaritos Mexico 8,965 18 Tai Chung Taiwan 3,015 19 Kao Hsiung Taiwan 8,481 19 Puerto Cortes Honduras 2,620 20 La Salina Venezuela 8,432 20 Kashima Japan 2,604 21 Yantian China 7,889 21 Rio Haina Dominican Rep. 2,557 22 Carmen Mexico 7,846 22 Freeport Bahamas 2,483 23 Skikda Algeria 7,694 23 Victoria Brazil 2,466 24 Pusan South Korea 7,601 24 Sao Paulo Brazil 2,443 25 Rotterdam Netherlands 7,509 25 Haifa Israel 2,403 26 Cabinda Angola 7,334 26 Sault Ste. Marie Canada 2,284 27 Shanghai China 7,173 27 Bremerhaven Germany 2,135 28 Point Lisas Trinidad 7,126 28 Puerto Cabello Venezuela 2,021 29 Bonny Nigeria 7,099 29 Ching Tao China 1,960 30 Singapore Singapore 6,004 30 Ning Bo China 1,867 Subtotal – top 25 foreign ports 360,726 153,242 Remaining ports 487,276 210,236 Total 848,002 363,478

74 U.S. Department of Transportation

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Table 46 - Summary of top 30 maritime trading partners, by total trade value and volume75 Rank Country Value Volume Imports Exports Total Imports to U.S. Exports. Total 1 China 121,297 16,887 138,184 43,003 33,841 76,844 2 Japan 84,249 24,243 108,492 11,649 49,834 61,483 3 Germany 40,772 10,541 51,313 10,646 5,049 15,695 4 Korea 21,339 10,979 32,318 9,548 16,678 26,226 5 United Kingdom 20,479 9,338 29,817 29,805 6,120 35,925 6 Mexico 20,430 6,652 27,082 109,834 24,173 134,007 7 Taiwan 18,056 6,886 24,942 5,795 13,367 19,162 8 Saudi Arabia 17,971 3,265 21,236 99,957 1,695 101,652 9 Venezuela 16,863 2,117 18,980 104,209 3,880 108,089 10 Brazil 12,857 5,848 18,705 31,846 10,185 42,031 11 Italy 13,507 3,961 17,468 7,929 9,933 17,862 12 France 10,013 3,886 13,899 5,275 3,733 9,008 13 Netherlands 5,911 7,261 13,172 7,764 9,167 16,931 14 Thailand 10,139 2,393 12,532 7,786 4,081 11,867 15 Belgium 4,471 7,486 11,957 5,926 7,289 13,215 16 Canada 8,374 2,594 10,968 73,152 36,330 109,482 17 Australia 4,675 6,292 10,967 6,449 3,479 9,928 18 Nigeria 10,204 757 10,961 50,445 2,264 52,709 19 Indonesia 8,473 1,995 10,468 7,713 4,773 12,486 20 Malaysia 8,718 1,617 10,335 4,451 2,347 6,798 21 Hong Kong 5,392 4,755 10,147 876 3,345 4,221 22 Russia 7,647 1,851 9,498 22,614 1,270 23,884 23 India 6,903 1,989 8,892 4,293 2,985 7,278 24 Singapore 3,240 4,152 7,392 812 4,831 5,643 25 Spain 4,130 3,159 7,289 5,630 9,393 15,023 26 Dominican Republic 3,741 3,533 7,274 1,153 4,875 6,028 27 Sweden 6,197 988 7,185 4,574 940 5,514 28 Columbia 4,712 2,312 7,024 33,665 4,967 38,632 29 Philippines 4,176 1,545 5,721 1,778 2,916 4,694 30 Honduras 3,123 2,559 5,682 1,336 2,734 4,070 Top 30 maritime trading partners 508,059 161,841 669,900 709,913 286,474 996,387 Remaining countries 96,822 91,761 188,583 138,089 77,004 215,093 Total 604,881 253,602 858,483 848,002 363,478 1,211,480

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Sault Ste. Marie Multi-Modal Initiative Phase I Market Assessment Page 107 10.1.3 Commodities During 2003, U.S. seaports handled a total of 1.2 billion tons of imports and exports, encompassing a wide range of commodities and we have summarized in Tables 47 and 48 the major commodity categories for U.S. imports and exports by marine transportation.

Table 47 - Summary of marine imports to the U.S. by commodity group76

Commodity Group Value Volume Cumulative Percentage

(millions of (thousands Value Volume dollars) of tons) Machinery, vehicles and associated parts 212,313 54,387 35% 6% Crude petroleum 122,106 407,021 55% 54% Chemical products and preparations 95,768 45,083 71% 60% Mixed freight 35,380 44,964 77% 65% Base metal in primary or semi-finished forms and in 17,080 6,157 80% 66% finished basic shapes Coal and petroleum products 16,401 89,505 83% 76% Other agricultural products 13,577 27,315 85% 80% Gasoline and aviation turbine fuel 8,767 33,376 86% 83% Paper or paperboard articles 6,914 4,652 87% 84% Non-metallic mineral products 4,630 30,318 88% 88% Subtotal – top 10 commodity groups 532,936 742,778 All other commodity groups 71,945 105,224 12% 12% Total 604,881 848,002 100% 100%

Table 48 - Summary of marine exports from the U.S. by commodity group42

Commodity Group Value Volume Cumulative Percentage

(millions of (thousands Value Volume dollars) of tons) Chemical products 84,403 46,855 33% 13% Machinery, vehicles and associated parts 76,448 12,241 63% 16% Other agricultural products 26,591 53,481 74% 31% Mixed freight 10,826 3,928 78% 32% Pulp, newsprint, paper and paperboard 9,331 12,543 82% 36% Coal and petroleum products 9,038 49,327 85% 49% Paper or paperboard articles 8,875 5,988 89% 51% Cereal grains 7,892 82,275 92% 73% Base metal in primary or semi-finished forms and in 5,414 6,932 94% 75% finished basic shapes Animal fee and products of animal origin not otherwise 3,037 13,290 95% 79% classified Subtotal – top 10 commodity groups 241,855 286,860 95% 79% All other commodity groups 11,747 76,618 5% 21% Total 253,602 363,478 100% 100%

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10.1.4 Major players Consistent with other modes of transportation, the oceangoing marine shipping industry is characterized by a large number of individual companies, although a significant portion of the industry is controlled by a small number of large companies. As summarized in Figure 56, the top 25 shipping lines, in terms of TEU capacity, account for over 80% of the industry’s capacity.

Figure 56 – Summary of major marine carriers by TEU capacity

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10.2 Analysis of opportunities 10.2.1 Potential market size Consistent with our analysis of other transportation modes, the potential market opportunity for Sault Ste. Marie with respect to oceangoing marine freight is a function of the origin and routing of the transportation movements. As with the potential for surface freight movements, diversion opportunities exists where the use of a Sault Ste. Marie routing provides tangible benefits to the end customer. We have focused primarily on containerized freight shipments, which is consistent with the primary focus of the community and maximizes the premiere competitive advantage of Sault Ste. Marie – the ability of a routing through the community to reduce transit times and associated costs. Inherent in this advantage is the understanding that a reduction in transit times actually translates into a cost benefit. This is the case for shipments of high value goods such as automotive parts, equipment components and retail goods, all of which are typically shipped in containers. Automotive and other durable goods manufacturers often utilize just-in-time inventory systems and accordingly, a delay in delivery can result in a direct loss of revenue By their nature, high value items can be associated with significant investments in inventory and delays in delivery times represent an opportunity cost to the organization Unlike containerized freight, the transportation of bulk and breakbulk goods, such as aggregates, mineral ores and other raw commodities are less time sensitive. As such, we consider shippers of these products to be less sensitive to shipping delays and as such, less receptive to the potential advantages that could be afforded by a Sault Ste. Marie routing. As noted in the analysis of surface transportation opportunities, the ability of Sault Ste. Marie to provide tangible benefits to potential customers is a function of the origin of the shipment, the routing utilized and the ability to avoid congestion points. On the following page, we have summarized the significant rail routings used to transport shipments from coastal ports to the U.S. Upper Great Lakes region (Figure 57). As noted in the map, shipments from West Coast ports (both Canadian and U.S.) converge in Chicago, which we understand represents a major congestion point. Conversely, shipments from East and Gulf Coast ports generally follow a more direct routing to the region.

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Figure 57 – Summary of westbound container shipments to the U.S. Upper Great Lakes region

50,000 TEU’s (annually)

1,100,000 TEU’s (annually)

In light of the current routings, we have identified the following potential diversion opportunities for Sault Ste. Marie: Container shipments landed at West Coast ports (both Canadian and U.S.) and destined for points east of Chicago (Michigan, Ohio and Indiana). For these shipments, a routing through Sault Ste. Marie would allow for the avoidance of congestion in Chicago.

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Container shipments landed at Montreal and destined for the northern portion of the region (i.e. Wisconsin and Minnesota). These shipments are currently routed through crossing points in Southern Ontario and through Chicago and a routing through Sault Ste. Marie would once again bypass congestion at Chicago. 10.2.2 The Sault Ste. Marie opportunity During 2003, a total of 7.8 million containers, representing 62 million tons of cargo, were landed at West Coast ports in the United States, the majority of which originated in Asia. Half of these containers remained within region surrounding the port, with the other half distributed throughout the United States (Figure 58).

Figure 58 – Inbound container shipments to U.S. West Coast ports (2003)77

9.5 million tons containerized 7.2 million tons non-containerized 16.7 million tons total imports 50% of imports

remain within port region

52.8 million tons containerized 21.0 million tons non-containerized 73.8 million tons total imports

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Of the total containers shipped to U.S. West Coast ports, 14% were destined for the U.S. Upper Great Lakes Region, with this amount almost evenly divided between the eastern and western portions of the region. In total, 1.05 million containers were transported from the West Coast to the U.S. Upper Great Lakes region during 2003 (Figure 59).

Figure 59 - Container shipments to U.S. Upper Great Lakes region from West Coast ports (2003)78

Container shipments for Western Great Container shipments for Eastern Lakes region Great Lakes region 4.3 million tons 4.3 million tons 541,000 TEU’s 515,000 TEU’s

From a diversion potential perspective, container shipments that terminate either in Chicago or to the west of the city do not represent an opportunity for Sault Ste. Marie. As Sault Ste. Marie’s strategic advantage is its ability to provide an alternative to congestion in Chicago, shipments that are either destined for the city or which currently avoid the congestion do not represent potential diversion opportunities. However, those container movements that terminate at points east of Chicago currently transit through the City, resulting in delays that could be avoided by a Sault Ste. Marie routing. Accordingly, it is this segment of the market – container shipments from the West Coast bound for Michigan, Indiana and Ohio – that are diversion opportunities for the community.

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Similarly, shipments from Vancouver that are destined for Michigan, Indiana or Ohio are also diversion opportunities as these shipments: Current transit through Chicago, exposing them to the same risk of delay; or Are transported to Toronto with further distribution by truck or rail through Windsor. The opportunity provided by Sault Ste. Marie represents a shorter, more direct route, resulting in potential time and cost savings. Based on our discussions with representatives of the Port of Vancouver, we understand that approximately 10,000 TEU’s are shipped annually from Vancouver to the eastern portion of the Upper Great Lakes region. Potential opportunities also exist for shipments inbound to the Upper Great Lakes region from East Coast ports if the shipments currently experience congestion in Chicago. While container shipments from Southern Atlantic and Gulf ports can avoid Chicago, North Atlantic ports that ship significant volumes into the western portion of the region are forced to route through the city. Specifically, we note 50,000 and 55,000 containers are shipped from the ports of New York and Montreal, respectively, to Minnesota and Wisconsin on an annual basis and these container movements represent a potential diversion opportunity. Overall, we estimate that the total divertible potential in 2003 amounted to 630,000 TEU’s (Figure 60 and Table 49).

Figure 60 - Summary of estimated market for container shipments (in TEU’s)

Containers currently landed in New York 50,000 Containers currently landed in Montreal 55,000

Containers currently landed in U.S. West Coast ports 515,000 Containers currently landed in Vancouver 10,000

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Table 49 – Summary of potential diversion opportunity by region Port Region Total Container Diversion Opportunity Imports Destination Total Containers Western U.S. (Los Angeles, Long Beach, 6,596,000 Michigan, Ohio 515,000 Oakland, Seattle-Tacoma) and Indiana Eastern U.S. (New York) 1,990,000 Minnesota and 50,000 Wisconsin Western Canada (Vancouver) 950,000 Michigan, Ohio 10,000 and Indiana Eastern Canada (Montreal) 550,000 Minnesota and 55,000 Wisconsin Total 630,000 Estimated containers per unit train 450 Total market (expressed in number of trains) 1,400

10.3 Analysis of resultant benefits The successful implementation of the concept would witness an increase in transportation activity not only in Sault Ste. Marie, but throughout the Canadian transportation network. For the most part, this increase is expected to represent incremental traffic flows in that the majority of containers to be routed through Sault Ste. Marie currently rely on U.S. transportation infrastructure. Based on the minimum requirements of the railways, we anticipate that as many as 140,000 TEU’s will be transported through Sault Ste .Marie, which equates to approximately 18,000 railcars. A review of the annual reports of CN Rail and CP Rail indicate that their revenue per carload for intermodal shipments is in the order of $1,000 per car and based on this level of revenue, the total incremental revenue resulting from the Sault Ste. Marie initiative would be at least $18 million per year (18,000 railcars x $1,000 per intermodal car). It is estimated that there would be another $18 million in revenues for the private sector who could potentially benefit from this initiative. These revenues, include trucking fees, intermodal yard fees and port fees. When other revenues are considered, the level of revenue that could potentially be generated by the initiative could be as high as $36 million annually. This incremental economic activity would be distributed throughout the logistics chain and will not necessarily solely benefit Sault Ste. Marie. 10.3.1 The revenue impact In order to measure the economic impact of this incremental revenue, we have relied upon revenue and GDP multipliers published by Statistics Canada. These multipliers, which are based on an input-output analysis of the Canadian dollar, measure the impact that a $1 increase in revenues in one type of industry has on all other industries in Canada. For transportation related industries, the revenue multiple is 1.63x, which is among the highest. Accordingly, the overall economic benefit of the initiative, from the standpoint of revenue generation, is estimated to be in the order of $95 million annually, as summarized in Table 50.

Table 50 - Summary of estimated economic impact – revenue generated Rail revenues projected to be generated by the initiative $18 million Other revenues projected to be directly generated by the initiative $18 million Total direct revenue generation $36 million Indirect and induced revenue generated (at 1.63x direct revenue) $59 million Total revenue generated as a result of the initiative $95 million

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10.3.2 The GDP impact A common criticism of revenue generation multiples is that they tend to overstate the economic benefits of an activity by failing to net out the effect of items purchased by one industry from another, so-called intermediate inputs. The inclusion of intermediate inputs results in a double counting of the economic benefits resulting from an activity. For example, higher transportation activities triggers greater demand for diesel fuel. Given that the cost of diesel fuel is reflected in the price established for transportation activities, it is effectively counted twice. In order to eliminate the impact of intermediate inputs, Statistics Canada has developed GDP multipliers, which measure the true incremental economic activity generated by a particular activity, and based on the multiplier for transportation activities (0.86x), the contribution to GDP that would result from the successful implementation of the Sault Ste. Marie initiative would be $31 million ($36 million x 0.86). 10.3.3 The employment impact In addition to calculating revenue and GDP multipliers, Statistics Canada also calculates a services of employment multipliers that measure the number of direct and indirect employment positions created as a result of an economic activity. Based on this information, transportation activities generate 7.25 direct employment positions and 5.19 indirect and induced employment positions for each $1 million in incremental revenue. Based on the forecasted revenues of $38 million, the potential employment impacts of the initiative would be 275 direct positions with a further 200 indirect and induced positions created. From a direct employment standpoint, the initiative is the equivalent of a 2% increase in full-time employment in Sault Ste. Marie. 10.3.4 Secondary activities With respect to additional economic activities that could be generated from the initiative, three broad categories exist: Value-added transportation-related activities which would include warehousing, repackaging and transload facilities as well as logistics and customs brokerage offices. Following the implementation of the initiative, the potential for these types of activities in Sault Ste. Marie appears high as a number of logistics companies indicated their intention to establish these types of activities in the community. Further, the Fort Erie – Niagara Falls case study demonstrates that major border crossing gateways could have a significant number of transportation-related businesses. Value-added processing activities involving products transported through Sault Ste. Marie, including potentially assembling component parts into the final end product. We are of the view that these opportunities are less significant. The nature of the commodities being shipped (primarily automotive parts, equipment components and consumer products) can best be classified as being in a finished or semi-finished state. As such, the possibility of undertaking value-added activities on finished products (such as consumer products and certain automotive and equipment parts) is non-existent as these products are intended to go straight to the customer with no additional value-add processes. Similarly, the ability of Sault Ste. Marie to undertake value-added activities on semi-finished goods would require the relocation of the main production facility (in the case of automotive parts this would involve the relocation of a car plant or component plant to Sault Ste. Marie). While this may be possible, the challenges associated with this type of relocation are significant.

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Value-added local economic activities made possible through enhanced transportation service. In the event that Sault Ste. Marie is able to attract dedicated container service to the community, local businesses (both in Sault Ste. Marie and Northern Ontario in general) may benefit from the enhanced transportation service. We are aware of at least one local company that could expand its operations if dedicated container service was available in the community and it is possible that a number of local companies could expand their operations following the successful implementation of the initiative. 10.3.5 Stability benefits With the establishment of a multi-modal initiative in Sault Ste. Marie, we believe that an additional type of benefit will result that has a positive impact on the local economy. This so-called stability benefit reflects the non-tangible impact that multi-modal activities will have on existing businesses in the community. For example, The increase in rail service to Sault Ste. Marie that results from the focus on international containers would effectively double the volume of traffic carried on the Huron Central Railway (if the Huron Central line was used as opposed to the CN line). This would contribute towards the preservation of rail service to the community, which is highly dependent on the activities of Algoma Steel (the largest customer of the Huron Central Railway). The preservation of rail service to and from the community provides other industries, such as forestry, mining and other resource-based industries with access to alternatives for transportation. To the extent that this reduces their overall costs and/or enhances their efficiency, this also provides a benefit to the community and local economy. The quantification of potential stability benefits was not included in the scope of the Phase I study and as such, we have not attempted to quantify their impact on the community. 10.3.6 Other considerations While this initiative does offer a certain level of economic stability and benefits, there are limitations. This initiative is a commercial service and as such, is not insulated from external economic factors affecting the transportation sector in North America and globally. In addition, there will be costs and implications to the community if this project is to proceed which will be further researched in later phases of the study.

10.4 Competitive strengths and weaknesses The ability of Sault Ste. Marie to develop the potential market for oceangoing freight movements is contingent on its ability to demonstrate tangible benefits through a reduction in transit times and shipping costs. Once again, the community’s strategic geographic location could provide this ability. While the development of a cost-benefit analysis is to be undertaken in Phase III of the study, we have attempted to provide a high level analysis of the potential benefit that could arise from the expanded Sault Ste. Marie gateway. Notwithstanding the inclusion of this analysis in Phase III, we believe this provides an indication as to the probability of actually attaining the level of interest quantified earlier.

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As summarized in Table 51, our analysis indicates that a routing through Sault Ste. Marie could potentially reduce transit times to key Great Lakes markets by up to four days during regular periods. During peak transit periods (e.g. October and November), the increased activity on existing routes may expand this time saving, increasing the overall benefit to end customers and logistics companies and enhancing the attractiveness of the initiative.

Table 51 - Summary of estimated benefit from proposed Sault Ste. Marie routing

Sault Ste. Marie Existing Routing Routing

Marine transit – Hong Kong to Vancouver (proposed) 12 days 14 days vs. Hong Kong to Long Beach (current)79

Rail transit – Vancouver to Sudbury (proposed) vs. Long 4 days 4 days Beach to Chicago (current)80

Rail transit – Sudbury to Sault Ste. Marie51 1 day

Waiting time in Chicago rail yards 2 – 3 days

Truck transit – Sault Ste. Marie to Detroit vs. Chicago to 1 day 1 day Detroit

Total transit time 18 days 21-22 days

Total benefit 3-4 days

In addition to this competitive strength, a number of other factors exist which will enhance Sault Ste. Marie’s potential to develop this important market: Capacity constraints at U.S. West Coast ports – Currently, major container ports on the U.S. West Coast are experiencing demand levels in excess of their operating capacities and as such, represent bottlenecks in the transportation network. The magnitude of these capacity issues was identified in a research report prepared by Deutsche Bank in April 2006 As some harbours (e.g. on the west coast of America) are already almost chronically overloaded, in many cases in the past ships have had to wait outside harbour for several days before they could be unloaded and then take on a further cargo. These long waiting times tied up shipping capacity, which was not then available for other transport. In addition, in the future some ports will not be able to satisfy the requirements that result from the use of the large container ships. These concern the maximum draught; the capacity of the terminal and storage; and sufficiently good and fast connections to the hinterland. Planned expansions for the Port of Vancouver – The Port of Vancouver is experiencing capacity constraints that will limit its ability to accept freight diverted from the U.S. ports. However, the Federal government has recently announced a capital investment of more than $500 million intended to significantly increase Vancouver’s capacity.

79 CN Rail website. 80 Transit time information based on discussions with rail representatives.

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Given the relatively small volume of shipments from Vancouver to Upper Great Lakes region, the opportunity for Sault Ste. Marie to attract oceangoing container freight requires a diversion of shipments from U.S. West Coast ports to Vancouver. The increasing inefficiency of U.S. ports will assist in the overall development of this market. The development of the Sault Ste. Marie gateway as an alternative to existing transportation routes provides a new hinterland distribution point for expanded container flows from Vancouver, while the expansion of Vancouver’s capacity allows for the required diversion of containers from U.S. ports. Notwithstanding these strengths, potential challenges exist which may limit the overall development of the oceangoing freight market: Access to rail service – The development of Sault Ste. Marie as a container distribution point will require dedicated container rail service to the community. The reliance of the community on secondary rail lines and the preference of Canadian railways to utilize existing routes pose significant challenges to this and other opportunities. In addition, the attraction of dedicated rail service for container movements may require significant investments in the underlying infrastructure, including: The length of the trains in service will likely be 6,000 to 7,000 feet long (as indicated by CP Rail). Accordingly, yard facilities and rail sidings may need to be upgraded to accommodate trains of this length. The operating speed of the connecting rail lines should be sufficient to allow for a transit from the main national rail lines to Sault Ste. Marie to be accomplished within one working shift. If this is not attainable, the need to change crews during the transit to Sault Ste. Marie will adversely impact on the overall feasibility of the initiative. The extent to which infrastructure upgrades are required to achieve this key success factor will be reviewed in Phase II of the study. Supporting infrastructure such as warehouses and unloading equipment will need to have sufficient capacity to accommodate trains of up to 450 TEU’s International Bridge capacity – The capacity of the International Bridge and related customs clearance facilities will need to be able to accommodate an additional 200 to 500 trucks per day and we understand that the International Bridge Authority is currently studying anticipated future demand and the associated infrastructure requirements. Emergence of competing initiatives – Currently, there are a number of initiatives in various stages of planning that are intended to enhance the ability of existing transportation networks to accommodate freight flows to the U.S. Upper Great Lakes region, including: The development of a new intermodal terminal in Detroit The development of a new intermodal terminal in Erie, Michigan The expansion of the Panama Canal Upon completion of one or more of these initiatives, the competitive advantage of Sault Ste. Marie may be diminished as new alternatives will have emerged and/or the capacity of existing transportation routes will have been expanded. However, we note that both the Detroit and Erie intermodal terminals are progressing slower than expected and are experiencing considerable local resistance. Further, expected future growth in container levels will likely mitigate the impact of emerging initiatives.

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10.5 Overall conclusions concerning oceangoing transportation As a result of the following factors: The significant size of the potential market The ability of the community to capitalize on its natural strength of providing benefits in terms of reduced transportation times and costs The overcapacity at U.S. ports and other portions of its transportation network and the need for alternatives The movement underway to expand the capacity of Canadian ports with the specific intention of accommodating shipments destined for the U.S. We consider the diversion of containers through Sault Ste. Marie to represent a viable opportunity for development. Furthermore, the magnitude of both the opportunity and the expected benefits supports the view that the movement of overseas freight destined for the states of Michigan, Ohio and Indiana represents the priority for the community, as outlined in Figure 61 on the following page.

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Figure 61 - Overview of the opportunity – why is it a priority?

The Market 630,000 TEU’s annually in 2003 700,000 TEU’s annually in 2005

140,000 TEU’s equates to 20% of the estimated market in 2005. The total The Expectation market is expected to 140,000 TEU’s annually increase, thereby reducing As discussed later in our the required market share report, the initiative will for the initiative. likely require demand sufficient to support daily train service to Sault Ste. Marie. Based on an average capacity of 450 TEU’s per train, the initiative would require 140,000 TEU’s per year to support daily rail service to the community. The Opportunity 1 train per day

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XI Market Interest

While the outcomes of the origin and destination analysis and identification process for diversion opportunities indicate that a sizeable volume of freight (both containers and bulk) could potentially be diverted through Sault Ste. Marie, this analysis merely indicates the total market demand. In order to assess the likelihood of capturing some portion of the opportunity, as well as the size of this “market capture”, we have conducted interviews with representatives of organizations involved in the logistics, supply chain and transportation sector. The purpose of the interviews was to test market interest in the initiative with a view of determining whether further planning is appropriate.

11.1 Supply chain participants The movement of goods from suppliers to end users can often involve a number of different companies, each fulfilling a specific role. While the exact situation for each end customer will differ based on their particularl circumstances, we have provided in Figure 62 a general explanation as to the roles, responsibilities and relationships of the various parties involved in the movement of goods.

Figure 62 - Summary of the supply chain

Shipping lines Rail companies Trucking move products move product companies move from origin to port from port to product from the distribution distribution warehouse warehouse to the

end customer Supplier Port Distribution Customer Authority Warehouse

Freight forwarders make arrangements for shipments on behalf of customers with shipping lines, rail companies and trucking companies

Logistics companies manage some or all parts of their customers’ logistics chain, including operation of warehouses and distribution facilities

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As noted above, there are a number of different participants involved in the movement of commercial goods: Common carriers – Common carriers are railways, shipping lines and airlines that are involved in the transportation of goods on behalf of customers. In certain instances, common carriers (particularly shipping lines) are retained by end customers to manage the full transit of goods from the origin to destination. In these circumstances, shipping lines will enter into contracts with other common carriers (e.g. railways and trucking companies) for the movement of goods from the ports to the final destination. Freight forwarders – Freight forwarders are companies that will make arrangements on behalf of end customers with common carriers. In addition to making arrangements with common carriers, will also manage customs clearance and other regulatory matters dealing with international shipments. Despite their involvement in the supply chain, freight forwarders are generally not involved in routing decisions – rather their focus is on getting the product from origin to destination while leaving routing decisions to common carriers. Third party logistics companies – Third party logistics companies, or 3PL’s, are involved in the delivery of third party logistics services to end customers. Generally speaking, there are four different categories of logistics companies: Standard third party logistics providers, which provide basic outsourced logistics services to customers, including warehousing and distribution. Service developers, which expand the suite of logistics services offered to include additional and more specialized services such as tracking and tracing of shipments, reloading services, security and repackaging. Customer adapters, which assume responsibility for the management of the customers’ logistics functions but do not necessarily create a new service. Customer developers, which fully assume and integrate the logistics function of their customers. Customer developers represent the highest degree of involvement by 3PL’s and delegation of responsibility by their customers.

11.2 Consultation participants The original terms of reference for our study called for interviews with 10 companies involved in the logistics and transportation sectors for the purposes of determining their views on the initiative and potential interest in pursing freight routings through the Sault Ste. Marie gateway. This approach recognized the influence that logistics companies have on the supply chain management and route selection. Shortly after the acceptance of our proposal, Destiny requested that the interview process be expanded to include consultation with five end users of transportation services. This amendment of the original terms reflected the fact that in certain instances, the end customers and not necessarily the logistic company will be the determining party in selecting transportation routes. By expanding the scope of the consultation process, it was expected that insight from this group could also be obtained and reflected in the market analysis. In undertaking our study, and reflective of the approach adopted by Destiny, we have attempted to include insight from all relevant and significant parties that could exert influence on the choice of routing. In order to provide this representation of ideas and insight, our consultation has included interviews with:

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Logistics companies and end users in accordance with the spirit of the terms of reference. Shipping companies, who are a determining factors in ship routings, call schedules and seagoing rates. All of these factors are key as the concept envisions a change in the port used to ship containers to the service area. Rail companies, who represent a critical player in the concept through their ability to control rail access to Sault Ste. Marie, either overtly (but allocating sufficient trains to service the community in support of the initiative) or covertly (through the establishment of freight rates that are either supportive or prohibitive) Other transportation companies, including air carriers and trucking companies, that are involved in varying degrees in the movement of international freight. The organizations consulted during the course of our study were selected based on a number of factors and considerations, which include: Whether they were previously involved in the concept of an expanded Sault Ste. Marie gateway. Their location in the proposed service area and the nature of their business activities (i.e. is it involved in the import and export of overseas cargo, particularly from Asia). Their size, with larger companies being preferred due to the scale of their operations, the creditability often provided by the support of a larger organization and in the case of logistics companies, the depth and breadth of their customer base. Referrals from other interview candidates, based on their perception that the organization would be interested in or potentially benefit from the expanded Sault Ste. Marie gateway.

11.3 Interview methodology Our interviews, which were conducted either in person or by telephone (depending on circumstances), followed a pre-established protocol. An initial telephone conversation was held with the organization to introduce the concept, identify the appropriate individual for the interview and schedule the actual interview. Prior to the interview, candidates were provided with an introductory letter from our group, an information package outlining the initiative, the process for our study and the intended outcomes of our interview. The interview team was provided with a list of prepared questions to be addressed during the course of the interview. However, the interviews did not closely follow the interview script, but varied based on the outcomes of the discussions. In certain instances, follow-up information requests or second interviews were held to clarify matters or seek additional information from the organization. In a number of instances, interview participants requested that their comments be presented in such a manner so as to ensure the confidentiality of the parties providing the comments, as well as to protect potentially sensitive commercial information. Accordingly, we have not identified comments made by specific parties but rather have presented the major themes emerging from the consultation process. The sole exception to this is the presentation of our interview results with rail companies, wherein we have identified the comments by party.

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11.4 End customer interview results Our interviews with end customers involved large industrial organizations in both the U.S. and Canada and was intended to obtain their views on the potential for Sault Ste. Marie as an expanded gateway for both container shipments and transload operations focusing on locally produced commodities. 11.4.1 Perspective on Sault Ste. Marie as a container gateway Overall, the results of our end customers concerning Sault Ste. Marie’s potential as a container gateway were extremely positive and supportive of the process. Strong interest was expressed for the concept of a rail-road gateway focusing on imports to the United States (consistent with the identified priority), particularly in light of the expectation that the level of shipments arriving from Asia could double within as little as three years for some organizations. End customers believe that significant benefits in terms of reductions in shipping times and costs could be derived from the diversion of traffic from existing transportation routes that are already experiencing a significant level of congestion and resultant delays. The majority of these routes involve the offloading of goods at one or more West Coast ports, transportation by rail through Chicago to their operations within the intended service area of the initiative. With the exception of one organization that is already working with members of the community, none of the organizations are actively pursuing alternatives to the current congestion issues. All of the organizations consulted are ultimately responsible for the selection of routes, although their decisions are often made in conjunction with or based on the actions of other parties. Railways and shipping lines were viewed as having significant influence over any routing decision due to their ability to control prices and the limited opportunity to obtain alternative service. In order to support a move to redirect container flows to Sault Ste. Marie, end companies identified the need to demonstrate a tangible financial benefit that would result from such a decision. Given the nature and size of the organizations interviewed, there is considerable complexity inherent in their inventory management systems and they recognize the cost of carrying inventory in transit as an expense to their organization. To the extent that the use of a Sault Ste. Marie routing reduces in-transit times for goods, this would be perceived as a direct financial benefit to the organization. Other potential methods of generating interest, including marketing efforts, incentives, etc. were not viewed as effective as the determining factor would be the cost of utilizing a Sault Ste. Marie routing compared to existing routes. While organizations recognized the potential benefits that could result from an expanded Sault Ste. Marie gateway, two main challenges were also identified by the interview candidates. The community’s location on a secondary as opposed to primary rail line was seen as the major impediment. In addition, the presence of shortline railways for part of the route was viewed as further lessening and already remote likelihood of support from the railways. However, if sufficient volumes of traffic could be attracted to the Sault Ste. Marie gateway, this support could be realized. It was estimated by certain end customers that the equivalent of one train per week of dedicated commitment would be required to convince railways to provide a price that was not prohibitive (although our discussions with rail companies indicated the required level of volume was the equivalent of one train per day).

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Concerns were also expressed surrounding the intention to route cargo through the Port of Vancouver. These centered on its perceived inability to manage cargo flows on a timely basis due to labour disruptions and the unsuitability of its equipment, as well as the ability for rail companies to move containers from the terminal to their ultimate destination. In the event that the expanded gateway could demonstrate tangible financial benefits to the end users, one end customer indicated they would strongly consider the establishment of additional transportation-related activities in the community, including distribution centres and repackaging facilities. Additional value-added processing of the commodities, however, was not considered to represent a significant opportunity for the community. One significant end user located in Northern Ontario expressed significant support for the initiative and viewed the expanded gateway as a means of resolving container supply issues for their organization. At the present time, this organization is required to obtain containers from Toronto as insufficient supply exists within Northern Ontario. In the event that this initiative is successful, the organization expressed the desire to fill a relatively sizeable part of the backhaul availability (approximately 200 TEU’s per week). In order to further the initiative, this organization was willing to second a staff member to the project to assist in the preparation of the business case and implementation strategy. In addition, this organization is involved in the shipment of minerals to Asia through the Port of Vancouver (from mining operations in Manitoba) and the establishment of a container gateway was viewed as increasing the reliability of empty container supply in the west, although this issue is not as critical as it is in Northern Ontario. 11.4.2 Perspective on Sault Ste. Marie as a break-bulk gateway Our interviews with end users concerning break-bulk opportunities for Sault Ste. Marie focused on the mining and forestry sectors. As noted in Chapter IX, the Sault Ste. Marie gateway already serves these sectors at the present time and as such, the ability to realize significant benefits from break-bulk activities was perceived as lower than those that would result from a successful container-focused initiative. While interview candidates indicates that potential could exist for pulp, paper and forestry products (which is consistent with the operations of Purvis Marine), mining company representatives did not view Sault Ste. Marie as having significant potential for additional services:

Mineral shipments from Northern Ontario that are bound for the intended service area are already sent through the community. As a result, no significant increase in traffic levels was anticipated. Shipments of commodities into Northern Ontario for use by or processing in mining operations was not viewed as a viable solution to the current process of unloading commodities in either Quebec or Montreal and transporting them by rail to the mining centres.

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11.5 Logistics company interviews To a considerable degree, the outcomes of the interviews with logistics companies was consistent with that of the user interviews in that the results were extremely supportive of Sault Ste. Marie. Several of the parties interviewed indicated that the development of an alterative container gateway had the potential to provide significant benefits to end users. In light of higher traffic flows and a reduction in available capacity, the logistic company representatives believed that the establishment of an alternative gateway would be well received by end users, with some logistics companies indicating a willingness to actively market the opportunity as a potential solution, viewing the opportunity as a competitive advantage to the logistics company that could deploy it first. The attractiveness of Sault Ste. Marie as an alternative to existing transportation routes is demonstrated by the fact that:

Three logistics companies indicated a willingness to work with Destiny in advancing the concept One logistics company is planning to move freight through Sault Ste. Marie on a test basis to assess the potential benefits provided by the community

One logistics company indicated a strong interest in establishing Sault Ste. Marie as its distribution centre for Eastern Canada and the Northeastern U.S. While several logistics companies were strongly in favour of Sault Ste. Marie as an alternative for shipments from the Asia-Pacific region, logistics companies also felt that these benefits would not result from the redirection of cross-border traffic in isolation. This is due to the fact that Sault Ste. Marie’s location is too remote from major population centres in Canada and as such, the community would not be suitable as a main distribution hub for products from the United States. As with end users, the determining factor for logistics companies was the potential to reduce total costs (including direct shipping costs and the cost of in-transit inventory) that would accrue from the use of Sault Ste. Marie as a container gateway. The interview candidates cautioned that only large companies with significant investments in in-transit inventory would be attracted by reduced shipping times. Other companies, perhaps smaller or less sophisticated, would only consider the gateway based on direct shipping costs only (i.e. no benefit from reduced time) as delays in transit times are adjusted for by extending the order-to-delivery cycle. We were advised that these smaller and less sophisticated customers could, in certain cases, account for upwards of 90% of a logistics company’s customer base. However, larger companies, while smaller in number, account for a disproportionately higher percentage of total freight movements. The logistics companies interviewed were not aware of significant alternative gateways in development, nor were they actively pursuing the development of such a solution. One interview candidate indicated that the transportation industry is inherently responsive in nature, and is willing to accept congestion and the associated delays as long as it can be managed.

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With respect to the importance of backhaul opportunities, the responses from logistics companies were mixed. Some interview candidates indicated that the ability to secure backhaul shipments at the point of delivery was key to success, as trucking companies would be unwilling to haul empty containers between Detroit and Sault Ste. Marie when they could haul full containers from Detroit to Chicago. However, other logistics companies indicated that backhaul is irrelevant to the success of the initiative due to the already significant container imbalance that exists. These interview candidates indicated that the filling of empty containers was been undertaken at or near West Coast port facilities (or in the case of Canada, Edmonton) and as such, it was not important to fill a container on a return leg from Detroit or other destination points within the service area. This latter view is consistent with our analysis of container imbalances in North America (see page 138) and in our view, supports the contention that backhaul opportunities are not necessary to the overall success of the project. For the most part, the logistics companies interviewed were not responsible for ultimately selecting which routes end customers would use, but they did acknowledge having significant influence over the decision-making process. Essentially, logistics companies that were supportive of the initiative indicated that if they could be convinced of the benefits from the use of a Sault Ste. Marie gateway, they could likely convince their customers to utilize it. In certain instances, the logistics companies interviewed were “assetless” companies, acting more as freight forwarders than integrated logistics providers. However, those organizations that did provide fully integrated services, including warehouse and distribution operations, indicated that they believed that distribution centres and repackaging facilites would also be established in Sault Ste. Marie. While the majority of the logistics companies interviewed shared the same support and vision as the end customers, they also expressed the same concerns with respect to challenges. Specifically, the issue of the influence of the railway on the advancement of the gateway concept was viewed as the largest single obstacle to its success. While interview candidates expressed the view that the railways interest was contingent upon the ability to achieve a sufficient volume, certain of their estimates were higher than those expressed by the end customers (e.g. one train per day for some logistics companies vs. one train per week). In addition, logistics companies identified shipping lines as having as much (or in some cases more) influence over routing decisions as railways. Capacity concerns at the Port of Vancouver were also viewed as a problem, although the recent Federal funding announcement for capacity expansion was viewed as mitigating this concern.

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11.6 Shipping company interviews Unlike end customers and logistics companies, the shipping lines interviewed expressed less support for the concept of an expanded Sault Ste. Marie gateway. Their general lack of enthusiasm for the initiative centered on four primary concerns: In its current condition, the Port of Vancouver is unable to effectively accommodate additional containerships and as such, the redirection of containers from West Coast ports at the present time is questionable. The redirection of cargo flows from U.S. ports to Canadian ports would require the shipping lines to address issues involved in crossing the Canada-U.S. border, which adds an element of complexity and unfamiliarity to the initiative. The establishment of a new routing would also require shipping lines to form new partnerships for the delivery of the product to the end user (in a number of cases, the shipping line is responsible for the full movement to the customer). Given their unfamiliarity with Sault Ste. Marie, they were uncertain as to trucking arrangements, terminal facilities, customs clearance and other issues. From their perspective, existing routes are working well and as such, it may be difficult to demonstrate a real advantage by going through Sault Ste. Marie. However, we were also advised that the Vancouver Port Authority was successful in attracting container traffic from U.S. ports in the past. Despite these concerns and the general lack of initial support for the concept, the shipping lines did indicated that they would be interested in a sizeable volume of activity would be committed by end customers. In demonstrating demand from other parties in the supply chain, as well as addressing the concerns noted above, shipping companies would likely require: Formally executed contracts with end customers representing a sufficient large volume of freight committed to the new gateway (we were not advised as to the definition of sufficient) The support of the railway(s) in order to avoid potential complications in the existing relationships between the shipping lines and the railways A clear understanding of the parties involved in the initiative, as well as the assignment of responsibility (e.g., negotiations with rail companies, operation of a sales office in China). To a large part, the above-noted concerns and requirements reflect the general nature of shipping companies. Given their responsibility for ensuring the delivery of goods throughout the transit cycle, they are reluctant to attempt new initiatives and are generally unwilling to enter into business relationships with parties that are unknown to them, as the loss of a shipment will be the responsibility of the shipping line.

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11.7 Rail company interviews During our study, we interviewed representatives of CN Rail, CP Rail and the Huron Central Railway. 11.7.1 CN Rail interview results During the course of our interview, CN Rail indicated its view that the movement of containers through Sault Ste. Marie does not represent a viable alternative and that the City and other community stakeholders should discontinue their pursuit of the initiative. This position is based on their view that the fundamentals of rail economics will not support dedicated container service to Sault Ste. Marie, regardless of the number of containers committed to the gateway as there is insufficient density on the existing line to support this level of service. In the event that containers are successfully redirected to the Port of Vancouver, it appears to be CN Rail’s intention to transport them to the service area by way of its existing network, which crosses at Ranier, Minnesota for transit to Chicago, with further distribution on CN’s network to points east or south as far as Memphis. While CN Rail was not receptive to the concept of container flows through Sault Ste. Marie, it did indicate its support for a break-bulk transload facility that focused on the forestry industry. CN Rail indicated that it would be willing to support whatever efforts were undertaken in this regard. 11.7.2 CP Rail interview results During the course of our interview with CP Rail, we were advised that, consistent with CN Rail’s position, the economic fundamentals of railway transportation pose a significant challenge to the initiative. While CP Rail could provide a price quote for container rail service to Sault Ste. Marie based on current volumes, we were advised that the price quoted would be prohibitive and as such, the initiative would be unable to demonstrate a competitive advantage. However, if sufficient volumes were obtained, the level of activity would warrant a decrease in the cost of rail service to a level that could be financially acceptable. It was suggested that demand sufficient to support one unit train of containers per day would be required to achieve the necessary economies of scale to allow for a competitive price. Unlike CN Rail, issues relating to overall line density did not emerge during our interview. 11.7.3 HCR interview results HCR, which is a wholly-owned subsidiary of Genesee and Wyoming Inc., operates under a 20-year lease agreement with CP Rail. Under the terms of this agreement, HCR has limited ability to market its operations and as such, its ability to influence the provision of container services to Sault Ste. Marie is nominal. However, the ability of Sault Ste. Marie to attract container shipments via the HCR would significantly enhance the HCR’s profitability and stability.

11.8 Other transportation company interviews Our interviews with airline carriers and trucking companies demonstrated little support for the initiative, due primarily to the absence of significant passenger levels (air) and the perceived lack of backhaul opportunities, as well as resistance from the railways (trucking).

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11.9 Overall conclusions The intent of the Phase I study is to determine whether there is sufficient and sustainable market interest to support the concept of a multi-modal initiative in Sault Ste. Marie. Key to this is the ability to obtain support and commitment from organizations that are involved in the movement of goods to and from Sault Ste. Marie’s intended service area of the Upper U.S. Great Lakes. Based on the results of our interviews, it is evident that there is a real interest for the concept of an expanded Sault Ste. Marie gateway on the part of logistics companies and their customers. There are significant concerns surrounding congestion (both existing and in the future) affecting transportation routes and the impact that this congestion has on delivery times and costs. There is a strong interest in investigating alternative transportation networks that would alleviate these concerns, including a routing through Sault Ste. Marie. If sufficient benefits can be demonstrated, logistics companies and their customers would be willing to commit relatively large volumes of traffic towards the community. While our study involved discussions with only a few logistics companies and end customers, even this limited consultation identified a sizeable market share of upwards of 60,000 containers per year. Logistics companies view the availability of an alternative routing through Sault Ste. Marie as a significant competitive advantage that they would be willing to market to their broader customer base, thereby increasing the overall level of industry within the transportation sector. In addition to routing freight through Sault Ste. Marie, interest also exists in establishing distribution centres and other activities within the community, generating additional economic and employment benefits. While logistics companies and their customers represent an important component of the overall management of the supply chain process, they are not the only parties that determine the routes that goods follow between the supplier and the end customer. Shipping lines and railways are critical to routing decisions – so much so that they exercise significant (in some cases almost complete control) over the choice of routings for freight shipments. These stakeholders are generally more reserved than logistics companies and their customers with respect to the concept, reflecting their concerns surrounding economic and operational considerations that would argue against the community. However, these companies also appreciated the potential benefits that could result from a Sault Ste. Marie routing and a number have stated that if sufficient demand were dedicated towards the initiative, their level of interest would increase accordingly. Understandably, the commitment of logistics companies and their customers is contingent upon a viable business case.

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XII The Sufficiency of Demand

The intended purpose of Phase I of this study is to determine whether sufficient sustainable demand exists to support the concept of a transportation initiative in Sault Ste. Marie. In this chapter, we synthesize the results of our research to provide the answer to this question. As noted in the previous chapter, logistics companies and their customers are clearly supportive of utilizing Sault Ste. Marie as an alternative route for cargo destined for the U.S. Upper Great Lakes region. Similarly, the results of the modal analysis presented in Chapters VII to X indicate that the potential market demand for the priority opportunity of road-to-rail transportation involving international marine containers is significant, amounting to 1,400 trains per year or almost 30 trains per week. Notwithstanding the reservations expressed by shipping lines and railways, a consistent theme has emerged from the interview process – if the benefits of an expanded Sault Ste. Marie gateway can be demonstrated, the interest will be there. This is a message that has been clearly enunciated by end customers and logistics companies, and rather more subtly stated by certain shipping lines and, most importantly, CP Rail. While the benefits are different among the various parties – cost savings for end customers and logistics companies, volume commitments for railways and shipping lines – the basic concept remains the same.

12.1 Current and future market potential As noted earlier in our report, we have estimated the total potential diversion opportunity available to the community to be in the order of 630,000 TEU’s, a figure that is based on 2003 trade levels. With the increase in international trade in recent years, the total potential diversion opportunity has likely grown since then. This conclusion is supported by an analysis of container flows into U.S. West Coast ports, which have grown by 20% between 2003 and 2005. (Figure 63)

Figure 63 - Summary of container shipments to U.S. West Coast ports81

Long Beach Los Angeles 8,000,000

Oakland Seattle 7,000,000 Tacoma 6,000,000 5,000,000 4,000,000

3,000,000 2,000,000 1,000,000 - 1997 1998 1999 2000 2001 2002 2003 2004 2005

81 American Association of Port Authorities

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While total imports to the U.S. have grown since the base year of our analysis (2003), the economic analysis of the Upper Great Lakes region indicates that economic growth in Sault Ste. Marie’s core target region lagged behind the national average, growing at half the rate of Southern and Western States. As such, while we believe that container shipments to the U.S. Upper Great Lakes region have grown since the base year of our measurement, we have assumed that the rate of growth is half of the national average or 10% (half of 20%). Based on the above, we have estimated the total potential diversion opportunity to be in the order of 700,000 TEU’s at the present time (Table 51). Further, given the expectation of continued economic growth in the U.S., this trend will likely continue in the future and if so, the total potential diversion opportunity will increase to 1.1 million TEU’s by 2015 (Table 52).

Table 52 – Summary of estimated diversion opportunity – 2005 and 2015 2005 2015 Estimated total diversion potential – 2003 base year (Table 48) 630,000 630,000 Increase due to economic and trade growth (5% per year) 63,000 485,000 Estimated total market (adjusted for growth) 693,000 1,115,000

12.2 Sufficiency of indicated demand During our consultation with logistics companies, end users, shipping lines and railways, all parties recognized the importance of rail service to the success of the initiative, which is consistent with the priority of rail-to-road service. Accordingly, we believe that the ability of Sault Ste. Marie to meet the conditions necessary to obtain regular scheduled rail service is critical to the overall success of the initiative. During our discussions with industry representatives, two estimates with respect to what is required to generate rail interest have emerged from our interviews: End customers and logistics companies have indicated one train per week would be sufficient to obtain the interest of a rail company. This translates into approximately 23,000 TEU’s per year, based on an average of 450 TEU’s per train. CP Rail and other interview candidates have indicated that the minimum requirement is likely one train per day, and based on a six-day per week service, this results in a required volume of 140,000 TEU’s per year.

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Based on this level of required demand, we have estimated the total market share required by the Sault Ste. Marie initiative to be in the range of 3% to 20%, depending on the assumed level of volume necessary to garner the support of railways (Table 53). Of particular interest is the fact that as transportation volumes grow, the required market share decreases.

Table 53 - Summary of estimated required market share 2005 2015 Low High Low High Estimated total diversion potential (A) 693,000 693,000 1,115,000 1,115,000 Required level of commitment (B) 23,400 140,400 23,400 140,400 Estimated required market share (B) ÷ (A) 3% 20% 2% 13% During the course of our interview process, we requested information from end customers and logistics companies concerning the volume of their container flows that could potentially be diverted through Sault Ste. Marie. Based on the responses received to date (the information from some companies is still outstanding or will not be provided at this time), the potential commitment at this time is in the order of 60,000 TEU’s, which is sufficient to support two to three trains per week. Based on the volumes contingently committed to the initiative by interested parties, it is evident that sufficient market exists to meet the minimum range of activity necessary to secure the commitment of a railway and as such, support exists for a decision to proceed to Phase II of the study. Based on the high range of required volumes, the parties that have expressed interest during the consultation stage of the Phase I study represent almost half of the required level of commitment. In our view, this is a significant accomplishment as the consultation involved only a limited number of logistics companies and end customers. Accordingly, if the Sault Ste. Marie initiative were more widely communicated and promoted (certain logistics companies expressed interest in marketing the Sault Ste. Marie solution to there client base), the level of potential interest could likely be significantly higher than the 60,000 TEU figure established during the Phase I study. Further, as the total market and diversion potential grows, so does the expressed level of commitment. Specifically, a number of the logistics companies and end users interviewed indicate that their transportation levels are expected to increase by as much as 50% over the next three years. This “natural” increase will also contribute towards the initiative’s ability to achieve the required level of interest. Once again, we believe these factors are supportive of a decision to proceed to Phase II.

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XIII Backhaul Opportunities

As noted on in Chapter X, the movement of oceangoing container freight from west coast ports to the states of Michigan, Ohio and Illinois (collectively the “MIO States”) represent, in our view, the primary opportunity for Sault Ste. Marie’s multi-modal initiative. To a certain extent, Sault Ste. Marie’s efforts in developing this market will be enhanced by its ability to identify and generate backhaul traffic – freight that can be shipped in containers for the westbound return leg of the route – which will increase the overall competitiveness of Sault Ste. Marie as an alternative routing. In this chapter, we discuss the nature of exports for the key states, the current container imbalance in North America and the potential opportunities for Sault Ste. Marie.

13.1 U.S. Upper Great Lakes export levels On a collective basis, the MIO States exported in excess of $90 billion of goods during 2005, accounting for 10% of total U.S. exports. Overall, these three states rank fifth, seventh and eleventh in terms of U.S. exports by value, respectively (Figure 64 and Table 54).

Figure 64 - Summary of U.S. exports by state - 200582

Greater than $75 billion

$25 billion to $75 billion

$10 billion to $25 billion

$4 billion to $10 billion

Less than $4 billion

82 U.S. Census Bureau, Foreign Trade Division

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Table 54 - Summary of top 15 U.S. exporting states by value (in millions of dollars) - 200583

State Total Exports Percentage of Total Texas 128,761 14.4% California 116,819 13.1% New York 50,492 5.6% Washington 37,948 4.2% Michigan 37,584 4.2% Illinois 35,868 4.0% Ohio 34,801 3.9% Florida 33,377 3.7% Pennsylvania 22,271 2.5% Massachusetts 22,043 2.5% Indiana 21,476 2.4% New Jersey 21,080 2.4% Georgia 20,577 2.3% North Carolina 19,463 2.2% Louisiana 19,232 2.1% Total – top 15 states 621,792 69.5% Remainder of country 272,839 30.5% Total 894,631 100.0% Since 2000, the value of exports from the MIO States has increased by a total of 24% compared to the overall U.S. growth rate of 15%.

Figure 65 - Summary of total exports – U.S. and selected states (in millions of dollars)84

40,000 1,000,000

900,000 35,000 800,000 30,000 700,000 25,000 600,000

20,000 500,000

400,000 15,000 (U.S. exports)

(state level exports) 300,000 10,000 200,000 5,000 100,000

- - 2000 2001 2002 2003 2004 2005

Indiana Ohio Michigan Total U.S.

83 U.S. Census Bureau, Foreign Trade Division 84 U.S. Census Bureau, Foreign Trade Division

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13.2 Major trading partners 13.2.1 Exports by country of destination Exports from the MIO states are heavily concentrated with a few major trading partners. As summarized in Table 55, Canada represents the largest market for exports from all three states, accounting for more than 52% of all exports. Overall, the 15 largest trading partners of the MIO States comprise 86% of total exports by value.

Table 55 - Summary of exports by state – 2005 (in millions of dollars)85 Country of destination State of Origin Percentage Michigan Ohio Indiana Total of Total Canada 22,633 16,992 9,550 49,175 52.4% Mexico 4,193 2,390 2,618 9,201 9.8% United Kingdom 716 1,154 1,516 3,386 3.6% Japan 1,071 1,423 769 3,263 3.5% France 615 954 1,467 3,036 3.2% Germany 1,057 1,108 691 2,856 3.0% China 698 934 294 1,926 2.1% Netherlands 386 610 369 1,365 1.5% Australia 370 683 267 1,320 1.4% Brazil 404 503 252 1,159 1.2% Belgium 443 523 148 1,114 1.2% South Korea 365 557 30 952 1.0% Saudi Arabia 396 461 72 929 1.0% Singapore 134 421 240 795 0.8% Italy 281 355 123 759 0.8% Total – top 15 countries 33,762 29,068 18,406 81,236 86.5% Remainder of world 3,822 5,733 3,070 12,625 13.5% Total 37,584 34,801 21,476 93,861 100.0% As noted in the above table, shipments to major trading partners located in Asia account for approximately 10% of total exports from the MIO States. 13.2.2 Exports to Canada by region Exports from the MIO States to Canada are comprised primarily of shipments to Ontario, which accounted for over 90% of all exports to Canada (Table 56).

Table 56 - Summary of MIO State exports by Province of destination86 Province of destination State of Origin Percentage Michigan Ohio Indiana Total of Total Ontario 21,692 14,987 8,296 44,975 91.5% Quebec 63 659 175 897 1.8% Alberta 234 327 237 798 1.6% British Columbia 119 288 195 602 1.2% Prairie Provinces 510 641 625 1,776 3.6% Atlantic Canada 15 90 22 127 0.3% Total 22,633 16,992 9,550 49,175 100.0%

85 U.S. Census Bureau, Foreign Trade Division 86 U.S. Census Bureau, Foreign Trade Division

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13.3 Exports by commodity Exports from the MIO States to both Asia and Canada reflect the manufacturing economy of the region and the heavy representation of durable goods manufacturing activities. We have summarized below exports from the MIO States by commodity to both Asia and Canada. 13.3.1 Exports to Asia by commodity As summarized in Table 57, exports from the MIO States to Asia consist primarily of finished or semi-finished products such as machinery, transportation equipment and fabricated metal products. Given the nature of these commodities, the majority of exports from the MIO States to Asia could potentially be shipped in containers, thereby representing a potential backhaul opportunity.

Table 57 - Summary of exports from MIO States to Asia – 2005 (in millions of dollars)87 Commodity Group State of Origin Percentage Container Michigan Ohio Indiana Total of Total Potential Machinery Manufactures 319 521 1,051 1,891 18.4% Yes Chemical Manufactures 555 662 644 1,861 18.1% Yes Transportation Equipment 206 836 794 1,836 17.9% No Computers & Electronic Prod. 477 205 499 1,181 11.5% Yes Primary Metal Manufactures 121 288 181 590 5.7% No Fabricated Metal Products 71 84 340 495 4.8% No Elec. Eq., Appliances & Parts 69 63 313 445 4.3% Yes Misc. Manufactures 248 62 88 398 3.9% Yes Plastic & Rubber Products 88 52 166 306 3.0% Yes Waste & Scrap 15 98 101 214 2.1% Yes Non-Metallic Mineral Mfgs. 7 67 139 213 2.1% Yes Processed Foods 42 96 75 213 2.1% Yes Paper Products 11 32 46 89 0.9% Yes Printing & Related Products 36 8 37 81 0.8% Yes Wood Products 33 16 28 77 0.7% Yes Total – top 15 commodities 2,298 3,090 4,502 9,890 96.3% 96.3% Remainder of world 64 114 204 382 3.7% Total 2,362 3,204 4,706 10,272 100.0% 100.0% 13.3.2 Exports to Canada by commodity As summarized in Table 58, exports from the MIO States to Canada reflect the integrated nature of vehicle manufacturing in North America (particularly Michigan and Ontario), with 41% of exports from the MIO States consisting of vehicles and vehicle parts. Based on the major commodities exported by the MIO States, it is apparent that most of the imports are destined for Southern Ontario, thereby limiting the backhaul opportunities for Sault Ste. Marie.

87 U.S. Census Bureau, Foreign Trade Division

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Table 58 - Summary of exports from MIO States to Canada – 2005 (in millions of dollars)88 Commodity Group Destination Region Percentage Container Ontario Eastern Western Total of Total Potential Canada Canada Vehicles and parts 19,085 357 872 20,314 41.3% Partial Reactors, boilers and related parts 7,366 365 578 8,309 16.9% Yes Electric machinery 2,144 37 127 2,308 4.7% Yes Mineral fuel and wax 1,792 4 322 2,118 4.3% No Iron and steel 1,697 17 166 1,880 3.8% No Plastics and articles thereof 1,641 42 157 1,840 3.7% Yes Articles of iron and steel 991 12 132 1,135 2.3% Yes Furniture, bedding and lamps 856 4 115 975 2.0% Yes Optic, photo, medical and surgical instruments 667 23 29 719 1.5% Yes Paper and paper products 538 10 66 614 1.2% Yes Rubber and articles thereof 499 14 84 597 1.2% Yes Glass and glassware 506 3 33 542 1.1% Yes Aluminum and articles thereof 461 7 17 485 1.0% Yes Miscellaneous articles of metal 448 2 25 475 1.0% Yes Soap, waxes, polish, candles 360 5 30 395 0.8% 96.3% Total – top 15 countries 39,051 902 2,753 42,706 86.8% Remainder of world 5,924 122 423 6,469 13.2% 100.0%

13.4 Implications of container imbalance Despite the magnitude of exports from the key states of Michigan, Indiana and Ohio, the total potential backhaul opportunities for Sault Ste. Marie are limited. As noted in Table 54, only a relatively small percentage of exports from the MIO States are destined for Asia. Further, the bulk of exports destined for Canada are intended for Southern Ontario or Eastern Canada, regions that have limited potential for backhaul opportunities for Sault Ste. Marie. In light of the above, we anticipate that there will be a significant imbalance between the volume of inbound and outbound containers transported through Sault Ste. Marie. However, we note that this is consistent with the current pattern of container imbalance in North America, as demonstrated by west coast ports. For example, 97% of inbound containers handled by the Port of Vancouver during 2005 were laden, compared to 76% for outbound containers (Figure 66).

88 U.S. Census Department, Bureau of Foreign Trade

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Figure 66 - Port of Vancouver laden versus empty container traffic, 200589

empty 1,000 loaded 900 800 700 600

500 400 TEUs (000s) 300 200

100 - inbound outbound Although faced with a shortfall of laden outbound containers, Vancouver in fact fares proportionally much better than U.S. West Coast ports in this regard. For instance, at the Port of Los Angeles just 33% of outbound TEUs were full in 2005. The reason for Vancouver’s relative success compared to other West Coast ports is its access to various commodity groups that traditionally moved as breakbulk cargo, but which are “containerizeable,” including wood pulp, lumber, and specialty agricultural products. In many cases exported commodities are moved overland in breakbulk mode from their point of production, and are “stuffed” into outbound containers at port position (i.e., at container yards within the Greater Vancouver Area). In light of the above, the absence of backhaul opportunities within Sault Ste. Marie’s intended service area is not inconsistent with existing trade patterns and as such, does not represent a significant competitive disadvantage, a conclusion that was confirmed during our discussions with representatives of logistics companies (see page 127)

89 Based on information presented in the port’s website.

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XIV Recommendations and Key Findings

In the concluding chapter of our report, we summarize our findings and recommendations and provide suggestions for future courses of action that could be adopted by Destiny.

14.1 Summary of key findings and recommendations 1. Due to the relatively small market size, competitive factors and the absence of significant passenger levels, air cargo does not represent a priority opportunity for Sault Ste. Marie. While individual organizations may wish to pursue air cargo opportunities, we do not believe future research stages should include an air cargo component. 2. Great Lakes marine movements are not considered to be a significant priority for the community due to existing marine traffic patterns and industry considerations. Similarly, industry considerations also do not support the movement of containers to Sault Ste. Marie by ship. As with air, we do not recommend that future research stages include a marine component. 3. The redirection of surface traffic (i.e. road and rail) represents a potential opportunity for the community, particularly with respect to the movement of commodities produced in Northern Ontario. However, the competitive challenges associated with this opportunity are significant and as such, we believe it represents a secondary opportunity for the community. 4. The priority opportunity and market for Sault Ste. Marie involves the movement of international shipping containers originating in Asia and destined for the key states of Michigan, Ohio and Indiana. This routing involves the landing of the containers in Vancouver, transportation overland by rail to Sault Ste. Marie and distribution from the community to the MIO States. The majority of the distribution into the U.S. will be accomplished by truck. Movement of these containers to their ultimate destination by other modes of transportation (rail, barge and air) may be viable, although these will be secondary to trucking.

In addition to the priority opportunity, the potential exists to redirect container flows destined for the Western portion of the Upper Great Lakes region and originating at East Coast ports through Sault Ste. Marie. This opportunity represents a much smaller market than the priority opportunity. 5. The main focus for developing the primary opportunity should be third party logistics companies. In our view, these represent the optimal potential partners as: Logistics companies have the necessary industry experience and insight to assist in the project’s development Partnership with logistics companies will provide access to the full customer base of the organization, thereby expanding its communication to the greatest extent possible Logistics companies have expressed strong support for the initiative and have indicated their willingness to work with the community to advance the concept

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Logistics companies have indicated their willingness to consider establishing and operating warehouses, distribution centres and other activities in Sault Ste. Marie if the initiative is successful The focus on logistics companies as opposed to end customers provides a broader coverage for the initiative, thereby reducing its overall risk profile 6. The nature of the commodities in the containers is a reflection of the heavily industrialized nature of the core market of Michigan, Ohio and Indiana and the predominance of durable goods manufacturing in the region. As summarized below, the machinery and manufactured products account for approximately 50% of container shipments into the region, with consumer products (including clothing, foodstuffs, durable goods and printed products) representing the next largest commodity grouping.

Table 59 – Container shipments by commodity grouping90 Commodity Grouping Estimated Percentage of Container Shipments (by Weight) Machinery and component parts 37.9% Miscellaneous manufactured products 11.1% Printed products 9.3% Clothing, textiles and leather products 8.5% Milled grain products and other processed foodstuffs 8.4% Articles of base metals 8.1% Durable consumer products, including electronics and furniture 5.9% Mixed freight 5.4% Articles of paper, rubber and plastic 3.7% Other commodities 1.7% The focus on this these of goods is intended to maximize the benefit of the reduced shipment times provided by Sault Ste. Marie and reflect the fact that: These goods are generally high value and as such, represent a significant investment in inventory. Accordingly, the time reduction provided by a Sault Ste. Marie routing would increase the magnitude of the benefit. The users of these products typically employ sophisticated inventory management systems (e.g. just-in-time) and as such, are more sensitive to time requirements for shipments

Notwithstanding the above, the use of logistics companies to promote the initiative may result in a broader range of commodities being included in the scope. 7. Backhaul opportunities, while initially considered to be critical to the success of the initiative, are a minor factor.

90 U.S. Department of Transportation

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14.2 Factors influencing infrastructure requirements and design 1. The Phase II infrastructure study should focus exclusively on road and rail requirements as these are associated with the primary opportunity. We recommend that air and marine infrastructure be excluded from future phases of the study. 2. The infrastructure requirements associated with this initiative will need to accommodate significant volumes and capabilities, including: The use of trains of up to 7,000 feet in length operating at a speed sufficient to allow a transit to Sault Ste. Marie to be accomplished within one working shift Sufficient terminal capability to load and unload single trains in a continuous and efficient fashion Warehousing and associated infrastructure necessary to support both the primary and secondary rail-to-road/road-to-rail opportunities The capability to accommodate an addition 200 to 500 trucks per day at the International Bridge, including associated customs clearance facilities