The Disruption Report #6

PASSENGER JETS CONVERTED TO CARRY FREIGHT

Prior to Covid, passenger jets carried 60% of all air freight. That is according to a Bloomberg News article, “Air Cargo Remains Single Bright Spot for Aviation in 2021.” Due to the reduced number of travelers, airlines have been forced to shrink the number of flights and, therefore, the available passenger jet space for cargo.

As a result, some airlines are removing seats and converting passenger jets into cargo planes. Air freight carriers like UPS are scaling up to meet demand by buying more cargo planes.

Once things are back to “normal,” we may see air freight as a more competitive arena for shipping goods. Until then, it looks like air freight prices will remain high.

BAD WEATHER AND PLASTICS SHORTAGES

The recent freezing weather in Texas is having a negative impact on the availability of plastic. That’s according to a Wall Street Journal article disturbingly entitled “Everywhere You Look, the Global Supply Chain Is a Mess.”

Plastic is made from petroleum-based resins, so plant shutdowns in Texas during the recent big freeze threw a monkey wrench into production. Here is how the article puts it:

Last month’s freeze in Texas was the latest plank on the pile. The state is home to the world’s largest petrochemical complex, which turns oil and gas and its byproducts into plastics… The February freeze triggered mass blackouts that shuttered plants, many of which remain offline.

plastic prices in Asia and Europe had already begun increasing due to supply shortfalls in the U.S. [It is] estimated it would take more than six months to correct the supply-and-demand imbalances caused by the February storm.

Another Wall Street Journal article, “Texas Freeze Triggers Global Plastics Shortage,” states that:

Prices for polyethylene, polypropylene and other chemical compounds used to make auto parts, computers and a vast array of plastic products have reached their highest levels in years in the U.S. as supplies tighten.

FREIGHT COSTS MAY REMAIN HIGH FOR THE NEXT TWO YEARS

According to a Bloomberg News article, McKinsey Sees Global Freight Costs Elevated for a Year or Two,” high freight costs could be with us for a while.

The article quotes Ludwig Hausmann, a partner with McKinsey & Co. consulting, as providing this reasoning:

He sees container rates staying high because a now-consolidated liner industry’s past tendencies to wage price wars has “completely vanished so there is more discipline around balancing supply so that it fits demand.” On top of that, a lot of long-term contracts with shippers have already been agreed for the next year or two — and “that will lock in a higher price.”

There is also a belief that the stimulus checks will lead to a continuation of consumer product purchases, which will continue to stress the supply chain with more orders than it can handle. Too much demand is ultimately a good problem, but it’s still a problem.

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