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A plastics factory feels the brunt of rising energy prices

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A plastics factory feels the brunt of rising energy prices

Long before President Vladimir V. Putin launched a war on Ukraine, Musharraf Khalid was already grappling with a costly, bewildering and unreliable assortment of problems affecting global supply chains.

His company, Royal Interpack North America, makes plastic packaging for fresh fruits. Last year, its raw material regularly stuck for weeks on container ships floating in traffic jams from the heavy port of Long Beach.

Last week, Mr Khalid’s business hit with another confusing variable when President Biden announced a ban on imports of Russian oil.

Mr Biden’s oil embargo is not expected to lead to a shortage of crude in the United States. But less oil landing on world markets – the result of US sanctions on Russian sales – reflects higher energy prices everywhere. It also means higher prices for petroleum products such as plastics, whose prices track oil. Even the recycled plastic chips, on which Mr. Khalid’s company relies as a primary ingredient for its packaging containers, would cost more.

“The price is going to go up,” said Mr. Khalid. “It’s going to be a dramatic change. It’s going to hit us again.”

Traces of their factory in Riverside, a sprawling desert city east of Los Angeles, indicate stakes for the global economy, as the United States, Europe, Britain and other major powers weaken Russia in a bid to reverse want to Deadly attack on your sovereign neighbor. A collection of sanctions imposed to damage Russia’s economy would spread pain around the world, most directly in the form of higher energy prices. It will intensify stress on economic growth while piling fresh trouble on top of the great supply chain disruption set up by the pandemic’s impact on commerce, factory production and transportation around the world.

“The energy goes into many other materials,” said Willie C. Shih, an international business expert at Harvard Business School. “Wherever you look, there’s going to be inflationary pressure.”

Natural gas – another big Russian export in price – is a central element used to make a vast array of plastics. It is also a major component for fertilisers, so the cost of producing cereals such as soybeans, corn and wheat will increase, Mr. Shih said. The meat raised on these grains will also go up with the bread.

The global economy is expected to grow by 3.4 per cent this year, according to an estimate released by S&P Global Economics on Wednesday. This represents a slight drop from previous forecasts, reflecting the impact of higher energy prices on the world’s most exposed regions, such as Europe, which relies heavily on Russian supplies.

Before the pandemic, Mr Khalid’s job as operations manager at Royal Interpac was a largely straightforward venture. Container ships carried a steady stream of recycled plastic chips from Thailand to the Port of Long Beach. Trucks took them to their loading dock at Riverside.

Inside, 120 workers ran machines that melted the chips and rolled them into sheets of plastic, spooling them onto coils, like giant rolls of plastic wrap. Other devices stowed sheets into plastic containers that hold strawberries, raspberries and other fresh fruit for giant retailers such as Dole and Driscoll’s.

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Production was predictable and even.

But early last year, the first significant crisis emerged. Royal Interpack struggles to secure enough silicone, a synthetic element it uses, to prevent plastic sheets from sticking together.

Typically, ordering more silicone requires waiting perhaps a week for goods to arrive by truck from the company’s supplier in Atlanta. Suddenly, Mr. Khalid had been waiting for three months. Their supplier advised that it could not produce more as it itself was awaiting shipment of a major chemical.

Calling for help, Mr. Khalid rushed to another factory in Riverside, which also does plastic fruit packaging. The second plant had excess silicon and was willing to share. In return, Mr. Khalid frees his neighboring plant from his shortfall: he shares the spare cardboard tubes he uses as cores for rolls of plastic sheets. Barter averted disaster for both operations.

Meanwhile, the price of a wooden pallet was tripled. Royal Interpack stores its materials and finished products on pallets, allowing forklifts to move them through their warehouse. Even palettes were hard to find at astronomical prices.

By the middle of last year, the company was running low on plastic chips as its imports on incoming container ships diverted from the port of Long Beach to floating warehouses.

The journey from Thailand usually took a month to complete. Now it was taking two to three times longer.

The factory required six tractor-trailers of plastic chips a day to meet the demand for its goods, but only four or five were arriving.

By October, more than 50 container ships had been towed from the twin ports of Long Beach and Los Angeles, awaiting their turn at the dock. Mr. Khalid’s plant was dangerously close to running out of plastic supplies. Worried, he cut production by one-fifth. They scrambled to identify the domestic suppliers. He found one, but the turmoil in the market pushed up prices by about 70 percent over the previous year.

Determined to avoid further shortages, Mr Khalid resolved to stockpile his most critically needed supplies. This filled their warehouse to capacity – a new challenge to navigate.

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Before the pandemic, his warehouse contained a week’s supply of plastic chips, or about a million pounds. In recent months, they have placed two and three times that volume, carrying giant sacks of plastic chips as high as local fire codes allow — 20 feet.

With the prices of cardboard boxes rising, the plant has stocked them as well.

Managing excess inventory within the confines of an already cramped warehouse is a constant logistical challenge that involves moving one thing out of its way to make room for another—a Rubik’s Cube that never fully resolves.

The factory sometimes hides the material outside the parking lot, a measure afforded by the dry local climate. Mr. Khalid is considering parking storage trailers on the sidewalk.

More people are needed for this additional activity. The plant has increased its work force by a third to 160 while preventing infiltration from nearby warehouses such as Amazon, which has proposed signing bonuses to attract workers.

Mr. Khalid has raised hourly wages from $16 to $18 for those who meet goals such as being on time and avoiding accidents.

Late last year, one of the plant’s primary machines failed, necessitating the purchase of a new part. It arrived by airfreight from Germany, landing in San Francisco only two days after Mr. Khalid had ordered. But another 20 days passed before it completed its 430-mile journey to Riverside in the back of a truck.

“The trucking company said, ‘We’re working on it, we’re working on it,'” Mr Khalid recalled.

These constant fluctuating brushes have infused uncertainty into every part of his operation.

Mr Khalid used to approach supplying supplies the way households manage their stock of milk or bread – there was no drama involved. Now, he obsessively calls his suppliers every few days, insisting on talking to his top managers. He knows the names of their kids, their vacation plans, their favorite sports teams.

“You have to be on top of it,” he said. “You have to build that relationship.”

It was the backdrop when Mr Putin unleashed his military attack on Ukraine, creating a humanitarian catastrophe, reshaping geopolitical alignments and adding tension to an already troubled global supply chain.

When Mr Khalid heard about Mr Biden’s decision to ban Russian oil shipments, he understood the inevitability, but he was also concerned about the consequences for his business.

His factory is protected for now by an abundant supply of plastic chips—enough to last until June. But after that it will again become a victim of turmoil in the supply chain.

“I don’t think it’s getting better,” he said.

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