A few months ago David Navazio, founder and CEO of medical supply company Gentell, had never heard of the Strait of Hormuz. But now, the narrow waterway thousands of miles from the company's headquarters in Yardley, Pennsylvania, is impacting the company's operations in more ways than one.
Chief among them is price, with Gentell under pressure from multiple angles. The company relies on byproducts from oil and gas production to make its products, which include medical bandages. Some raw material costs have increased by up to 30%.
And, with a global presence that spans five continents, moving those products has become much more expensive. Navazio said the cost of shipping a container from New Zealand to California is now about $4,500, down from $2,000 before the war.
For Americans, the most visible sign of the war in Iran is prices at the pump, where the national average has soared to a nearly four-year high above $4.50 a gallon. But petrochemicals derived from oil and gas production are found in more than 6,000 products that consumers use every day, including aspirin, keyboards, perfumes, contact lenses and vitamin capsules.
As raw material costs rise, companies have to decide whether to pass the increase on to consumers and potentially face reduced demand, or keep prices lower at the expense of company margins.
While Gentell's costs are rising, they can't pass on all of the increased expenses for now in part because their largest customer is the U.S. government through the Medicare program. Gentell supplies products to nearly 5,000 nursing homes across the United States, and those contracts are typically established annually. Ultimately, Navazio said, “the government is going to be really hurt by all of this.”
For now, Kevin Quilty, Gentell's chief operating officer, said the higher prices are “a little bit of a margin squeeze” for the company. While he said the company expects commodity price volatility to be short-term, there will be “some trickle-down effect in terms of what our prices will be.”
The oil price shock from the closure of the Strait of Hormuz is just the latest hurdle the company has had to face, after also experiencing tariff uncertainties and supply chain disruptions due to the Covid-19 pandemic.
Quilty said the pandemic went some way to preparing the company for the current price shock, as it critically highlighted the need to set schedules and supplier commitments. At this point, Quilty said the pandemic was a bigger challenge for the company than the current environment.
But everything will depend on how long traffic through the Strait of Hormuz remains paralyzed. President Donald Trump said Sunday that talks to end the war with Iran and reopen the Strait are moving forward, but urged his negotiating team not to rush to a deal.
Experts have also said that once the waterway is open, it will take months for traffic to return to pre-war levels.
“We hope that… once the war in Iran ends and the strait opens… we will see oil prices go down,” Navazio said.
When asked what happens if the conflict is not temporary, he said flatly: “Then we will raise the price.”
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