David Navagio, founder and CEO of medical supplies company Jentel, had never heard of the Strait of Hormuz until a few months ago. But now, the narrow waterway thousands of miles from its headquarters in Yardley, Pennsylvania, is impacting the company’s operations in more ways than one.
The biggest factor is price, and Gentel is under pressure from various angles. The company relies on derivatives from oil and gas production to manufacture products such as medical bandages. Some raw material costs have soared by as much as 30%.
And with a global footprint spanning five continents, it’s much more expensive to move these products. The cost to ship a container from New Zealand to California now costs about $4,500, up from about $2,000 before the war, Navagio said.
For Americans, the most visible sign of the Iran war is soaring prices, with the national average rising to more than $4.50 a gallon, the highest in nearly four years. However, petrochemicals derived from oil and gas production are found in more than 6,000 products that consumers use every day, including aspirin, keyboards, perfume, contact lenses, and vitamin capsules.
When raw material costs rise, companies must decide whether to pass the increase on to consumers and potentially face a drop in demand, or to lower prices at the expense of company profits.
Gentell’s costs have been rising, but because its largest customer is the U.S. government through the Medicare program, it won’t be able to pass on all of its high costs for the time being. Gentell supplies approximately 5,000 nursing homes across the United States, and these contracts are typically established on an annual basis. Ultimately, Navagio said, “the government will be greatly affected by all of this.”
For now, Gentell’s chief operating officer, Kevin Quilty, said the higher prices are “a bit of a margin squeeze” for the company. He said the company hopes any changes in raw material prices will be short-term, but there will be “some trickle-down effect on pricing.”
The oil price shock from the closure of the Strait of Hormuz is just the latest headwind the company has had to deal with, having also weathered tariff uncertainty and supply chain disruptions due to the coronavirus pandemic.
Kirti said the pandemic has prepared the company for the current price shock, as it has highlighted the need to secure schedules and commitments from suppliers. For now, Kirti said the pandemic is a bigger challenge for the company than the current environment.
But everything depends on how long the Strait of Hormuz traffic remains largely disrupted. President Donald Trump said Sunday that negotiations to end the war with Iran and reopen the strait are progressing, but he called on his negotiating team not to rush a deal.
Experts also say that even after the waterway opens, it will take several months for traffic to return to pre-war levels.
“We expect oil prices to come down once the Iran war ends and the strait opens,” Navagio said.
Asked what would happen if the conflict is not temporary, he asserted: “In that case, we will raise prices.”
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