Strait of Hormuz Conflict Impacts US Medical Supply Company

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 away 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 derivatives from oil and gas production to manufacture its products, which includes medical dressings. Some raw material costs have surged by as much as 30%.

And, with a global footprint that spans five continents, moving those products around has become a lot more expensive. Navazio said the cost to ship a container from New Zealand to California is now about $4,500 — up from about $2,000 prior to the war.

For Americans, the most visible sign of the war in Iran is prices at the pump, where the national average has shot 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 consumers use daily – including aspirin, keyboards, perfumes, contact lenses and vitamin capsules.

As those raw material costs rise, companies have to decide whether to pass the increase along to consumers and potentially face reduced demand, or else keep prices lower at the expense of company margins.

While Gentell's costs are rising, for the time being they can't pass along all of the higher expenses in part because their largest customer is the U.S. government through the Medicare program. Gentell supplies products for nearly 5,000 nursing homes across the U.S., and those contracts are typically set on an annual basis. Ultimately, Navazio said, "the government is going to be really impacted by all of this."

At the moment Kevin Quilty, Gentell's chief operating officer, said the higher prices are "a little bit of margin crunch" for the company. While he said the company hopes the raw material price volatility is short-term, there's going to be "some trickle-down effect in terms of what our pricing will be."

The oil price shock from the Strait of Hormuz's closure is just the latest headwind the company has had to contend with, after also navigating through tariff uncertainties and supply chain disruptions from the Covid-19 pandemic.

Quilty said the pandemic in some ways prepared the company for the current price shock, since the it critically highlighted the need to lock in schedules and commitments from suppliers. At this point, Quilty said the pandemic was a greater challenge for the company than the current environment.

But everything will depend on how long traffic through the Strait of Hormuz remains largely stalled. President Donald Trump said Sunday that talks to end the war with Iran and reopen the strait are proceeding, but he urged his negotiating team not to rush into a deal.

Experts have also said once the waterway is open it will take months for traffic to return to pre-war levels.

"We're hoping that … once the war in Iran ends and the strait is opened up…hopefully we'll see oil prices come down," said Navazio.

When asked what happens if the conflict is not temporary, he said definitively: "Then we're going to raise the price."