So far sheltered from the worst impacts of the Covid-19 pandemic, the emergence of the Omicron strain in Western Australia has raised the prospect of supply disruptions in some of the world’s largest commodity markets.

This could lead to upward pressure on the prices of everything from iron ore and lithium – two commodities for which WA is responsible for a remarkable 60% of global supply – to zircon, where WA accounts for 40%. market, gold, nickel, alumina and titanium. raw material.

As WA delayed the opening of its hard border amid fears it could suffer similar health and supply chain impacts as has been seen in the east, the Omicron variant has spawned a path in the state and is spreading now.

WA now has 131 active cases, two of whom are in hospital.

Notably, an outbreak of 17 cases in Bunbury, including 13 workers and four close contacts at the Albemarle-MinRes lithium plant, could lead to further delays at a megaproject already hit by labor shortages and, until last year, the weak lithium market.

Commodity prices have now risen around 400% from their late 2020 lows due to a faster-than-expected supply shortage, with additional pressure on supply a potential risk for lithium chemical producers and downstream industries like electric vehicle manufacturers.

An outbreak at a Pilbara iron ore mine – potentially averted last week when Rio Tinto identified two Covid-positive workers at Perth airport with its pre-flight testing regime – could lead to serious supply pressures on a market already struggling with the lack of high quality products the supply to brazilian operations was interrupted due to torrential flooding this month.

“WA is the world’s largest supplier of iron ore and lithium (as spodumene concentrate),” UBS’s Lachlan Shaw said.

“Almost 60% of the world’s iron ore and lithium supply comes from Western Australia. The potential risk of disruption and delay from COVID directly to miners and indirectly to their supply chains is greatest. in these products.But WA also makes decent contributions to the global supply of zircon, manganese, alumina, titanium and nickel.

Winners and losers

There are big winners in supply shocks, like Australian iron ore miners who were able to feast on record prices early last year when Vale in Brazil struggled to grow in the face of growing Chinese demand.

But there are also losers.

“When supply disruption leads to higher prices, the winners and losers depend on the disrupted producer,” Shaw said.

“If COVID-related disruptions emerge and remain site- and company-specific, industry peers can capitalize to the extent that their operations may be less impacted and they can make the most of higher commodity prices. raw materials.

“But if the COVID disruptions have a similar impact on miners and the industry, then the benefits of higher prices can only serve to offset lower volumes.”

Apart from iron ore, WA produces the bulk of Australia’s gold supply, around 11% of the world’s total, 10% of the alumina supply, 5-10% of mined nickel and ~10% titanium raw materials.

It is also a small producer of manganese, copper and other base metals.

Ramélius feels the pressure of the labor shortage

Gold miner Ramelius Resources (ASX:RMS) says a labor shortage, including a lack of truck drivers for its extensive WA gold network, is putting a damper on production.

Ramelius produced 66,919 oz in total at sustaining costs of $1,493/oz during the December quarter at the Edna May and Mt Magnet mines in WA, totaling 132,605 oz at $1,473/oz for the first half.

This puts it on track to reach the lower end of its FY22 guidance range of 260,000-300,000 oz at $1,425-1,525/oz.

But the company said it had taken into account “the actual impacts of the delayed reopening of the WA border and/or any future Covid-19 infections on mine site personnel or supply pipeline disruptions”. which are “difficult to accurately assess at this time”.

Ramelius relies heavily on trucks as its operations consist of central processing centers with large satellite mines, some over 100 km away in the case of Edna May’s Marda and Tampia satellites.

Reaction to the continued border closures has been mixed. Many members of the Western Australian public quietly support the measure, due to the extraordinary popularity of Prime Minister Mark McGowan and fears of the health effects of opening the border.

Some miners, including mineral resources and iron ore magnate Gina Rinehart, would like the border to remain open despite problems accessing labor from the east and overseas, but the CEO of Fortescue Metals Group (ASX:FMG) Elizabeth Gaines and Evolution Mining (ASX:EVN) boss Jake Klein, who is based in Sydney, both think it should be fine.

Klein said yesterday that the state was “postponing the inevitable”.

In a study published today, the WA Chamber of Commerce and Industry said 65% of 400 businesses surveyed say the delay in opening borders will be negative for them, with just 23% saying it will will be positive.

“The results of the survey reinforce CCIWA’s calls for the state government to set a new reopening date as soon as possible and that key rules attached to the safe transition plan are also announced,” said CCIWA Chief Economist Aaron Morey.

“The results also clearly reflect the need to compensate affected companies.

“Many companies are reporting multi-million dollar losses, with an average cost of $2.5 million estimated by respondents.”

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