Nickel Supply Crunch Deepens as Markets Fail to Price the Risk

Mixed hydroxide precipitate output from Indonesia has fallen approximately 37% from its September 2025 peak. The decline was not driven by weakening demand. It was driven by disrupted sulphur shipments and deteriorating ore grades feeding the country’s high-pressure acid leach plants. Two senior industry executives, speaking on a Crux Investor panel on 2 August 2026, described a convergence of forces that are tightening the nickel market structurally: deliberate government supply management, geological depletion, and a geopolitically exposed acid supply chain, each operating independently and compounding simultaneously. The result, according to Mark Selby, CEO of Canada Nickel Company, and Ingo Hofmaier, CFO of Lifezone Metals, is a nickel supply crunch that forward price curves have not yet caught up with. What follows unpacks each layer of the tightening thesis, explains why stainless steel demand is making the squeeze materially more acute, and draws out what the convergence means for investors assessing nickel price direction and project exposure.

Indonesia has stopped flooding the nickel market, and the policy shift looks durable

For the better part of a decade, Indonesia ran a volume-maximisation model: build capacity with Chinese capital, produce nickel pig iron and MHP at scale, and let prices fall where they may. That model is over.

Since late 2025, Indonesian regulators have deployed three specific levers to manage supply and defend a higher price floor:

• Royalty adjustments applied to nickel ore extraction
• Production quotas with caps on output volumes
• Revised HPM/HMA minimum pricing formula changes that reset the benchmark cost curve for domestic ore transactions

The SMM H1 2026 review confirms that quota management and benchmark formula adjustments are reshaping the nickel ore cost curve in real time. The preferred operating band for Indonesian producers now sits at approximately $18,000-$19,000 per tonne, the estimated break-even threshold under the new framework. A sustained return to $15,000/t nickel is considered structurally implausible by executives operating within these constraints.

The nickel price floor established by Indonesia’s regulatory pivot is examined in detail elsewhere, with the cost-curve mechanics and quota enforcement record pointing to why a sustained return to sub-$15,000 per tonne is now considered structurally implausible by most operators inside the system.

Indonesia’s HPM benchmark pricing revision, formalised through Ministerial Decree No. 144.K/MB.01/MEM.B/2026 effective April 2026, increased the correction factor applied to nickel grade and introduced cobalt, iron, and chromium into the pricing system for the first time, materially steepening the cost curve for lower-grade ore transactions.

Critically, the policy shift is not purely a price-defence exercise. It is a regulatory response to geology.

Mark Selby noted that Indonesia is now importing ore from the Philippines, historically considered lower quality, as a direct signal of how far domestic high-grade depletion has progressed.

When a country that dominates global nickel supply begins importing feed material, the policy floor beneath prices is anchored to something more durable than political preference.

Indonesian ore grades are falling faster than the market has priced in

The grade trajectory tells its own story, and the numbers compound rather than stabilise.

Average saprolite grades fell from approximately 1.66% Ni in 2024 to approximately 1.52-1.57% in 2025, a 7-10% decline in a single year according to Crux Investor analysis and SMM data. Spot-traded ore is now predominantly in the 1.3-1.4% range, with material above 1.4% increasingly scarce in meaningful volumes. SMM projects the average could settle around 1.4% by 2030.

How grade decline compounds processing costs

Lower grades are not simply a volume problem. They are a cost multiplication problem, particularly for HPAL operations.

As ore grades fall, more material must be mined, hauled, and processed per unit of contained nickel, increasing energy, labour, and slag disposal costs at every stage. For HPAL plants specifically, sulphuric acid consumption scales inversely with ore grade: once average grades drop below approximately 1.5% Ni, the chemical relationship between grade and acid demand steepens. This is a fixed stoichiometric constraint that operational efficiency improvements cannot fully offset.

Even if Indonesia’s quota policies were fully liberalised tomorrow, the geology would still drive higher marginal costs and a tighter effective supply curve.

What sulphur supply chains and the Strait of Hormuz have to do with battery-grade nickel

Most nickel market models treat supply risk as a function of mine output and smelter capacity. The MHP bottleneck operates through a different, less visible mechanism.

Indonesian HPAL plants do not import sulphuric acid at scale. Instead, they import elemental sulphur and combust it on-site to produce the acid used in the leaching process. The supply chain runs through a specific sequence:

1. Elemental sulphur is shipped to Indonesian processing sites
2. On-site combustion converts sulphur to sulphuric acid
3. Acid feeds the HPAL leaching process, dissolving nickel from laterite ore
4. MHP is precipitated from the leach solution as battery-grade intermediate product
5. MHP output flows to refiners producing battery-grade nickel sulphate

A disruption at step one cascades through every subsequent stage with limited buffering capacity. That is precisely what has occurred: MHP production has fallen approximately 37% from its September 2025 peak, attributed directly to sulphur import disruptions rather than demand weakness, according to Ingo Hofmaier and Mark Selby.

The geopolitical exposure is concentrated. Four of the five largest sulphur suppliers to Indonesia are located in regions whose exports transit the Strait of Hormuz. The compounding mechanism is acute: as ore grades fall, each tonne of nickel requires more acid, which requires more sulphur, which must pass through the same geopolitical chokepoint.

Strait of Hormuz shipping disruptions have cascading effects across multiple commodity supply chains simultaneously, and the structural dynamics reshaping oil flows through the same corridor provide a broader framework for assessing how frequently and severely sulphur transit routes can be interrupted.

Ingo Hofmaier characterised forward price curves as underpricing upside risk, in part because they do not adequately account for Hormuz-linked disruptions to the sulphur supply chain that underpins battery-grade nickel production.

Stainless steel demand is outpacing what consensus models have built in, and the gap is wider than investors recognise

Battery demand captures the headlines. Stainless steel absorbs the metal.

Stainless steel still accounts for the majority of global nickel consumption, yet consensus analyst models have consistently under-weighted its growth contribution. Historical stainless steel production growth has run at 4-6% per year over multi-decade periods, and executives estimate current growth at approximately 4.6-4.8% annually.

Worldstainless global production data recorded a 2.1% increase in stainless steel melt shop output in 2025, reaching 64.2 million tonnes, a figure that itself underscores the persistent baseline growth in nickel-intensive stainless demand even before accounting for the higher structural growth rates cited by executives in the battery supply chain discussion.

Total nickel demand has expanded at close to 7% per year since 2019, according to Mark Selby and Ingo Hofmaier. Many mainstream analyst forecasts still cluster around approximately 3% annual demand growth, roughly half the observed rate.

CREA’s 2026 report on Indonesia’s nickel sector noted that while Indonesian policy is “aimed at EVs,” the bulk of nickel remains “parked in stainless steel.”

A 4-percentage-point gap between actual and modelled demand growth, compounded annually, produces systematically too-loose market balances in consensus models. The equilibrium clearing price that resolves supply and demand is correspondingly higher than mainstream forecasts imply.

Why forward nickel price curves may be underestimating all of this simultaneously

No single factor in the tightening thesis is unprecedented. Policy floors have been tried before. Ore grades decline in every mature mining jurisdiction. Geopolitical risks come and go. Demand forecasts miss.

What is unusual is that all four are operating simultaneously, independently, and in the same direction:

• Policy floor: Indonesia’s quota and pricing formula changes defend a structural cost floor of approximately $18,000-$19,000/t, backed by ore-grade-linked cost inflation
• Geological depletion: Ore grades falling 7-10% in a single year, with spot material already in the 1.3-1.4% range, raising marginal costs regardless of regulatory settings
• Sulphur and Hormuz exposure: MHP output already down 37% from peak, with four of five major sulphur suppliers transiting a single geopolitical chokepoint
• Demand mis-modelling: Approximately 7% actual growth versus approximately 3% consensus, compounding the supply deficit annually

Forward curves price in single-factor scenarios. The tightening case here is multi-factor and convergent, which is precisely why the gap between current prices and structural reality may be wider than any individual model captures.

Structural commodity deficits that persist across multiple years share a common pricing dynamic: forward curves consistently underweight them until physical tightness forces spot prices sharply above model-implied equilibria, a pattern visible in silver markets running their sixth consecutive annual deficit and relevant to how nickel’s convergent supply constraints may eventually be repriced.

Caveats and risks to the tightening thesis

The thesis carries legitimate moderating factors. The $18,000-$19,000/t cost floor is directionally supported but operator- and project-specific; high-efficiency integrated verticals may run at somewhat lower cost. Hormuz disruption risk is inherently probabilistic, and forward curves may be implicitly assuming intermittent rather than structural disruption, an assumption that could prove correct.

New non-Indonesian sulphide supply does exist in the development pipeline. However, most such projects involve long lead times and significant capital expenditure, and many were previously delayed by the very low Indonesian-driven prices that the new policy framework has now moved to prevent. Near-term relief from these sources is limited.

What the convergence means for investors positioning in nickel now

The structural shift in Indonesia’s nickel market has direct implications for which project types, cost structures, and geographies are favoured in a portfolio built for the next several years rather than the last decade.

Categories of exposure better aligned with a higher-price-floor, geology-constrained nickel environment include:

• High-grade sulphide projects outside Indonesia with robust ESG credentials and lower operating cost structures
• Non-Indonesian supply sources with diversified feed and acid supply chains
• ESG-aligned developers that carry lower financing costs and better offtake access, even without a near-term physical price premium for low-carbon nickel
• Producers geared to above-$15,000/t nickel rather than those reliant on sub-$15,000/t prices for project viability

Real-time indicators for monitoring battery-grade supply stress include:

• Sulphur trade flows into Indonesia and disruption frequency
• Strait of Hormuz shipping conditions and insurance premium movements
• HPM/HMA formula adjustments from Indonesian regulators
• Monthly MHP output data from Indonesian processors

Mark Selby and Ingo Hofmaier both indicated that the era of low-cost Chinese-funded Indonesian capacity suppressing Western sulphide project investment is considered to have concluded. ESG-aligned projects, even without a spot premium, carry financing advantages that translate to better project economics and earlier delivery timelines.

The nickel market’s next chapter is being written by geology, not just geopolitics

The 37% decline in MHP output from its September 2025 peak was not a demand story. It was a geological and logistical story: ore grades falling faster than models assumed, sulphur supply chains exposed to a single maritime chokepoint, and a regulatory framework that has shifted from flooding the market to defending a cost floor anchored to physical reality.

The convergence of deliberate supply management, irreversible ore-grade depletion, sulphur constraints, and demand growth running at roughly double the consensus rate is tightening nickel faster than forward prices currently reflect. These conditions are not forecasts. They are observable in current production data, spot ore markets, and trade flow patterns.

For investors, the distinction matters. The structural conditions described are already present in the data, not dependent on future events to materialise.

For investors wanting to translate the structural tightening thesis into specific project exposure, our dedicated guide to pre-FID nickel project positioning covers Crawford and Kabanga in detail, including their grade profiles, financing structures, offtake arrangements, and the valuation implications of a nickel market where sub-$15,000 per tonne pricing is no longer the planning assumption.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions. Forward-looking statements regarding nickel prices, demand growth, and supply conditions are subject to market developments and various risk factors.