Indonesia’s production of nickel is surging as a wave of new capacity powers up to meet growing demand from the electric vehicle (EV) battery sector.

The country’s mines lifted output by 41% year-on-year in the first seven months of 2022, according to the International Nickel Study Group. Year-to-date production of 814,000 tonnes accounted for 47% of the global total, compared with 38% over the same period of 2021.

Indonesia helped drive a 14% year-on-year rise in global mined production in January-July, enough to tip the supply-usage balance to a surplus of 29,000 tonnes from a deficit of 146,000 tonnes a year ago.

This is bad news for nickel bulls, with the London Metal Exchange (LME) three-month price currently trading at $23,000 per tonne, down by nearly half from its March high of $55,000, and Goldman Sachs becoming the latest bank to downgrade its price forecasts.

However, it’s also bad news for nickel pricing, since the Indonesian supply wave is coming in forms of the metal not traded on either the LME or the Shanghai Futures Exchange (ShFE).


Indonesia’s nickel boom reflects both the country’s rich mineral resources and the government’s drive to push miners down the value-add processing chain.

What was once shipped as low-grade ore to China’s stainless steel mills morphed into a stream of nickel pig iron (NPI) after the authorities banned ore exports in 2020. Exports of both NPI and ferronickel may also be banned as the government now channels investment into EV battery materials.

Indonesia is currently home to an industrial-scale chemistry experiment in how to transform the country’s particular type of nickel ore from stainless melt input to battery cathode input.

The first fruits of that work are now appearing in the form of rising output of intermediate products such as matte and mixed hydroxide precipitate (MHP) that can be converted into nickel sulphate for battery manufacturing.

The sector is currently dominated by Chinese players, so no surprise as to where all this nickel is heading.

China’s nickel import mix is shifting fast to reflect the new streams of product leaving Indonesia. Imports of nickel matte from Indonesia have gone from zero last year to 74,000 tonnes in the first eight months of this year.

Imports of Indonesian MHP have mushroomed to 251,000 tonnes from just 15,000 tonnes over the same period of 2021. This material is coming from new high-pressure-acid-leach plants such as that operated by PT Huayue, which announced its maiden shipment to the Chinese port of Ningbo in February.

In August, imports of Indonesian NPI and ferronickel hit an all-time monthly high of 583,000 tonnes.

The flip side of higher raw materials flows is a fall in China’s appetite for high-purity refined metal. Net imports fell by 33% to 90,000 tonnes in January-August.

So-called Class I nickel is a favoured form for conversion into battery-ready nickel sulphate, but it’s now being displaced in the Chinese market.


This Indonesian supply surge was widely expected, but its exact timing was fuzzy given the number of new processing routes being used to convert ore to battery nickel.

It is now undeniably here and has, according to Macquarie Bank, shifted the market into “a structural surplus which could last for several years”. (“Commodities Compendium”: Sep 28, 2022)

Even Goldman Sachs, previously a stand-out bull, agrees. The bank has just slashed its three-month price target from $26,000 per tonne to $16,000 and its 12-month call from $28,000 per tonne to $20,000.

The combination of European demand shock, Indonesian production burst and the closing of the processing gap between stainless and battery nickel means there “is close to 30% downside for the nickel price into year-end”.

The title of the bank’s Sep. 26 research note – “Nickel: mispriced for a mounting Class II glut” – pretty much says it all.


There is one kink in this bear narrative, though.

Although Western battery manufacturers and automakers are starting to take a direct interest in Indonesia’s fast-expanding nickel sector, it remains a largely Chinese phenomenon.

The rest of the world has been relying on supplies of refined nickel to convert into battery-grade sulphate. This is why LME stocks, all of which are Class I, have been steadily dwindling. They are now down by 49% on the start of the year at 51,816 tonnes.

The Class I market is currently hostage to the fate of Russian metal, unsanctioned officially but likely to experience significant self-sanctioning on 2023 contracts.

Nornickel’s 200,000 tonnes of annual supply, all in the form of Class I metal, “is key to price direction”, according to Macquarie.

But which price? That for LME nickel, which is defined by Class I deliverability? Or that for the growing volumes of intermediate products being traded between Indonesia and China?

Both the LME and ShFE, where stocks are even more depleted, are struggling to price simultaneously a growing global nickel surplus and a tight Class I supply chain.

This mismatch of market-place and market is one of the reasons the LME nickel contract melted down in March.

Exchange nickel trading has been characterised by low liquidity and abrupt pricing shifts ever since.

LME time-spreads imploded earlier this week, the cash-to-three-month period trading out to a contango of $167 per tonne as a thin market over-reacted to changes in the cost of dollar financing.

The same time-spread was trading at a backwardation of $840 per tonne just before the LME suspended trading.

The limitations of exchange pricing in capturing the widening spectrum of nickel products is part and parcel of this volatility.

It’s also driving users, particularly Chinese battery players, towards different pricing methodologies, such as using MHP payables or nickel sulphate as a basis point for transactions.

Macquarie Bank now provides three different nickel price forecasts for LME refined metal, Chinese nickel pig iron and Chinese nickel sulphate.

It’s a sign that while the technical processing routes between old and new nickel demand drivers may be closing, the pricing gaps are getting wider.

Source: Reuters, September 29, 2022