Indonesia's nickel ore quota reduction remains the dominant force in the nickel market. The government cut 2026 mining quotas by approximately one-third from 2025 levels, responding to environmental concerns about deforestation and pit lake contamination in Sulawesi and Halmahera. The policy has directly impacted NPI (nickel pig iron) production, with Indonesian NPI output falling to 820,000 tonnes of nickel content in May, down from 980,000 tonnes monthly in Q4 2025.
The quota reduction is creating a bifurcated market. NPI prices in Indonesia have risen to $14,500-15,000/t of contained nickel, up from $12,000/t in December 2025, as smelters compete for limited ore supply. In contrast, Class 1 nickel (higher purity for battery and LME delivery) has held relatively stable, supported by steady production from traditional refining centers in Australia, Canada, and Norway.
LME nickel inventories declined to 142,000 tonnes in early June, down from 172,000 tonnes in March, as physical offtake increased. The drawdown has been concentrated in nickel briquette and cathode warrants, consistent with battery sector demand for Class 1 material. The cash-three months backwardation of $230/mt reflects the inventory tightness and preference for prompt delivery.
The medium-term outlook hinges on Indonesia's policy direction. The government has signaled it may maintain ore quotas at reduced levels through 2027 to support domestic processing margins and environmental remediation. This would structurally constrain the nickel surplus that most analysts had projected for 2026-2027.
Indonesia's quota policy is the single most important variable in the nickel market. Buyers should assume that the supply constraint is deliberate and will persist. Secure term contracts for nickel sulfate and briquette requirements at prices indexed to LME cash with a floor around $17,000/mt. The backwardation favors prompt buying.