Indonesia is still the whole story
The nickel market is a single-country story with a single question: will Indonesia enforce its production quotas? In June, news broke that the Indonesian government had approved a 10% increase in nickel ore mining quotas for H2 2026, sending LME prices from $18,500/mt to below $16,500/mt in three weeks.
The quota increase is a response to budget pressure — the nickel industry accounts for 15% of Indonesia's export revenue. But there is a credibility gap. The government announced stricter quota enforcement in January 2026, only to loosen it six months later. Market participants have priced in an "Indonesia discount" — a structural risk premium that assumes quotas will expand whenever prices rise above $17,000/mt.
Stainless steel demand is the swing factor
Stainless steel production in China fell 6% year-on-year in Q2 2026 to 7.9 million tonnes, driven by a construction slowdown and destocking in the white goods sector. Stainless accounts for 68% of global nickel consumption, and the weakness is directly weighing on LME prices.
European stainless demand is marginally better. Output stabilized in Q2 after a 4% decline in Q1, but mills are operating at 72% capacity. The EU's carbon border adjustment mechanism (CBAM) is adding compliance costs for imported stainless, providing a measure of protection for domestic producers but dampening overall consumption.
The battery wedge: Class I premiums are compressing
The conversion capacity for nickel matte to Class I sulfate has expanded rapidly. In 2025, 320,000 tonnes of Indonesian NPI were converted to matte and then to sulfate. In 2026, that figure is projected at 450,000 tonnes. The result is that the premium for battery-grade nickel over LME nickel has compressed from $5,000-6,000/t in early 2025 to $2,000-3,000/t currently.
This is bad news for nickel miners who bet on the EV premium. The good news for the market: more Class I supply means the LME contract is becoming more representative of the broader nickel market, improving transparency for procurement teams who previously had to pay opaque premiums for physical delivery.
Bull, bear, and base cases
The bull case: Indonesia enforces strict H2 quotas below 180 million wet tonnes, battery demand growth absorbs incremental supply, and stainless demand recovers in H2. LME nickel rallies to $20,000/mt. CRU and some sell-side analysts have this view, noting that ore depletion at Indonesian mines is accelerating and grades are declining.
The bear case: Indonesia floods the market with quotas, Chinese stainless output falls another 5%, and the Class I surplus from Indonesia builds to 100,000+ tonnes. LME nickel tests $14,000/mt.
The base case: gradual quota increases keep the market in moderate surplus (50,000-100,000 tonnes), LME nickel trades $15,000-18,000/mt. The market remains torn between the "structural deficit" narrative (long-term EV demand) and the "Indonesia can always produce more" reality.
Nickel procurement is a two-market problem. For stainless steel buyers: current LME levels near $16,500/mt are fair but not cheap — the downside risk from Indonesia quota increases outweighs upside potential. Consider hedging 30% of Q4 2026 requirements at current levels, keeping 70% floating to capture potential Indonesian-driven dips to $15,000/mt. For battery-grade nickel sulfate buyers: the compression of the Class I premium is a tailwind. Lock in term contracts with converters at premiums of $2,000-2,500/t over LME, but avoid long-dated fixed-price contracts — the premium could compress further to $1,500/t as conversion capacity expands.