Nickel's two-tier market: why the surplus narrative misses the real supply risk

The great bifurcation: Class 1 scarcity inside a Class 2 surplus

The single most important concept for understanding the 2026 nickel market is that it is not one market — it is two. Class 1 nickel (high-purity cathodes, briquettes, and powders >99.8% Ni) is the metal deliverable against LME contracts, used in EV batteries, superalloys, and electroplating. Class 2 nickel (nickel pig iron / NPI, ferronickel, and mixed hydroxide precipitate / MHP) is the lower-purity product that feeds stainless steel mills and, increasingly, battery supply chains after further processing.

These two markets could hardly be more different in June 2026.

The headline surplus of 212,000-288,000 tonnes (INSG/Argus consensus for 2026) exists almost entirely in Class 2. Indonesia's explosive growth in NPI production — driven by rotary kiln-electric furnace (RKEF) technology fueled by Chinese investment — has created an ocean of low-cost, low-purity nickel that the stainless steel industry absorbs but the LME cannot. (FACT: INSG April 2026 Monthly Bulletin; Argus Media 2026 Nickel Outlook) Meanwhile, Class 1 production has been structurally constrained: traditional sulfide ore mines in Canada, Australia, and Russia have faced depleting reserves, capital underinvestment, and — in Russia's case — sanctions-related trade friction. (FACT: Sumitomo Metal Mining Annual Report; CRU Group)

The result is a two-tier price structure that is historically unusual and operationally treacherous. LME nickel — which prices the Class 1 metal that traders can physically deliver — sits at $20,000-23,000/t. But NPI and MHP trade at meaningful discounts, with Chinese NPI benchmarks reflecting the fact that the stainless steel feedstock market is genuinely oversupplied. The divergence means that a buyer sourcing LME-deliverable nickel faces an entirely different market reality than a buyer contracting for NPI or MHP.

Indonesia: the producer that is also the risk

Indonesia accounts for an estimated 60-70% of global nickel mine supply in 2026, up from roughly 50% in 2023. (FACT: US Geological Survey; INSG) This dominance gives Jakarta extraordinary leverage over the global nickel market — leverage it is now actively using in ways that contradict the surplus narrative.

The quota cuts: policy-driven scarcity

In January 2026, Indonesia's Ministry of Energy and Mineral Resources (ESDM) set the national nickel ore production target for the year at approximately 250-260 million tonnes under the RKAB (Work Plan and Budget) approval process — a cut of roughly one-third from the 379 million tonnes approved in 2025. (FACT: SMM; IDNFinancials; APNI) BMO Capital Markets estimated that a cut of this magnitude could remove as much as 700,000 tonnes of nickel supply from the market — potentially flipping the global balance from surplus to deficit. (FACT: BMO Capital Markets, January 2026)

The cut was not evenly distributed. The most dramatic single reduction hit PT Weda Bay Nickel, the world's largest nickel mine, a joint venture between Tsingshan Holding Group (51.3%), Eramet SA (37.8%), and PT Aneka Tambang (10%). Its initial 2026 ore quota was slashed to just 12 million wet metric tonnes, down from 42 million tonnes in 2025 — a 71% reduction. (FACT: Eramet Q1 2026 Management Report; Mining.com, February 11, 2026) By mid-June 2026, Eramet announced that the quota was fully exhausted, that the mine was being placed into care and maintenance, and that a revision application had been submitted. (FACT: Eramet Q1 2026 Results, April 28, 2026; CNBC Indonesia)

The Weda Bay shutdown is not a hypothetical risk — it is happening now. The RKEF smelters at the Indonesia Weda Bay Industrial Park (IWIP) continue operating on stockpiled ore, but on a limited basis. NPI production at the site was approximately 9,000 tonnes in Q1 2026, down 1% year-on-year, with sales of just 3,800 tonnes, down 2%. (FACT: Eramet) The broader IWIP complex has HPAL smelters consuming ore at a rate that would require roughly 100 million tonnes annually — far above the current quota allocation. The mismatch is structural and severe.

The HPAL boom meets the sulfur wall

Indonesia has approximately 12 operational HPAL plants with more under construction, representing tens of billions of dollars of investment in battery-grade nickel production capacity. (FACT: CRU Group; SMM) These plants use high-pressure acid leaching to convert laterite ore into MHP, which is then processed into nickel sulfate for EV batteries. The process is heavily dependent on sulfuric acid — and sulfuric acid production depends on sulfur imports.

This is where the Strait of Hormuz crisis becomes a nickel story.

Indonesia sources 75-80% of its sulfur imports from the Middle East, with Iran as the single largest supplier. (FACT: FINI/Indonesian Nickel Industry Forum; Reuters, March 6, 2026) Since the Strait of Hormuz closed on February 28, 2026, due to the US-Israel-Iran conflict, that supply has been effectively severed. The sulfur price delivered to Indonesia surged from $101/t in July 2024 to $554/t by January 2026 — a 440% increase — before the conflict drove it even higher. (FACT: Atlantic Council, April 2026)

The HPAL process requires 25-30 tonnes of sulfuric acid (equivalent to roughly 10 tonnes of sulfur) to produce one tonne of MHP, according to Morgan Stanley estimates. (FACT: Reuters, April 17, 2026) Sulfur costs now account for an estimated 30-35% of total HPAL operating costs, up from ~25% before the disruption. (FACT: Discovery Alert, June 2026) Indonesian HPAL plants maintain average sulfur inventories of just 1-2 months. (FACT: FINI/Mysteel, March 12, 2026) Industry sources report that initial production curtailments of 10%+ have already begun at some HPAL facilities. (FACT: Kitco News; Substack/Jose Luis Chavez Calva)

The LME stockpile paradox: 250kt of metal that isn't moving

LME nickel inventories stand at approximately 250,000 tonnes in June 2026 — the highest level since 2015, and up roughly 44% year-on-year. (FACT: LME Warehouse Reports, June 2026; Tacto.ai) A conventional reading of this data point suggests ample supply: 250kt is more than two weeks of global consumption sitting in visible storage.

The reality is more nuanced. A significant portion of LME nickel inventory is warranted overhang — metal that was delivered into LME warehouses because the owner had no other buyer for it. As one analyst described it, the LME has become "the dumping ground for Class 1 that nobody needs and wants." (FACT: CRU Group's Andrew Mitchell, quoted in Mining.com, January 2026) The single-day warranting of 20,760 tonnes on January 7, 2026 — the largest inflow since December 2019 — was a stark reminder that the LME is absorbing surplus Class 1 metal, not reflecting robust supply availability.

Moreover, the 250kt figure includes metal that is not freely deliverable for various logistical and contractual reasons. LME on-warrant stocks — the truly available portion — are lower than headline inventories suggest. And the composition matters: a significant share of the inventory is in the form of full-plate cathode and briquettes that command premium pricing in the physical market, not standard-grade material that can be drawn at low cost.

The critical question for buyers: is the 250kt a buffer or a trap? Our assessment is that it is partially both. There is enough metal to prevent a 2022-style short squeeze, but not enough high-quality, geographically accessible metal to prevent sustained backwardation and premium spikes in specific regions.

Demand: the EV battery reality check

Nickel demand growth in 2026 is real but uneven, and the market is being forced to recalibrate its assumptions about how fast the battery revolution will consume nickel.

Stainless steel remains the dominant demand driver, accounting for approximately 70% of global nickel consumption. (FACT: INSG; CRU Group) Growth in this segment is flat to slow in China, where the property-driven economic slowdown continues to weigh on stainless demand. The rest of the world shows modest growth, but not enough to compensate for Chinese stagnation. Indonesia's own NPI production feeds primarily into stainless steel mills in China and Indonesia, and with Chinese stainless output flat, the Class 2 surplus finds fewer willing buyers.

EV batteries represent the growth story — but the growth is slower than the optimistic 2023-2024 forecasts anticipated. Lithium-iron-phosphate (LFP) chemistries have gained significant share in the global EV market, reducing the nickel intensity per vehicle. Plug-in hybrid vehicles, which use smaller batteries, have also captured share from pure battery EVs. The result: nickel demand from the battery sector is growing in absolute terms, but at a pace that has disappointed the most bullish producers. (FACT: BMI/Fitch Solutions; Fastmarkets) Nickel sulfate premiums to LME cash have been shrinking as a result — a trend visible in spot market assessments from Fastmarkets and SMM. (FACT: Fastmarkets; SMM)

This demand composition is critical for the two-tier thesis. Stainless steel demand absorbs Class 2 (NPI/MHP) but does not tighten Class 1. Slower battery demand growth reduces the urgency of HPAL capacity expansion — but also means that when the sulfur crisis hits HPAL output, the impact on battery-grade supply is more manageable than it would have been in a higher-growth scenario.

Philippine ore: the swing supplier that didn't swing

When Indonesia cuts quotas, the natural market response is for other ore suppliers to fill the gap. The Philippines — the world's second-largest nickel ore producer — has been the traditional swing supplier to China's NPI industry. In previous cycles, when Indonesia restricted ore exports, Philippine ore volumes surged.

Not this time. Philippine ore exports to China have remained unchanged year-on-year in 2026. (FACT: SMM; CRU Group) The reasons are structural rather than cyclical: Philippine miners are facing their own regulatory constraints, declining ore grades at older mines, and logistical challenges amplified by the broader shipping disruption in Asian waters. Fuel costs for Philippine miners have spiked dramatically — the country imports 98% of its oil from the Middle East — further compressing margins and limiting production responses. (FACT: Seeking Alpha, May 8, 2026; Reuters)

The absence of a Philippine supply response means that Indonesian quota cuts bite harder than historical precedent would suggest. The usual safety valve is not operating.

The balance debate: surplus now, deficit later?

The consensus forecast range for the 2026 nickel market balance — 212,000 to 288,000 tonnes of surplus — masks an unusually wide dispersion of views that reflects genuine analytical uncertainty.

ING Think projects a 2026 surplus of roughly 261,000 tonnes, with LME nickel averaging ~$15,250/t — implying current prices are well above fair value. (FACT: ING Think, February 2026) Sumitomo Metal Mining sees a surplus around 256,000 tonnes. (FACT: Sumitomo Annual Report) BMI/Fitch Solutions forecasts an average LME price of $15,500/t, arguing the surplus persists and may widen to ~250,000 tonnes in 2027. (FACT: BMI, January 2026)

But these projections were developed before the full severity of the sulfur crisis became apparent. Macquarie Group raised its 2026 nickel price forecast by 18% to $17,750/t in January 2026, citing a sharp drop in the expected surplus due to tighter Indonesian quotas. (FACT: Macquarie, January 2026; Mining.com) BMO Capital Markets noted that the quota cut could remove up to 700,000 tonnes — enough to flip the market to deficit. (FACT: BMO, January 2026) Goldman Sachs has raised price forecasts into the $16,600-17,750/t band on Indonesian quota and sulfur risks. (FACT: Goldman Sachs Commodities Research)

The honest answer: the balance depends entirely on two variables that no model can predict with confidence — (1) whether the Strait of Hormuz reopens and sulfur flows resume, and (2) whether Indonesia enforces or relaxes its quota cuts in H2 2026. The US-Iran ceasefire framework announced on May 24-25, 2026, offers hope for Hormuz reopening (FACT: Reuters, May 25, 2026; Yahoo News), but the timeline is uncertain. If Hormuz reopens and quotas are revised upward, the surplus narrative reasserts itself and LME nickel corrects toward $16,000-18,000/t. If both constraints persist, the surplus shrinks dramatically and prices push toward $23,000-25,000/t.

What this means for buyers

The two-tier nickel market demands a two-tier procurement strategy. The old approach of buying "nickel" as a single commodity class no longer works.

Buyers of LME-deliverable Class 1 nickel (cathodes, briquettes)

You are operating in a structurally tighter market than the headline surplus number suggests. The pool of available LME-grade metal outside of exchange inventory is limited, and the sulfur crisis is threatening the HPAL capacity that was expected to gradually close the Class 1-Class 2 gap. Key actions:

• Budget for $18,000-23,000/t LME through H2 2026. The downside is limited by Indonesian policy risk and the sulfur supply constraint; the upside is open toward $25,000 if both risks materialize simultaneously.
• Lock term supply now. The Weda Bay halt and HPAL curtailments are reducing the pool of metal that can be converted from MHP/matte to Class 1. Producers are allocating to long-term contract holders first.
• Monitor LME warranting activity. Large warranting events (like the 20,760t event in January) indicate surplus Class 1 finding a home. A sustained absence of warranting suggests the LME is no longer absorbing excess metal — a bullish signal.
• Include a Hormuz reopening clause in contracts. If the Strait reopens and sulfur prices normalize, HPAL capacity restarts and Class 1 supply increases. A reopen-triggered pricing adjustment protects against paying crisis premiums for post-crisis metal.

Buyers of NPI, MHP, and nickel sulfate

The Class 2 market is genuinely oversupplied, and you have pricing leverage — but with important caveats. NPI supply is vulnerable to the Weda Bay ore shortage, and MHP supply is directly exposed to the sulfur crisis. Key actions:

• NPI buyers: Negotiate discounts of 15-25% to LME benchmark. Chinese NPI inventories are elevated and stainless steel demand is flat. But watch Weda Bay — if the mine stays on care and maintenance, NPI supply from IWIP tightens quickly.
• MHP buyers: The sulfur crisis is your single biggest supply risk. MHP premiums to LME have been compressed but could spike if HPAL curtailments accelerate. Secure 3-6 months of forward coverage if you are dependent on Indonesian MHP.
• Nickel sulfate buyers: Shrinking premiums reflect ample converter capacity from MHP to sulfate. But the sulfur crisis is the wildcard: HPAL → MHP → sulfate is the dominant production pathway. If sulfur stays constrained, the entire chain tightens. Current premiums of ~$1,500-2,500/t over LME could widen to $3,000+ if the squeeze deepens.

Multi-commodity buyers with exposure across the nickel complex

• Diversify across nickel forms: do not over-commit to any single product class. The two-tier structure means price signals in one tier do not translate to the other.
• Structure contracts to separate the LME base price from the product-type premium/discount. NPI should have a discount formula linked to the SMM or CRU NPI benchmark, not a fixed discount to LME.
• Build sulfur and ore supply monitoring into your supply chain intelligence. The availability of sulfur in Indonesia and ore quotas at Weda Bay are now first-order price drivers for the entire nickel complex. Follow FINI (Indonesian Nickel Industry Forum) announcements and Eramet/Tsingshan production reports.