Nickel Rally Fades as Indonesian Ore Gap Battles Record LME Stocks

LME nickel has retreated to $17,350 per tonne after a brief rally to $20,000 in early June, and the market cannot decide which force is stronger: the structural tightening of Indonesian ore supply or the crushing weight of record LME inventories. Both are real. Both are unprecedented. And they point in opposite directions.

Indonesia's 2026 nickel ore quota — the RKAB, or Rencana Kerja dan Anggaran Belanja — was cut to approximately 250-270 million wet tonnes, down from 379 million tonnes in 2025. The cut was deliberate. Jakarta wants to preserve ore for domestic downstream processing, particularly high-pressure acid leach (HPAL) plants that produce nickel sulfate for batteries. The problem: Indonesia's smelting capacity — NPI, matte, and HPAL combined — needs an estimated 327-334 million tonnes of ore in 2026. The math is brutal: a 70-80 million tonne gap between what smelters need and what they are legally permitted to mine. The government has ruled out a broad quota increase, limiting mid-year revisions to smelters with verified ore shortages. The market does not believe that will close the gap.

Ore grade decline compounds the volume constraint. Average nickel ore grade from Indonesian mines has fallen from 1.66% in 2024 to 1.52-1.57% in 2025, according to industry data. A 10% grade decline means 10% more ore must be mined and processed for the same nickel output — at a time when ore volume is being cut by 30%. The effective nickel units available to smelters are falling faster than the headline quota numbers suggest.

The Iran conflict introduced a second supply shock. Indonesian HPAL operations depend on sulfur imports for the acid leaching process, and roughly 76% of that sulfur comes from Middle Eastern sources. The Strait of Hormuz disruption and Iranian missile strikes on regional infrastructure sent sulfur prices soaring in April-May. Several HPAL lines operated at reduced rates through June. Sulfur prices have since moderated as alternative supplies from Korea and Japan ramped, but the episode exposed a critical vulnerability: the world's largest nickel processing hub depends on a single shipping lane that is now a war zone.

LME nickel inventories tell the other side of the story. On-warrant stocks stand at 195,200 tonnes, up 50,000 tonnes year-to-date and near the highest since 2021. The inventory build is dominated by Class 2 nickel — NPI and ferronickel from Indonesia and China, warranted against the LME's fast-track listing rules. This is not the high-purity Class 1 nickel that the LME contract was designed for, but it counts for delivery. The market is awash in nickel units, just not the right kind in the right place.

The divergence between Class 1 and Class 2 nickel is the most important structural feature of this market. Class 1 — high-purity nickel briquettes and cathode, deliverable against the LME contract and used in plating, superalloys, and battery precursor — is in relative balance. Class 2 — NPI, ferronickel, and nickel matte, used primarily in stainless steel — is in massive surplus. The LME contract prices Class 1 but is increasingly influenced by Class 2 deliveries. This creates a price that satisfies neither upstream producers nor downstream consumers.

Stainless steel demand, which consumes roughly 70% of global nickel, is flat to slightly negative in 2026. Chinese stainless output fell 1.2% through May as property construction slowed and export markets faced rising trade barriers. European stainless production is up marginally, supported by automotive and industrial equipment demand. Indian stainless demand is growing at 6-7%, driven by infrastructure and consumer goods, but India is a relatively small part of the global market. The net is flat.

Battery demand is the growth story, and it is real. Global EV sales are forecast at 18.5 million units in 2026, up 22% year-on-year. Nickel-rich battery chemistries — NMC 811 and NCMA — use approximately 40-60kg of nickel per vehicle. Battery-grade nickel sulfate demand grew 28% in H1 2026. The problem for nickel bulls: battery demand starts from a low base. Even at 28% growth, battery nickel consumption is roughly 500,000 tonnes — about 15% of total nickel demand. It is growing fast but not fast enough to absorb the NPI surplus.

StoneX's Q3 outlook projects a modest nickel deficit of ~30,000 tonnes for 2026 — the first deficit year since 2021 — driven by ore tightness and sulfur-related HPAL cuts. But they caution that 'the deficit is small enough to be covered by destocking, and LME inventories are large enough to absorb several years of modest shortfalls.' The market needs sustained ore tightness and stronger battery demand before nickel can break sustainably above $20,000.

Indonesia's policy direction is the single most important variable. The government wants to capture more value from nickel: export taxes on NPI are under discussion, and investment in battery-grade processing is being prioritized over stainless steel feed. If Indonesia restricts NPI exports, the Class 2 surplus could tighten rapidly, forcing Chinese stainless producers to bid for alternative nickel units. If Indonesia instead expands RKAB quotas mid-year, the ore tightness narrative collapses. Most analysts expect some quota expansion — perhaps 10-15% — but not enough to eliminate the gap.

For now, nickel is stuck. Too much inventory to sustain a rally. Too much ore tightness to justify a selloff. The range is $16,500-20,000. The breakout will come from Jakarta.