Surging sulfur prices — driven by the extended closure of the Strait of Hormuz, a chokepoint for roughly 20% of global sulfur trade — are reshaping the cost structure of Indonesia's nickel processing sector. Sulfur is an essential input for high-pressure acid leach (HPAL) facilities that produce mixed hydroxide precipitate (MHP), the key intermediate for battery-grade nickel sulfate. Without sulfur, the acid leaching process that extracts nickel from low-grade laterite ore cannot operate. (FACT: Reuters, May 14, 2026)
Macquarie Bank estimates that the combined impact of rising sulfur costs and a new Indonesian ore pricing formula — which pushes costs for HPAL producers up by more than $3,000/t — has driven breakeven prices for HPAL nickel production to approximately $18,000/t. At current LME nickel prices around $18,880/t, HPAL producers are operating on wafer-thin margins of less than 5%. Any further sulfur price increases or a dip in LME nickel below $18,000/t would push significant portions of Indonesia's battery-grade nickel capacity into loss-making territory. (FACT: Reuters, Macquarie Bank, May 14, 2026)
The INSG has already revised its 2026 nickel demand growth forecast downward from 6.2% to 4.2%, while global production is expected to contract by 4.3% as Indonesian output growth slows sharply. These forecasts were released on April 22 and did not fully incorporate the sulfur squeeze — meaning further downside to production forecasts is likely. The INSG's balance has flipped from a 283,000-tonne surplus in 2025 to a 32,000-tonne deficit for 2026, with the sulfur crisis accelerating the swing. (FACT: Reuters, INSG, CarbonCredits, April-May 2026)
Indonesia's new ore pricing formula compounds the sulfur problem. Jakarta revised its benchmark pricing mechanism for domestic ore transactions, effectively raising the cost of feed for HPAL plants. The new formula links ore prices more directly to LME nickel values rather than allowing domestic negotiation, removing the cost discount that Indonesian processors previously enjoyed relative to international competitors. Combined, the sulfur shock and pricing reform have erased the structural cost advantage that made Indonesia the world's lowest-cost nickel producer. (FACT: Macquarie Bank, S&P Global, May 2026)
The sulfur crisis originates outside nickel markets. The Strait of Hormuz closure — triggered by heightened Middle East tensions that began in early 2026 — has disrupted the flow of sulfur from major exporters including Saudi Arabia, Qatar, and the UAE. Sulfur is typically shipped as a by-product of oil and gas production, and the strait's closure has created an acute shortage that has driven global sulfur prices to multi-year highs. For Indonesian HPAL operators who import sulfur for their acid plants, the supply chain disruption is immediate and cannot be substituted in the short term. (FACT: Reuters, CarbonCredits, May 2026)
The upstream impact is cascading: MHP CIF prices have risen 17.9% year-to-date to $15,806/t, reflecting both higher input costs and reduced supply availability. MHP is the primary feedstock for nickel sulfate production, which in turn feeds NMC and NCA cathode manufacturing for EV batteries. Battery manufacturers relying on Indonesian MHP face a dual squeeze — higher prices and the risk of supply rationing if HPAL operators reduce output to preserve margins. (FACT: S&P Global, Discovery Alert, May 2026)
Credit markets are paying attention. The margin compression at Indonesian HPAL facilities introduces credit risk for project financing tied to Indonesia's battery-grade nickel expansion. Projects like the Pomalaa HPAL plant (a $4.5 billion joint venture between Vale, Sumitomo, and Zhejiang Huayou) and the Merdeka Battery Materials operations face delayed payback periods if breakeven costs remain at $18,000/t or rise further. Macquarie projects that at least several HPAL operations are now operating at or near break-even, with limited buffer for maintenance, capex, or working capital requirements. (FACT: Reuters, Macquarie Bank, May 2026)
The sulfur squeeze has also drawn attention from investment funds. LME nickel contract positioning has shifted as speculators price in the probability of involuntary HPAL output cuts. LME three-month nickel hit a two-year high of $20,000/t in early May before settling around $19,000/t, up 14.5% since the start of 2026. The gap between prevailing LME prices and HPAL breakeven costs is now the single most important metric for forecasting battery-grade nickel supply availability. (FACT: Reuters, CarbonCredits, May 2026)
For EV battery and cathode manufacturers sourcing nickel units from Indonesia, the sulfur crisis presents an acute supply risk. The $18,000/t HPAL breakeven creates a hard floor for battery-grade nickel prices, but also means any LME dip below that level will trigger MHP output reductions — not from policy choice but from economic necessity. Buyers should: (1) stress-test supply agreements for price renegotiation clauses tied to input cost escalation; (2) diversify MHP sourcing to include non-Indonesian producers (Australia, Canada) even at higher unit costs, for portfolio resilience; (3) monitor sulfur import data and Strait of Hormuz geopolitical developments as the leading indicator for HPAL output. If sulfur prices rise another 20%, expect HPAL curtailments within 60 days.