Sulfur Squeeze From Strait of Hormuz Closure Disrupts Indonesian Nickel Processing

The Iran war has severely constrained the flow of sulfur from the Gulf, which accounts for approximately one-quarter of global supply. Sulfur is a critical input for Indonesia’s HPAL plants, which convert low-grade laterite ore into mixed hydroxide precipitate (MHP) destined for the battery sector. Indonesia relies on the Gulf region for 75% of its sulfur imports, making its fast-growing HPAL sector acutely vulnerable to the Strait’s closure. (FACT: Reuters Open Interest, Andy Home, May 14, 2026)

HPAL plants are a fast-growing component of Indonesia’s nickel production mix. Last year, HPAL output reached 450,000 metric tonnes, representing more than 10% of global nickel production. A further 100,000 tonnes of new capacity was scheduled to come online in 2026, according to Macquarie Bank. However, the sulfur squeeze has put those expansion plans in serious doubt. (FACT: Reuters Open Interest, Macquarie Bank, May 14, 2026)

Zhejiang Huayou Cobalt (603799.SS) has already halted half of its operating HPAL capacity due to the sulfur shortage. Analysts believe it is highly likely that the next wave of capacity will be put on hold, as even existing operators struggle to maintain run-rates amid rising input costs. (FACT: Reuters Open Interest, May 14, 2026)

The sulfur shock compounds the impact of Indonesia’s own policy measures — tighter mining production quotas and a new minimum selling price formula for nickel ore. The new ore pricing formula pushes costs for HPAL producers up by more than $3,000 per tonne. Combined with rising sulfur prices, Macquarie Bank estimates break-even prices for Indonesian HPAL producers are now as high as $18,000 per tonne. (FACT: Reuters Open Interest, Macquarie Bank, May 14, 2026)

The International Nickel Study Group (INSG) released revised forecasts on April 22, 2026, projecting that the global nickel market could shift from three years of massive surplus to a modest deficit of 32,000 tonnes in 2026. This marks a sharp revision from the Group’s October 2025 forecast of a 261,000-tonne surplus. The INSG cut its 2026 demand growth forecast from 6.2% to 4.2%, while global production is expected to contract by 4.3% as Indonesian output growth slows sharply or potentially goes into reverse. (FACT: Reuters Open Interest, INSG, April 22, 2026)

Notably, the INSG forecasts released on April 22 do not explicitly reference the potential impact of the sulfur squeeze, as few analysts expected the Strait of Hormuz to remain closed for this long. This implies the actual supply impact could be even more severe than the INSG’s revised deficit projection. (FACT: Reuters Open Interest, May 14, 2026)

LME three-month nickel responded to the confluence of supply threats, hitting a two-year high of $20,000 per tonne in early May 2026. The metal traded around $19,000 per tonne as of mid-May, up 14.5% since the start of 2026. Investment funds have accumulated long positions of 35,750 contracts (215,000 tonnes), the highest since 2022, reflecting a collective bet that Indonesia’s production growth will stall. (FACT: Reuters Open Interest, LME, Trading Economics, May 14-23, 2026)

Unlike policy-driven quota cuts, which are subject to mid-year review and potential revision, the sulfur supply constraint is a geopolitical factor entirely outside Jakarta’s control. This distinction is critical: while Chinese operators have formally complained to Jakarta about quotas and pricing, no amount of policy tweaking can reopen the Strait of Hormuz. As Reuters columnist Andy Home noted, the sulfur squeeze is rapidly emerging as the single biggest threat to the world’s dominant nickel producer. (FACT: Reuters Open Interest, May 14, 2026)