The international nickel market underwent a structural repricing in the first half of the year, primarily driven by supply-side policy developments. At the start of the year, Indonesia's policy tightening on nickel ore quotas spurred a price rebound from the bottom. Following the outbreak of conflict in the Middle East in late February, concerns over sulfur supply intensified. This, combined with the implementation of Indonesia's new Harga Patokan Mineral (HPM) policy, led to a significant surge in LME nickel prices, which peaked above $20,000 per tonne in early May, reaching a near two-year high. However, persistently high energy prices and a resurgence in expectations for U.S. Federal Reserve interest rate hikes weighed on the broader base metals sector. Furthermore, elevated global refined nickel inventories exerted additional downward pressure, leading to a correction from the highs. In June, the Fed's policy meeting conveyed a more hawkish stance, strengthening expectations for rate hikes within the year. Concurrently, Indonesia indicated a potential relaxation of nickel ore mining quotas to meet smelting demand, bolstering expectations for increased Work Plan and Budget (RKAB) quota approvals. These factors combined to pressure nickel prices lower.

Indonesian Policy Shifts Market Expectations

Indonesia's indication of easing nickel ore mining quotas to satisfy smelting needs has shifted market focus to the approval of secondary RKAB quotas in the second half of the year. Market reports suggest Indonesia has already approved 260 million tonnes of nickel ore RKAB quotas for 2026, aligning with initial annual targets. WBN nickel mine entered maintenance and suspended production in mid-May due to quota shortages. Vale has applied for incremental quotas for its High-Pressure Acid Leach (HPAL) project, indicating strong collective motivation among mining companies for quota applications. In early June, Indonesia signaled it would adjust nickel ore quotas to match the actual capacity requirements of its domestic Rotary Kiln-Electric Furnace (RKEF) and HPAL plants. Recent market rumors suggested a significant quota expansion to 360 million tonnes. Although the Indonesian government has denied this and stated that any new quotas must be tied to smelting capacity, the total volume of potential new additions remains uncertain. The key focus for the second half of the year will be the scale of Indonesia's nickel ore quota approvals. If approvals exceed expectations, a decline in ore prices could lower cost support across the nickel supply chain, with the magnitude of quota releases potentially determining the depth of any nickel price correction. In the medium to long term, the trend of tightening Indonesian nickel resources may persist, with attention in the fourth quarter on the possibility of the quota tightening narrative resurfacing.

Indonesia's imports of nickel ore from the Philippines continue to rise, with recent ore prices showing some decline. Since last year, Indonesia's nickel ore shortfall has been largely supplemented by imports from the Philippines, used for adjusting silicon-magnesium ratios. The volume of these imports has increased significantly year-on-year, particularly with a noticeable supply increase after the rainy season, leading to a price adjustment for Philippine nickel ore. According to data from MySteel, Indonesia imported 4.1915 million tonnes of nickel ore from the Philippines from January to April 2026, a 70.5% year-on-year increase, with full-year imports potentially exceeding 25 million tonnes. In Indonesia, the premium for RKEF-grade nickel ore has narrowed to $1-5 per tonne. Combined with a decline in the benchmark price, Indonesian RKEF-grade ore prices have fallen by approximately $7 per tonne, with overall supply appearing ample. HPAL-grade ore, affected by production cuts for Mixed Hydroxide Precipitate (MHP), is under slight pressure, with spot prices ranging from $26 to $34 per tonne.

Following the reopening of the Strait of Hormuz, sulfur supply remains tight in the short term. Indonesia has weak domestic sulfuric acid production capacity from oil and gas refining, relying on imports for about 70% of its sulfur, with approximately 75% of those imports sourced from the Middle East. In March, escalating conflict in the Middle East caused a sulfur supply shortage, pushing prices above $1,100 per tonne and increasing the proportion of sulfur costs in MHP smelting expenses to over 40%. Currently, while tensions in the Middle East have generally eased and navigation through the Strait of Hormuz is gradually resuming, shipping sulfur to Indonesia takes over two months, indicating a prolonged recovery cycle. Therefore, sulfur supply in Indonesia remains tight in the near term. Subsequent attention will be on the lagged effect of supply recovery on cost support. Furthermore, sulfur price volatility significantly impacts MHP smelting costs. As of June 26, sulfur prices are around $1,100 per tonne, corresponding to an MHP smelting cost of approximately $15,000 per tonne (cobalt-adjusted). If sulfur prices subsequently retreat to around $900 per tonne, MHP smelting costs would be about $14,000 per tonne (cobalt-adjusted), translating to an electrowinning nickel cost of roughly $17,000 per tonne (cobalt-adjusted), potentially lowering cost support levels.

Persistent High Global Nickel Inventories

Persistently high global nickel inventories continue to exert strong downward pressure on prices. Internationally, weak overseas demand in the first quarter led to a slight increase in LME nickel stocks. Since the second quarter, reduced export profitability has decreased deliveries of Chinese refined nickel to overseas warehouses, leaving LME inventories stable at elevated levels. As of June 26, LME nickel inventories stood at 274,800 tonnes, an increase of 19,500 tonnes or 7.6% since the start of the year, and a rise of 70,500 tonnes or 34.51% compared to the same period last year. Domestically in China, a pattern of stronger external and weaker internal prices opened the import arbitrage window from March onwards. However, with limited demand-side absorption, social inventories of refined nickel in China have accumulated substantially. As of June 26, domestic social inventories were 129,200 tonnes, an increase of 68,200 tonnes or 111.7% since the beginning of the year, and a rise of 91,400 tonnes or 241.5% year-on-year. Recently, the import arbitrage window for refined nickel has closed, which may slow the pace of domestic refined nickel inventory accumulation going forward.

Overall, high global nickel inventories are suppressing prices, keeping nickel spot premiums/contango under pressure and increasing traders' willingness to sell at discounts. Combined with market expectations for future supply increases, inventory drawdowns may be difficult to achieve in the short term.

Downstream Demand in Seasonal Lull

Seasonal factors are leading to a decline in stainless steel production, while the ternary battery chain maintains demand based on immediate needs. In the stainless steel sector, factors such as the rainy season and summer heat have led to insufficient end-user orders for civil decoration, hardware, and home appliances, causing steel mills to reduce production schedules. MySteel estimates stainless steel production in June at 3.5332 million tonnes, down 7.42% month-on-month. Production schedules for July show a slight recovery, but output for 300-series stainless steel is projected to decline further to 1.8721 million tonnes, a decrease of 5.15% month-on-month. In the new energy sector, ternary precursor and cathode material producers have marginally slowed production schedules, maintaining procurement only for immediate needs. The incremental demand from new energy is currently insufficient to offset the seasonal weakness in traditional sector demand. Additionally, industrial nickel demand from sectors like alloys and electroplating remains at low levels.

Summary and Outlook

Looking ahead, the scale and release pace of Indonesia's RKAB nickel ore quota approvals remain the key variables determining nickel price trends. If quotas are significantly relaxed, the narrative of tightening Indonesian ore supply would be disproven. Combined with the pressure from high global nickel inventories, nickel prices could seek further lows. Attention in the fourth quarter would then shift to whether the quota tightening narrative could re-emerge. If quotas increase moderately, maintaining a tight supply-demand balance for nickel ore, nickel prices may oscillate within a range once market concerns ease, presenting potential buying opportunities on dips. If quota releases fall below expectations, the narrative of tightening nickel ore supply would persist, providing upward momentum for price recovery. Furthermore, while the premium related to sulfur supply concerns has receded following the reopening of the Strait of Hormuz, actual sulfur supply in Indonesia remains tight in the short term. High sulfur prices continue to provide cost support for MHP production, warranting vigilance regarding the lagged impact of sulfur supply recovery.

In summary, heightened expectations for U.S. Federal Reserve rate hikes and a strong U.S. dollar continue to pressure base metal prices. However, easing tensions in the Middle East and a subsequent decline in energy prices could help alleviate inflationary pressures. July is the application window for Indonesia's RKAB nickel ore quotas. While the final approval results for incremental applications from mining companies will take time, pessimistic expectations have already formed. Nickel prices are likely to experience weak, range-bound movement in the short term, with support levels watched around the cost of integrated electrowinning nickel production. Caution is advised regarding potential volatility from recurring Indonesian policy news. Key focuses for the second half of the year include the scale and release pace of Indonesian nickel ore quota approvals, the recovery of sulfur supply, and changes in nickel inventories. Strategically, a cautious approach is recommended, with potential for short-term bearish trades but a longer-term constructive view, while emphasizing risk management.