Sulphur supply risks, not Indonesia alone, drive nickel rally, analysis says

Rising nickel prices are being driven as much by tightening sulphur supply as by Indonesia’s production policies, according to an analysis published by LME Insight, highlighting a growing risk to the global battery materials supply chain.

London Metal Exchange (LME) nickel prices climbed to $19,365 per metric ton on May 1, their highest level since June 2024, amid concerns over Indonesian nickel supply and stronger market sentiment.

However, the analysis argued that the market’s focus on Indonesia’s reduced production quotas and pressure on mixed hydroxide precipitate (MHP) output overlooks a deeper issue: tightening sulphur availability linked to geopolitical tensions in the Middle East.

LME Insight said nickel prices have risen about 7% since late February, coinciding with escalating conflict involving Iran. Iran and several Gulf countries, including Saudi Arabia, Qatar and the United Arab Emirates, are major sulphur producers because sulphur is recovered as a byproduct of oil and gas processing.

The report noted that attacks on energy infrastructure, including the Ras Laffan gas facility in Qatar, threatened sulphur supply from a market that was already tightening structurally.

Sulphur is a critical input for high-pressure acid leach (HPAL) processing, the technology widely used in Indonesia to extract nickel and cobalt from laterite ores. HPAL operations consume an estimated 25-30 tons of sulphuric acid for every ton of nickel produced.

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Indonesia itself produces limited sulphur domestically and depends heavily on imported elemental sulphur or sulphuric acid, making local nickel processing vulnerable to higher input costs and supply disruptions, the analysis said.

The report also pointed to China’s plan to suspend sulphur exports starting in May as an additional factor tightening global supply.

Despite the recent price rally, LME Insight said the nickel market is not yet showing signs of an immediate physical shortage. LME nickel inventories fell by around 11,000 tons between early March and May 1, while cancelled warrants — metal earmarked for delivery — remained relatively low compared with the extreme levels seen during the 2022 nickel short squeeze.

The market structure also remains in contango, with cash prices trading below three-month contracts, suggesting traders are pricing in future supply risks rather than near-term scarcity.

According to the analysis, the market is increasingly concerned about how elevated sulphur costs could affect Indonesian MHP production economics in the second half of 2026.

The report added that sulphur supply risks could also spill over into copper markets. Copper solvent extraction-electrowinning (SX-EW) operations in Chile and Zambia rely heavily on sulphuric acid for heap leaching, meaning rising acid costs could increase production costs and tighten global copper supply.

LME Insight said the situation exposed a structural challenge in the energy transition. While reduced oil and gas processing may gradually lower recovered sulphur supply, demand for sulphur continues to rise due to expanding HPAL nickel production needed for electric vehicle batteries.

“The Iran conflict has accelerated a tightening that was already in motion,” the report said, adding that nickel may be “pricing the first chapter” of a broader supply-chain issue.

Editing by Reiner Simanjuntak