Indonesian nickel producers have flooded the market, and their low-cost position will now allow them to weather subdued prices as other producers struggle, analysts told S&P Global Commodity Insights.

The island nation is reaping the benefits of its 2020 ban on nickel ore exports, which kickstarted an investment cycle, particularly from China-based companies. Indonesia produced an estimated 40.2% of the world's nickel in 2023, according to S&P Global Market Intelligence data. Nickel markets now have ample supply, and some miners of higher-cost nickel sulfide ores, which had expected their higher-quality product to capitalize on the energy transition, are cutting production.

Things are not expected to improve for these miners in 2024: Commodity Insights analysts projected a nickel surplus through 2028 and forecast a 26.1% drop in the three-month nickel price in 2024, following a 44.7% decline in 2023, making it the worst-performing base metal on the London Metal Exchange in 2023.

"Structurally, a lot of supply is coming out of Indonesia, and it's just cheaper ... than what can be produced in Australia, Canada or New Caledonia. The surplus is obviously pushing down the nickel price at the moment, and so all of these Western producers can't make money," Cameron Peacock, investor relations manager at Nickel Industries Ltd., told Commodity Insights. The Sydney-based company holds interests in six nickel projects in Indonesia.

Low prices, no problem

The London Metal Exchange nickel cash price was $15,984 per metric ton on Feb. 1, decreasing slightly from $16,375/t as of Dec. 29, 2023, and dropping 48.4% from the 2023 high of $30,958 on Jan. 3, data from Market Intelligence shows.

Indonesian producers benefit from lower operating costs, such as cheaper labor and energy, as well as lower costs for capital from Chinese financers, analysts said. Indonesia is projected to produce 43.9% of the world's nickel by 2027, according to Market Intelligence data.

"Cash costs for Indonesian [high-pressure acid leach] operations can be as low as $7,000/t (including cobalt byproduct credits)," Benchmark Mineral Intelligence nickel and cobalt analysts Will Talbot and Jorge Uzcategui said in an email. "This means they can weather this low price environment more easily and still realize margins for some." The $7,000/t metric equates to $3.17 per pound.

Well-established Indonesian nickel mines Sorowako and Pomalaa booked 2023 cash costs of $6.56/lb and $6.85/lb, respectively, according to Market Intelligence data. The Weda Bay mine in Indonesia ramped up production in 2023, but the operation produced lower volumes than expected due to a slowdown in permit approvals, according to a third-quarter 2023 earnings report from French company Eramet SA, which owns 38.7% of the mine. Cash costs at Weda Bay were $8.24/lb in 2023.

Sitting lower on the cost curve with Chinese backers who "tend to be more price-agnostic" means Indonesian producers are expected to keep pumping supply into the market, Daniel Croft, a metals analyst at the SFA (Oxford) consultancy, told Commodity Insights.

Although Indonesian producers can keep operations going, they are still taking a hit to profits, analysts warned.

"Nickel prices have fallen below production cost of some nickel pig iron producers in Indonesia, and profit of nickel matte and [mixed hydroxide precipitate] projects shrank sharply," Zhang Lingying, a nickel analyst at Shanghai Metals Market, told Commodity Insights.

Curbed production and investments

Low nickel prices are eating into the global production cost curve and causing supply curtails for non-Indonesian nickel producers, Jason Sappor, a Commodity Insights senior analyst, said in a Jan. 30 report.

Several companies announced in January that they would suspend nickel operations in Australia. BHP Group Ltd. will close part of its Kambalda concentrator after supplier Mincor Resources NL suspended nickel sulfide operations at North Kambalda and South Kambalda, Panoramic Resources Ltd. will suspend nickel sulfide operations at Savannah, and First Quantum Minerals Ltd. will suspend limonite and saprolite mining operations at Ravensthorpe. Mincor Resources is a subsidiary of Wyloo Metals Pty. Ltd.

Nickel sulfide operations in Australia, Canada and Europe often face higher operating costs because they "refine nickel to a higher purity" than the nickel produced in Indonesia. Additionally, mining laterite ores in Indonesia is often less capital-intensive, Croft said.

"This is not a good time to be promoting or asking for money for a nickel project — financiers don't like where nickel prices are headed," Adrian Gardner, principal analyst of nickel markets at Wood Mackenzie, told Commodity Insights.

"New refining projects in Canada and the US, which we should have expected to be commissioned this year, have delayed their construction finalization dates because of rising construction costs and the need to borrow more money," Gardner said.

The analyst pointed to Li-Cycle Holdings Corp.'s Rochester Hub battery recycling facility in New York, which paused construction in October 2023, and Electra Battery Materials Corp., which is struggling to finance a refinery complex in Ontario.

"A lot of these announced projects won't see the light of day because it's uneconomic at these prices, and they just can't get funding at these prices," Nickel Industries' Peacock said.

Aside from new capacity additions, operating nickel facilities are also feeling the burn. For example, Glencore PLC said it will stop funding its 49%-owned Koniambo Nickel SAS saprolite ore mine in New Caledonia. Glencore declined a request to provide comment.

"One major change in direction for the nickel industry as a result of Indonesia's growing dominance is the shift away from the use of Class 1, refined metal for battery-grade nickel sulfide production to intermediate products like mixed hydroxide precipitate and nickel matte derived from nickel pig iron or ferronickel," Croft said.

Russian nickel sulfide miner PJSC MMC Norilsk Nickel, commonly known as Nornickel, seems insulated from the price drop.

"Nornickel, like many in the industry, is navigating through these market shifts," a spokesperson told Commodity Insights in an email. "The current market conditions, characterized by excessive nickel supplies and falling prices, are challenging. However, it is important to note that more than half of nickel producers are currently making losses due to the level of discounts on Class 2 nickel. In the meantime, we are a producer with a negative cost per unit of nickel thanks to high-value byproducts, so we are least affected."

With non-Indonesian nickel miners curtailing production, the US and other countries trying to move away from buying metals from China or China-backed companies may have trouble finding alternatives. Most of the announced nickel projects in Indonesia include Chinese companies as partners, 2023 research from S&P Global Ratings shows.

"Incentives will need to be put in place to increase investment in Western jurisdictions," the Benchmark analysts said.