Indonesia is flooding the nickel market with low-cost supply, and we don't think it's going to stop anytime soon. This is a structural change. S&P Market Intelligence expects the oversupply to continue beyond 2025. The country will likely add 300,000 metric tons of capacity in 2024 alone. At the same time, demand is vulnerable to China's lower appetite for steel and slower growth in production of electric-vehicle batteries.
What's happening
Indonesia's desire to maximize the value-add from its nickel resources over the past decade has helped boost its global market share of nickel output to about 53% last year, up from about 34% in 2019. Over the same period, Indonesia's refined nickel market share rose to 41% from 16%, contributing to a 45% fall in the global price of nickel in the past year.
Why it matters
This is a structural change that won't fully respond to cyclical market-pricing trends.
- Make no mistake, lower nickel prices have hit the profits of Indonesian nickel pig iron and nickel matte producers. Indonesia is cutting some planned expansion this year to conserve cash and other delays are possible.
- However, Indonesian producers predominantly trade against Shanghai's lower-grade nickel pig iron (NPI) benchmark for stainless steel production and are inherently less sensitive to the key London exchange (LME) prices that affect class-1 primary nickel.
- While Indonesian mines are generally ranked in the third quartile or worse of the global cost curve, lower capital and maintenance costs underpin Indonesia's lower all-in sustaining cost position relative to peers. The pace in which downstream development has taken place has also caught the market by surprise.
Technology prospects add a twist to the plot.
- China's Tsingshan Holding, the world's biggest nickel producer, developed a method to turn NPI into nickel matte--a pure form of nickel that can be refined to battery-grade material.
- The technological flexibility of converting NPI to nickel matte gives Indonesian producers a competitive advantage. This flexibility to redirect between LME prices and NPI prices is something we have yet to see in other markets.
The implications reverberate into geopolitics.
- Indonesia's supply surge puts global peers at risk. Global miner BHP (A-/Stable/A-1) says its nickel operations will not likely be profitable before the end of the decade and may mothball some operations. Several Australian miners have already announced they would suspend nickel operations; and the government has pledge support to the sector.
- Automakers and other sectors that need nickel inputs could increasingly shift some of their value chain to Indonesia for security of supply, changing industry dynamics while also deepening Indonesia's position in the electric-vehicle battery industry.
- Given China is a big foreign investor in Indonesia, and that nickel is classified as a critical mineral, the shift could exacerbate global geopolitical risks.
What comes next
The previous nickel boom buys miners time, from a credit perspective. Rated miners will likely withstand the weaker commodity prices which we are anticipating over the next 12-24 months. Balance sheets are strong from price rallies over the previous two years. More production cuts are possible, but risks are pegged firmly to the downside.
Yet the "downstreaming" policy that got us to this point will stay strong under as power passes to Indonesia's new president this year. By exporting refined products rather than just raw ore, Indonesia gains more value-added. Its nickel-related product exports have more than quadrupled since 2014. The country is also attracting other downstream investments by foreign producers that need resources. We think Indonesia's nickel dominance is likely here to stay.
Writer: Cathy Holcombe
Related Research
- Indonesian nickel production dominates commodity market, S&P Global Market Intelligence, Feb. 6, 2024.
- The Promise And Pitfalls Of Indonesia's Nickel Boom, March 12, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Minh Hoang, Singapore + 65 6216 1130; minh.hoang@spglobal.com |
| Secondary Contact: | Ker liang Chan, Singapore (65) 6216-1068; Ker.liang.Chan@spglobal.com |
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