Middle East crisis adds uncertainty to Indonesia's nickel supply as sulfur imports face disruption

As the core of the global nickel supply chain, Indonesia's hydrometallurgical projects (HPAL) producing MHP (Mixed Hydroxide Precipitate) rely heavily on sulfuric acid. Since Indonesia produces sulfuric acid primarily by burning sulfur, sulfur constitutes the "industrial lifeblood" of the country's new energy nickel material industry. In 2025, Indonesia's sulfur imports surged by 48% year-on-year, with the main incremental demand coming from the commissioning of new projects such as the battery materials producer QMB New Energy Materials.

However, this prosperous raw material foundation now faces severe challenges. The recent persistent tensions in the Middle East have seriously threatened shipping safety in the Strait of Hormuz. For Indonesia, which is highly dependent on sulfur from Saudi Arabia and Qatar, any disruption to this critical passage would create a massive supply gap. Even without a complete blockade, reduced shipping efficiency due to vessel diversions and rising freight costs driven by conflict risk premiums would significantly inflate delivered costs for Indonesian buyers.

Source: Mysteel

Before the outbreak of the Middle East war, concerns were already emerging on the supply side of the Indonesian nickel market. Expectations of production cuts at certain Indonesian hydrometallurgical projects had been circulating in the market. The uncertainty surrounding sulfur supply has further amplified these concerns. If sulfur availability--essential for maintaining current operating rates--cannot be secured, MHP output, already under pressure, could potentially decline further.

It is understood that negotiations for second-quarter MHP long-term contracts have not yet officially commenced, with smelters generally adopting a wait-and-see stance and refraining from quoting prices. This standstill reflects intense bargaining between upstream and downstream players over future pricing power.

Furthermore, rising sulfur prices are gradually transmitting to nickel prices. According to Mysteel calculations, sulfur, as a key auxiliary material in MHP production, requires approximately 8-10 tonnes per metal tonne of MHP. Price fluctuations directly impact the overall costs of hydrometallurgical processing. International sulfur prices were already operating at elevated levels in 2025. By the end of February 2026, sulfur prices at major Chinese ports remained around Yuan 4,050/tonne, double the level from the same period last year. If Middle East tensions lead to further supply tightening, the cost support for MHP will become increasingly solid.

Meanwhile, the market had held relatively high expectations for increased high-grade nickel matte production. In January 2026, Indonesia's high-grade nickel matte production reached 35,400 tonnes in Ni. content, showing a month-on-month increase. However, high-grade nickel matte production also faces dual pressures: on one hand, its raw material--nickel ore--is becoming more expensive due to expectations of tightened RKAB quotas in Indonesia; on the other hand, if rising sulfur prices increase sulfuric acid costs, the economic viability of producing nickel sulfate from high-grade nickel matte will also narrow.

Historically, MHP has occupied the lowest position on the cost curve, benefiting from cobalt by-product credits and relatively lower processing costs, while high-grade nickel matte remained disadvantaged due to its higher cost structure. However, the current landscape is changing: rising sulfur prices are elevating the cost of MHP, while increasing ore prices are squeezing profit margins for high-grade nickel matte.

Looking ahead to the second quarter, with potential tightening of MHP supply and broad-based increases in raw material costs, the entire intermediate product market faces upward pressure on its pricing benchmark. Whether MHP or high-grade nickel matte, selling prices are likely to rise alongside costs. For nickel prices, this implies that the marginal cost pricing benchmark may gradually shift from lower-cost MHP toward higher-cost high-grade nickel matte.

Written by Cora Ji, jiruyan@mysteel.com