Sunday, May 31, 2026 · 12:55 PM
Zhejiang Huayou Cobalt on May 1 halted half the production at its Indonesian Huafei plant, cutting battery-grade nickel output after sulfur prices surged to $948 per ton from $514 in late February. That's an 84% jump in eight weeks. The sulfur shortage, driven by disruptions in Middle East supply from the Iran war, has forced several Indonesian nickel processors to trim output by at least 10% since March, hitting plants that process nickel ore into mixed hydroxide precipitate for EV batteries. This isn't a squeeze. It's a structural break.
Market participants are treating this like a transient logistics problem, waiting for Hormuz shipping to normalize. They're wrong. The Middle East provides 75% to 80% of Indonesia's sulfur, and sulfur now accounts for 30% to 35% of HPAL operating costs, up from 25% typically. Indonesia controls more than half of global nickel production. When your marginal cost structure rises 40% in a single input that has no substitute, you don't have a disruption—you have a repricing event. The LME three-month contract sits at $17,850. The International Nickel Study Group revised its 2026 balance from a 283,000-tonne surplus to a 32,000-tonne deficit, but that forecast went to print before Huayou's announcement and before four Chinese-operated plants at Morowali Industrial Park shut down following a February landslide, affecting facilities that account for 30% of Indonesia's HPAL capacity, with the largest plant possibly offline for three months.
Affected plants include facilities backed by Huayou Cobalt, Lygend Resources and Tsingshan Group. Huafei generated 14.50 billion yuan in revenue in 2025, accounting for 17.89% of Huayou's total revenue and 569 million yuan of parent net profit. The company disclosed no timeline for resuming full production. That's the tell. When operators don't give you a restart date, they're not confident in input prices stabilizing. The chairman of FINI, Indonesia's nickel smelters association, confirmed that inventory levels at several facilities have stocks sufficient only until May 2026 or potentially earlier. We're there. Right now. Indonesia cut 2026 nickel mining quotas to 250-270 million wet metric tons from 379 million in 2025, and revised the floor price formula for calculating tax and royalties, effective April 15, further pressuring producers' margins.
The last time sulfur became a strategic bottleneck was during the 1970s phosphate boom, when U.S. Gulf Coast fertilizer producers bid spot acid to $300 per ton and squeezed copper smelters in Arizona into curtailment mode. The playbook then: operators with captive sulfide ore that generated acid internally—like Phelps Dodge at Morenci—kept running while laterite-dependent competitors idled. Today's Indonesian HPAL plants process laterite ore. They require external sulfuric acid. Sulfide ore bodies with high native sulfur content generate sulfuric acid as a byproduct, eliminating import needs—Kabanga in Tanzania, where approximately 30% of ore is sulfur, determines acid cost by ore chemistry rather than global market conditions. Indonesia has no equivalent advantage. The nation imports approximately 75% of its sulfur requirements from Middle Eastern suppliers. That's a single-point failure embedded in the world's largest nickel supply node.
Consensus assumes Indonesian operators will source alternative sulfur from Canada, Kazakhstan, or North Africa and absorb a temporary premium. They're underestimating the logistics trap. Non-Middle Eastern sulfur suppliers typically offer smaller volumes per shipment, requiring more complex logistics coordination, and shipping distances from alternative sources increase transportation costs and extend delivery timelines. The vessels that carry Middle East sulfur in 40,000-ton parcels from Ruwais don't call on Sudbury. You're looking at 15,000-ton shipments on different freight rates with 25-day longer voyages. Even if you secure the tons, your delivered cost stays elevated structurally. Several battery material nickel miners in Indonesia have trimmed output by at least 10% due to sulfur shortages, with operational setbacks coming after many plants had been running above capacity to benefit from wide margins and high demand, with production cuts taking output back to nameplate levels and tightening MHP supply.
Two things to watch. First: MHP payable percentages. Offers for MHP rose to 95% of LME nickel prices for nickel payable on April 28 from 91% in March, though no deals have been concluded at this level. That's the real price discovery. When Chinese cathode producers start paying 95 points instead of 91, they're pricing in sustained tightness, not a blip. Second: watch for Chinese smelter imports from the Philippines and New Caledonia. If Beijing starts securing non-Indonesian feed, that's confirmation the supply shock has permanence. The sulfur market isn't healing until Hormuz shipping normalizes or Indonesian operators build domestic acid plants from pyrite. Huayou aims to address the issue through construction of acid production projects using pyrite and phosphogypsum, expected to come on stream by the end of 2026. That's seven months minimum before structural relief, assuming no construction delays. Until then, every HPAL plant in Sulawesi is priced at the mercy of a war zone 4,000 miles away.