Reports indicate Indonesia, the world's dominant nickel producer, is weighing a drastic reduction in its RKAB (production quota) for 2026, potentially cutting approved output to 250 million tons. This 34% drop aims to tighten supply and support flagging prices. This article analyzes the friction between this policy goal and the reality of rising smelter demand, declining ore grades, and the immediate bullish reaction in SHFE and LME markets. We explore whether this supply shock is sustainable or merely a signal to the market.
The global nickel market was jolted this week by reports that the Indonesian government is considering a significant policy shift designed to floor plummeting nickel prices. Sources within the Indonesia Nickel Miners Association (APNI) suggest a plan to cap the 2026 Work Plan and Budget (RKAB) approval at approximately 250 million tons—a staggering 34% reduction compared to 2025 levels. If enacted, this move would fundamentally alter the supply-demand balance that has kept nickel in a surplus for the past year.
The immediate market reaction was decisive. Benchmark prices on the Shanghai Futures Exchange (SHFE) broke through the 123,000 yuan/mt level, driven by speculative bulls betting on a supply contraction. This sentiment spilled over into the physical market, where immediate production costs for nickel sulphate producers rebounded, emboldening smelters to raise offers despite sluggish downstream demand from the precursor sector.
However, a deeper analysis reveals a complex tension between policy intent and operational reality. The primary driver for this potential cap is the preservation of reserves. Data indicates that Indonesia’s average saprolite ore grade has deteriorated from 1.66% to 1.57% in just one year—a distinct warning sign of high-grading. Lower grades require significantly higher volumes of ore to produce the same tonnage of metal, particularly for the burgeoning High Pressure Acid Leach (HPAL) sector producing Mixed Hydroxide Precipitate (MHP) for batteries.
This creates a paradox: the government wants to limit extraction to support prices and extend mine life, yet the domestic processing industry is expanding. Our forecasts indicate Indonesia could add over 200,000 tons of nickel metal capacity in 2026. Restricting ore supply to 250 million tons while smelter demand pushes toward 280 million tons (or higher, factoring in lower grades) would force a fierce domestic scramble for feedstock, potentially idling newer, less efficient RKEF lines.
Furthermore, the "annual" nature of the RKAB allows for mid-year revisions. Historically, strict quotas have often been relaxed when economic pressure on the processing sector becomes too acute. While the headline number is bullish, the practical enforcement remains the critical variable. The market is currently pricing in the intent to tighten, but the ability to maintain such a tight cap against rising industrial thirst remains unproven.
Sentiment: Bullish (Short-Term) / Neutral (Medium-Term)
Reasoning: The immediate threat of a 34% supply cut will continue to support a risk premium in nickel futures and spot ore prices in the short term. However, the medium-term outlook is neutral; the disconnect between a hard ore cap and expanding smelter capacity suggests that quotas may eventually be revised upward to prevent stalling the downstream industry. Expect volatility as policy details are finalized.