Huachuang Securities: Supply Cost Constraints Resonating, Nickel Price Bottom Support Emerging

Huachuang Securities has released a research report stating that global nickel resources are abundant and highly concentrated. Assuming that Indonesia imports 20 million tons from the Philippines in 2026, and with Indonesia's quota of 260-270 million tons, it is expected that there will still be a gap of over 30 million tons in Indonesia's static nickel ore balance. There is a marked differentiation in industry demand, with traditional demand remaining weak and stable, while solid-state batteries open up future opportunities. The firm anticipates that sulfur prices will struggle to return to historical lows, causing a reconstruction of costs in hydrometallurgical nickel, but with sulfur prices gradually retreating, the profitability of hydrometallurgical enterprises is expected to recover. The main points from Huachuang Securities are as follows: Indonesia Dominates Global Nickel Supply, with Resource Nationalism Suppressing Incremental Release Global nickel resources are abundant and highly concentrated. According to USGS data, the global nickel reserves will reach 140 million tons by 2025, with Indonesia occupying a core position in global nickel ore production due to its rich laterite nickel ore resources, expected to account for 67% of global nickel ore production in 2025, followed by the Philippines (7%). Since 2025, under resource nationalism, Indonesia has strengthened nickel resource control through adjustments in HMA pricing and PNBP tax systems. The nickel mining quota in Indonesia was reduced from 379 million tons to 260-270 million tons in 2026, a decrease of nearly 30%. The new HPM pricing formula has also raised the ore coefficient, with cobalt, iron, and chromium, as associated metals, being included in the pricing for the first time, thereby reconstructing the nickel ore pricing system. Currently, the Philippines is the largest exporter of nickel ore globally and has become a crucial supplement to Indonesia's nickel smelting raw materials under the reduced nickel ore quotas in Indonesia, but the actual incremental supply is limited. Assuming Indonesia imports 20 million tons from the Philippines in 2026, within the quota of 260-270 million tons, it is expected that there will still be a gap of over 30 million tons in Indonesia's static nickel ore balance. Indonesia Plays a Core Role in Nickel Smelting Globally, While Supply of Multiple Smelting Products Weakens Marginally Under Raw Material Disturbances Nickel pig iron is the main primary nickel product, and Indonesia is currently the largest nickel pig iron producer. Marginally, Indonesia's nickel pig iron supply has shown a contraction trend; nickel sulfate is an important incremental source of primary nickel, with global nickel sulfate supply concentrated in China. Currently, there is overcapacity, but in 2026, output pace will be constrained by raw materials imported from Indonesia, leading to a tightening supply situation. MHP supply is characterized by high concentration, with core supplier Indonesia's production expected to decline in 2026. China is the core consumer and importer of global MHP, showing a high degree of external reliance, and the raw material sector is tightening simultaneously. In terms of high-grade nickel, Indonesia is the largest producer of ferronickel globally. Since 2026, driven by Indonesia's nickel policies and rising raw material costs, the supply release pace in the second quarter has marginally weakened, with a slight recovery in July. In terms of refined nickel, supply is mainly dominated by China and Indonesia, with the operation rates constrained by profits and imports. Significant Differentiation in Demand: Traditional Demand is Weak and Stable, While Solid-State Batteries Open Up Future Opportunities Nickel downstream demand is distributed across stainless steel (64.4%), alloys (12%), batteries (11.9%), and electroplating (4%), with distinct structural differentiation. Stainless steel remains the fundamental demand for nickel. By 2026, domestic stainless steel capacity is expected to continue recovering, and Indonesian capacity will warm up as quotas are implemented, providing underlying support during the traditional peak season in the third quarter; structural increments in high-temperature alloys and other high-end manufacturing sectors, while traditional demand such as electroplating remains stable. In the short term, lithium iron phosphate in power batteries has squeezed the market share of ternary materials, but high-end long-range passenger vehicles and energy storage still require high nickel ternary materials. According to IEA data, global sales of new energy vehicles are expected to reach 23 million units by 2026. In the long term, the number of electric vehicles is expected to increase sixfold by 2035. Solid-state batteries will gradually start mass production post-2027, which will further drive the demand for ultra-high nickel materials and open up long-term growth space for nickel. According to earlier data from Steel Union, global primary nickel supply is expected at 3.79 million tons in 2025, with a market surplus of 420,000 tons. If we assume that Indonesia's actual nickel ore supply is 250 million tons and the Philippines supplements with 25 million tons of nickel ore, it is expected that global primary nickel supply will shrink to 3.6 million tons in 2026, with the surplus narrowing to 50,000 tons, significantly easing supply pressure. Rising Sulfur Prices Boost Hydrometallurgical Costs and Constrain Supply Release, Temporarily Firming Nickel Price Bottom; If Sulfur Prices Fall Subsequently, Hydrometallurgical Enterprise Profitability is Expected to Recover Global sulfur is primarily derived from oil and gas by-products, with core output regions concentrated in the Middle East, where capacity expansion is limited. Indonesia's hydrometallurgical refining park is highly reliant on sulfur imports from Middle Eastern sources. Recent geopolitical conflicts in the Middle East have disrupted global sulfur circulation, with Indonesian CFR sulfur prices rising sharply, reducing the willingness to start or restart HPAL hydrometallurgical projects and further raising hydrometallurgical costs, thereby constraining the release of incremental global nickel intermediate products. Currently, sulfur has replaced nickel ore as the largest cost expenditure in hydrometallurgical MHP production, leading to significant production losses in the HPAL hydrometallurgical route. RKEF pyro-metallurgical nickel processes consume less sulfur and are only slightly affected by price increases in ore, energy, and auxiliary materials, allowing the industry to maintain thin profit margins. High-grade nickel processes exhibit low sulfur demand and strong cost resilience. The combination of rising sulfur prices and the new pricing benchmark adjustments for Indonesian ores is elevating nickel procurement costs, and the increased production costs are providing a bottom support for nickel prices. It is expected that sulfur prices will struggle to fall back to historical low levels, leading to a reconstruction of hydrometallurgical nickel costs, but as sulfur prices gradually retreat, hydrometallurgical enterprise profitability is expected to recover. At the enterprise level within the industry chain, attention should be focused on leading core players in the sector: 1) LYGEND RESOURCE: A global leader in nickel trading and integrated nickel production through both hydrometallurgical and pyro-metallurgical processes in Indonesia; 2) Zhejiang Huayou Cobalt: Diversified layout in nickel, cobalt, and lithium industries, with significant advantages in high nickel products; 3) GEM Co., Ltd.: Dual supply of recycled and primary nickel, a key manufacturer of ternary precursors globally; 4) CNGR Advanced Material: A global precursor leader, securing Indonesian pyro-metallurgical nickel raw materials while simultaneously diversifying into phosphorus and lithium resources and steadily increasing diverse materials output. Risk Warning: Changes in Indonesian industrial policy; significant fluctuations in nickel prices; downstream demand falling short of expectations and technological path changes; substantial increases in prices of key auxiliary materials such as sulfur.