The world's biggest nickel hub is cutting output because it has run out of water

On September 22, 2026 a spokesperson for PT Indonesia Morowali Industrial Park (IMIP) on Sulawesi told Reuters that a water shortage linked to El Niño had reduced nickel pig iron (NPI) production at some of its smelters, that tenants had been told over the preceding weekend, and that operations had not stopped and no workers had been cut so far. IMIP, majority-owned by China’s Tsingshan, houses more than 50 tenants making nickel products for stainless steel and battery materials, with about 4.2 million tonnes a year of NPI capacity according to Bloomberg. Water is used to cool and protect smelting equipment.

Shanghai Metals Market (SMM) reported that IMIP’s RKEF smelters cut operating rates by around 30–40% from September 22. It estimated a two-week disruption removes 50,000–70,000 tonnes of NPI (5,500–7,700 tonnes of contained nickel) and a longer one more than 100,000 tonnes. Bloomberg reported on September 15 that another nickel producer had halted a plant ramp-up because of the same water shortage.

The cut lands on a supply base already being squeezed by policy: Indonesia set its 2026 nickel ore mining quota at about 260–270 million wet tonnes, against about 379 million in 2025, and imported more than 11 million tonnes of Philippine ore in the first seven months of 2026 to fill the gap. NOAA’s Climate Prediction Center has given better than 90% odds of a very strong El Niño through the 2026–27 northern winter.

Opportunity

The obvious reading is that this is a two-week weather blip in an oversupplied market. SMM makes that case itself: Chinese port NPI inventories rose 52.5% between September 3 and 17 to 53,800 tonnes of contained nickel, and China’s October 300-series stainless output is expected to fall by more than 100,000 tonnes from September, so the demand cut roughly matches the supply cut for now.

What that reading leaves out is duration. The cause is not a breakdown that gets fixed but a drought produced by what forecasters expect to be one of the strongest El Niño events on record, and Indonesia’s dry season lengthens in El Niño years. Morowali is also not one smelter among many: Indonesia supplies more than half the world’s nickel, much of it from a few industrial parks, so a water constraint there is a constraint on the marginal tonne for the whole market. The newer high-pressure acid leach plants that make battery-grade nickel use far more water than RKEF lines — 200–400 cubic metres per tonne of nickel, according to Skillings.

Hypothesis: the nickel market has spent two years pricing Indonesian supply as elastic and effectively unlimited; the combination of a roughly 30% ore-quota cut and a physical water limit at the largest hub during a multi-month El Niño makes Indonesian supply less elastic than any time since the ore export ban, and producers outside Indonesia — whose costs are unaffected — are the ones that gain if the cut lasts beyond the inventory buffer.

How it could play out

El Niño keeps Sulawesi dry into late 2026 → IMIP cuts last beyond two weeks and spread to water-hungry HPAL plants → the port-inventory buffer SMM identified is drawn down → NPI and then LME nickel prices lift off their lows while Indonesia is still enforcing lower ore quotas → margins widen for ferronickel and nickel producers outside Indonesia and for stainless makers competing with Indonesian stainless output → equities priced for the 2024–2026 glut are re-rated.

The failure path: rains arrive on schedule, IMIP secures alternative water, and weak Chinese stainless demand absorbs the lost tonnes, so the episode passes without a price response.

Questions worth asking

• How long do the cuts last? SMM says anything beyond two weeks exhausts the buffer, so the date IMIP restores full operating rates decides whether this is a blip or a supply shock.
• Which Indonesian nickel operations depend on river water, lakes or hydropower rather than desalination, and are any of the HPAL battery-nickel plants already restricted?
• Does Indonesia respond by loosening ore quotas to protect smelter jobs, or by tightening them further to support price?
• Which producers outside Indonesia have idle or curtailed capacity that restarts at a modestly higher nickel price?
• Who loses: which battery-material and stainless producers are contracted to buy Indonesian intermediate products with no alternative source?

Where to look

• Nickel Industries (NIC.AX) — ASX-listed operator of RKEF lines inside IMIP, directly exposed on volume but levered to any price recovery
• PT Vale Indonesia (INCO.JK) — Sulawesi nickel producer whose smelter runs on hydropower, so it is exposed to the same drought from a different direction
• Vale (VALE) — parent of PT Vale Indonesia and owner of nickel operations in Canada and Brazil that do not face Indonesian water limits
• South32 (S32.AX) — Cerro Matoso ferronickel in Colombia, a non-Indonesian producer that gains from higher prices
• Eramet (ERA.PA) — New Caledonia ferronickel plus ore sales from Weda Bay in Indonesia
• Sumitomo Metal Mining (5713.T) — refined nickel producer with its own feed sources
• Outokumpu (OUT1V.HE) — European stainless maker that competes with low-cost Indonesian stainless

Thesis check

The chain is short and physical: no water, no smelting, and the place without water is where the marginal tonne of the world’s nickel is made, during an El Niño forecast to run into 2027 and on top of an ore-quota cut of about 30%.

The weak link is the size of the buffer. SMM’s own figures show port inventories up by half in two weeks and Chinese stainless demand falling by roughly as much as the supply cut, so a short disruption can pass with no lasting effect on price. The thesis needs the cuts at IMIP to last weeks, not days.

Sources

Reuters via Kitco, Sep 22 2026 · Mining Weekly (Bloomberg), Sep 22 2026 · SMM, Sep 22 2026 · SMM analysis, Sep 2026 · Bloomberg, Sep 15 2026 · Skillings, Sep 2026 · NOAA CPC ENSO diagnostic discussion, Sep 2026