Why Indonesia's nickel permit review is bearish for ASX-listed Nickel Industries

The Indonesian government has announced a comprehensive evaluation of permits for Rotary Kiln Electric Furnace (RKEF) smelters, which produce ferronickel and nickel pig iron – a key ingredient for stainless steel production.

Indonesia has become a nickel powerhouse in recent years, growing production from around 800,000 tonnes in 2020 to 2 million tonnes in 2023. In 2023, the country's nickel pig iron production accounted for over 90% of its nickel output and approximately 35% of global nickel supply.

However, the move to review permits seeks to reserve rapidly depleting ores for higher-value nickel products such as MHP (mixed hydroxide product) and nickel sulphate used in electric vehicles.

Which stock does this impact? Nickel Industries (ASX: NIC) is the largest ASX-listed nickel company, with a market cap of around $3.6 billion. Unfortunately, most of its earnings are derived from RKEF nickel production in Indonesia. In 2023, RKEF operations produced US$337.2 million in EBITDA or approximately 83.6% of Group earnings.

There is no indication yet of how this move will impact existing permits. But the uncertainty has sent Nickel Industries shares down around 7.4% on Wednesday.

The broader nickel market: Indonesia's nickel pig iron production is forecast to grow almost 30% by 2030, according to Morgan Stanley. These estimates may face downside risks depending on what happens to future production permits and whether any restrictions are rolled on to current permits.

Nickel pig iron trades at a 33% discount to the LME price, while products like nickel sulphate trade almost at parity.

"This development highlights the supply risks that are inherent in a commodity that is so geographically concentrated in one country," the analysts said, adding that "this could help to reduce the discount that NPI is trading at versus the LME price, and could also potentially slow down Indonesia’s nickel output growth in the short term, especially if currently operating plants are affected too."

"All else equal, this could tighten the supply-demand balance versus what we currently model."

While this may turn out to be a positive development for nickel prices, there are very few ASX-listed stocks remaining. In 2023, IGO reported a billion-dollar impairment on its Western Areas assets, Panoramic Resources fell into voluntary administration and Mincor was luckily acquired by Andrew Forrest's Wyloo Metals – though its shares were down 33% year-to-date before the takeover bid emerged. All we're left with is a panicky Nickel Industries as these reforms place a majority of its earnings at risk.