A pioneering group of Indonesian nickel smelters with the world’s lowest production costs has been hit by a jump in the price of a key raw material, crimping their profitability just as the market is saddled with a glut.

The price of sulfur, a chemical used to produce acid, has more than tripled in price over the past year, driven by increased demand. That’s a headache for producers in Indonesia that use high-pressure acid leaching, known as HPAL. The breakthrough technique enables the smelters to extract metal from low-grade ore with chemicals, avoiding the need for blast furnaces.

Indonesia is home to the world’s largest nickel industry, with Chinese-led investment and a focus on cost-cutting innovation leading to a boom in production in recent years. The upsurge in supply of nickel metal—a commodity vital for auto batteries—has prompted a slump in prices, with benchmark refined futures in London hitting the lowest since 2020 earlier this year.

That slump has intensified competition among producers, posing a challenge for the industry, as well as for local governments, which have promoting mineral development as a way of boosting the Southeast Asia’s largest economy. Due to low emissions and costs, HPAL factories had been enjoying policy preferences, although the central government said this week it planned to punish producers at a key industrial park for alleged environment breaches.

“We may see a point later this year or early next year when HPAL factories see very thin margins,” said Luigi Fan, an analyst at SMM Information & Technology Co. Still, more HPAL producers are still likely to come online, partly because of strong prices for cobalt, a byproduct, according to Fan.

Existing producers include PT Trimegah Bangun Persada, known as Harita Nickel, and China’s Lygend Resources & Technology Co. on Obi Island. Projects due to start soon include Nickel Industries Ltd., which is backed by Chinese giant Tsingshan Holding Group Co., and a venture from PT Harum Energy in Weda Bay.

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The expansion of HPAL operations pushed Indonesia to become a global major importer of sulfur, which is traditionally used to make fertilizer. Middle Eastern countries and Canada are among the main producers, with global oil majors such as Saudi Arabian Oil Co., or Aramco, recovering sulfur from natural gas and oil processing.

It takes about 12 tons of sulfur to make 1 ton of mixed-hydroxide precipitate, or MHP, a form of nickel aimed at automakers. Given the surge in sulfur costs, HPAL factories need to pay over $2,500 more than last year for each ton of MHP, pressuring margins in an industry that is still growing, said Fan. At present, the average cost of producing 1 ton of MHP stands at about $11,000.

Production is expected to go on rising in Indonesia. Output of MHP nickel is set to surge to 619,000 tons in 2026, up more than a third from this year, according to Angela Durrant, principal analyst of base metals at CRU Group. 

“Despite these cost pressures coming from the rise in sulfur prices since mid-2024, Indonesian HPAL assets will remain in the first quartile of the cost curve,” Durrant said, referring to a measure of how cheaply plants can produce. “We do not expect higher sulfur prices to slow the pace of capacity additions.”

This story was originally featured on Fortune.com

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