Nickel's February Rollercoaster: Navigating the Supply Shock and Macro Backdrop

February's price action in nickel was a classic tug-of-war between two powerful, opposing forces. On one side, a fundamental supply shock promised to tighten the market. On the other, a sudden macroeconomic shift triggered a violent risk-off reaction. The result was a volatile month defined by a sharp rally, a dramatic reversal, and a final stabilization that left the market's direction uncertain.

The rally began with a clear catalyst. In early February, the Indonesian government announced it would cut its nickel ore production quota for 2026 to 270 million tonnes, a reduction of over 100 million tonnes from the previous year. This move, followed by aggressive pullbacks from major miners like PT Weda Bay Nickel, signaled a credible supply constraint. Prices responded, climbing to a monthly high of $17,959 per tonne by late February. The rally was also supported by speculative flows betting on nickel's role in electrification and datacenters, treating it as a proxy for broader tech optimism.

That momentum was shattered on February 2nd. The SHFE nickel contract fell 11% intraday to hit limit-down, while the LME contract dropped over 7%. The trigger was a shift in macro sentiment. The nomination of a hawkish Fed chair candidate, Kevin Warsh, abruptly changed expectations for U.S. monetary policy. This boosted the dollar and sparked a wave of speculative fund liquidation. As one report noted, the previous rally had been fueled by speculative funds, leaving positions vulnerable. When negative signals emerged, concentrated selling and panic liquidation accelerated the decline, pushing prices down to around $16,800.

By late February, the market found a new equilibrium. Prices stabilized around $17,730 per tonne, holding near the monthly high despite the violent reversal. This level reflects the ongoing tug-of-war. The supply shock from Indonesia remains a structural floor, but it is now being weighed against the disruptive headwinds of a hawkish Fed and high industrial inventories. The key question for the coming weeks is whether the fundamental supply constraint can reassert itself over these macro-driven risk-off flows. For now, the market is caught between a powerful supply-driven rally and a disruptive macro shock.

The Structural Supply Shock: Indonesia's Policy Regime Shift

The February price rally was not just a fleeting sentiment trade. It was the market's first, tentative reaction to a fundamental and durable shift in the global nickel supply regime. Indonesia's actions are creating a new structural reality, moving the market from a state of uncoordinated overproduction toward managed scarcity.

The core of this shift is a formalized supply agreement between the world's two largest producers. On February 12th, Indonesia and the Philippines' leading industry associations signed the IndoPhil Nickel Corridor, establishing shared standards and policy coordination. Together, these nations control roughly 75% of global output. This is not a minor policy tweak; it is a regime change in how the market operates, akin to OPEC but with far greater concentration. The agreement formalizes what was previously an implicit understanding: that uncoordinated overproduction had destroyed the economics both governments depend on, and managed supply is now the rational correction.

This coordination is backed by concrete, enforceable quotas. Indonesia's Ministry of Energy and Mineral Resources has set the 2026 RKAB quota at approximately 260 million metric tonnes, a cut of nearly one-third from the 379 million tonnes approved in 2025. This mandatory annual plan is the regulatory engine for the new regime. The policy is deliberate, signaling a move from chaos to control. As industry leaders describe it, Indonesia is actively managing a price corridor, with a $20,000 near-term target and $22,000 longer-term ceiling. The goal is to lift prices high enough to ensure government revenue and profitable growth, but not so high that it triggers a flood of new, competing capacity that could undermine the new order.

This supply shock is being amplified by a simultaneous reacceleration in demand. The battery supply chain, which had been destocking through 2025, has now completed that cycle. Buyers are actively purchasing again, while underlying EV demand has grown 20% annually for four consecutive years. The result is a powerful setup: a structural supply constraint meeting a demand reacceleration that most analysts have not yet fully priced. This dynamic is more potent than a supply shock alone.

The durability of this new regime is key. The OPEC analogy is instructive, but the concentration is more extreme in nickel. With 75-80% of supply now under coordinated management, the market's trajectory is being steered by a small group of producers. For now, the agreement is industry-led, but it signals a direction of travel that state policy has been reinforcing. The market's task is to determine whether this managed scarcity can hold, or if the powerful incentives to break the ceiling will eventually reassert themselves. For investors, the filter is clear: the new regime favors producers with the lowest costs, a sulfide processing route, and a jurisdiction outside Indonesia, all with a fully funded execution plan. The volatility of February was the market adjusting to this new structural reality.

Investment Implications: Separating Durable Plays from Sentiment Trades

The structural supply shock and policy regime shift create a clear filter for identifying durable investment plays. In this new managed scarcity environment, the investment thesis is no longer about betting on a single price spike. It's about backing projects with the lowest costs, the most favorable jurisdictions, and the clearest path to production. The market's volatility is a feature, not a bug, as it separates those with a real asset from those chasing a narrative.

The core filter is straightforward. Projects must be in the first-quartile for All-In Sustaining Cost (AISC), process nickel via a sulfide route, and be located outside Indonesia. This combination ensures they can operate profitably within the new managed price corridor. The policy shift effectively creates a structural floor for prices, but near-term volatility will remain high as macro sentiment and inventory flows interact with the new supply ceiling. In this context, execution risk is the primary variable. Companies with fully funded execution timelines and strong technical progress are de-risking their path to production.

Canada Nickel's Crawford project exemplifies this de-risking. The company has advanced its detailed engineering phase, recently appointing a lead consultant to move the project forward. This technical progress, combined with its focus on a low-risk, well-established jurisdiction like Ontario, aligns with the filter. Similarly, Lifezone Metals is making tangible strides toward its 2026 Final Investment Decision for the Kabanga project in Tanzania. The company has successfully raised $75 million in capital to fund its pre-FID activities, demonstrating financial discipline and a commitment to execution. Its progress on site preparation, infrastructure coordination, and environmental approvals is a direct effort to de-risk the project ahead of the critical investment decision.

The bottom line is that the February volatility was a market-wide stress test. It highlighted the vulnerability of sentiment trades and speculative longs. For investors, the durable plays are those that can withstand the turbulence. They are the projects that meet the stringent filter of low cost, favorable jurisdiction, and a fully funded, advancing execution plan. These are the assets positioned to capture value as the new supply regime takes hold.

Catalysts and Risks: What to Watch in the Coming Months

The market's stabilization around $17,730 per tonne is a temporary truce. The coming months will be defined by a series of forward-looking tests that will determine whether the supply-driven rally sustains or falters. The key is monitoring the interplay between Indonesia's policy enforcement, demand reacceleration, and the ever-present risk of a macro reversal.

First, the primary catalyst is Indonesia's actual 2026 quota enforcement. The announced cut to 270 million tonnes is a powerful signal, but the market will watch for tangible proof that this is a managed ceiling, not a negotiation target. The risk is that policy ambiguity or smuggling could undermine the supply regime. Indonesia has signaled it will crack down on illegal mining activities, but the sheer scale of the reduction-over 100 million tonnes from 2025-creates a powerful incentive to break the rules. Any sign of relaxed enforcement or a flood of unreported ore would immediately challenge the structural floor the market is pricing in.

Second, sustained demand reacceleration is needed to absorb the constrained supply. The rally has been supported by steady demand from EV battery production and stainless steel manufacturing. However, for prices to hold above the $17,000-$18,000 range, this demand must not only continue but accelerate. The battery supply chain has completed its destocking cycle, and buyers are now actively purchasing again. The critical test is whether underlying EV demand growth-up 20% annually for four years-can translate into consistent, large-scale procurement that matches the new supply limits. Without this, the market risks a stalemate where tight supply meets tepid demand.

The primary risk, however, remains a sharp reversal in macro sentiment. The February crash demonstrated how vulnerable the rally was to a hawkish pivot, as the nomination of a new Fed chair candidate triggered a violent risk-off reaction. A dovish shift or a global growth scare could temporarily crush prices despite tight fundamentals. The market's recent sensitivity to such signals means that even a credible supply shock can be overshadowed by a sudden change in the dollar or risk appetite. This dynamic creates a persistent headwind for any sustained rally.

In summary, the setup is clear. The supply regime shift provides a durable floor, but its strength is untested. The market must now see Indonesia follow through on its quotas, demand reaccelerate, and navigate a volatile macro backdrop. The coming months will separate those who see a managed scarcity from those who see a temporary spike.