Persistent drought driven by the El Ni帽o weather pattern is taking a direct toll on Indonesia's nickel industry. Due to insufficient water supply, Nickel Industries has suspended the capacity ramp-up at its Excelsior Nickel Cobalt project on Sulawesi. During the period of water supply constraints, the project is expected to operate at only about 30% of its designed capacity, while the company's other facilities have not yet been impacted by the dry conditions.
Indonesia accounts for roughly 60% of global nickel supply. The drought has now expanded from impacting a single project to affecting the broader nickel production cluster. The Indonesia Morowali Industrial Park (IMIP) has previously warned that if new water sources cannot be secured, overall output at the park could decline by 30% to 40%.
Meanwhile, reduced output at smelters is already putting downward pressure on nickel ore demand in regions such as Sulawesi, Maluku, and Papua. Rainfall around IMIP has plummeted, prompting smelters to cut back directly due to water shortages, which have become the most immediate limiting factor. Nickel Industries reported that its Hengjaya mine, located near IMIP, received less than 4 millimeters of rainfall in August, compared to a historical average of 222 millimeters for the same period.
El Ni帽o is making Indonesia's dry season more severe and extending the duration of low-rainfall weather. Beyond hampering nickel production, the drought is also intensifying seasonal forest fires and triggering haze across multiple parts of Southeast Asia. In the Bahodopi area of Morowali Regency, Central Sulawesi, where IMIP is located, river water levels are also declining. Local river flow is critical for the operation of high-pressure acid leach (HPAL) nickel smelters, coking plants, and coal-fired power plants, and the decreasing water supply has begun to constrain industrial activity.
Dedy Kurniawan, head of media relations at IMIP, stated on September 2 that the drier and more prolonged weather associated with El Ni帽o has reduced potential local rainfall and affected river flow. Kurniawan noted that across the entirety of IMIP's industrial operations, El Ni帽o has slowed production speed, ultimately leading to an output drop of 30% to 40%. However, IMIP management believes the impact remains within controllable bounds and does not anticipate a full shutdown of smelters or any layoffs. Kurniawan added that climate-related disruptions remain manageable and should not have a greater impact on employee welfare.
In addition to water supply issues, some companies within IMIP are also under pressure from high sulfur prices. Sulfur is a key input for the HPAL process, and HPAL projects, including the Excelsior Nickel Cobalt facility, rely on related reagents.
According to a September 12 report by Bloombergtechnoz, a business and financial media outlet covering Indonesia, the Indonesia Nickel Miners Association (APNI) has confirmed that reduced smelter output is leading to lower uptake of upstream nickel ore. In addition to water shortages, internal governance issues within the industry are also affecting demand. Djoko Widajatno, chairman of the APNI advisory board, said that El Ni帽o has lowered nickel ore absorption because smelters are struggling to secure the water needed for their processes, leading to a significant decline in output, compounded by internal governance problems. APNI is currently unable to estimate the exact scale of the decline in nickel ore demand but believes the impact has systematically spread to major mining centers in eastern Indonesia. Widajatno stated that the decline is not linear but has had a systemic effect on Sulawesi, Maluku, and Papua.
Similar pressures are emerging in Luwu Regency, South Sulawesi. Declining river flows have strained hydroelectric power supply, forcing PT Bumi Mineral Sulawesi (BMS) to reduce production at its No. 1 rotary kiln electric furnace (RKEF) nickel smelter and plan temporary layoffs for approximately 570 employees.
Research from Shanghai Metals Market (SMM) indicates that restricted hydropower supply in the Luwu area has disrupted operations at some local nickel smelters. SMM noted that disturbances to both water and electricity supply at certain local smelters have led to output cuts. The impact has not yet spread to the Weda Bay industrial zone in Central Halmahera. SMM also assesses that drought conditions linked to El Ni帽o around the IMIP park may continue to cause water shortages in the area, as rainfall has been reported to be extremely low over the past month.
The drought coincides with shrinking ore supply quotas in Indonesia. The Ministry of Energy and Mineral Resources (ESDM) has set a nickel ore production quota target of 260 million to 270 million tons in the 2026 Work Plan and Budget (RKAB), down from a target of 379 million tons in the previous year. Indonesia's nickel industry is currently facing pressure from both ends: upstream ore production quotas are contracting, while smelters are cutting output due to water shortages, power supply issues, and rising raw material costs. The decline in smelter output further weakens ore demand, transmitting the impact from the processing stage back to the mines.