LME nickel prices rose to a three-week high! The expected cooling of the Federal Reserve's interest rate hike is compounded by Indonesia's quota fog and AI infrastructure to catalyze nickel prices

The Zhitong Finance App learned that as the newly announced US CPI and PPI for June fell significantly below economists' agreed expectations, financial market traders' aggressive expectations for the Fed's interest rate hike have weakened significantly. Coupled with uncertainty about Indonesia's commodity quota policy and the ongoing AI data center construction process driving stronger demand for nickel-containing UPS and battery energy storage systems, the London Metal Exchange (LME) nickel price rose to the highest level in three weeks.

The strongest upward driver for LME nickel prices is undoubtedly that the mining policy of Indonesia, the world's largest nickel producer, still has a large degree of uncertainty, casting a shadow over supply prospects.

After US producer prices (PPI data released on Wednesday) unexpectedly weakened, prompting traders to cut their bets on the Federal Reserve's tightening monetary policy, the price of this battery metal jumped 2.8% for a while, leading the LME metal trading price on the London Metal Exchange. Higher interest rate expectations usually significantly drive up the borrowing costs of manufacturers and the pace of procurement by downstream producers, thereby weakening demand for metals.

According to data released by the US Bureau of Labor Statistics on Wednesday, the June core producer price index (i.e. core PPI), which excludes food and energy, rose 4.7% from the same period last year, significantly lower than economists' unanimous expectations. The overall PPI index for June, which includes food and energy, unexpectedly fell 0.3% month-on-month. It unexpectedly recorded the first decline since August last year, which was significantly lower than economists' expectations of about 0% month-on-month; the overall PPI increase for the year-on-year benchmark narrowed significantly to 5.5%, which was far lower than the 6.2% agreed by economists.

Following the unexpected weakening of the CPI data released on Tuesday, PPI data once again confirmed the continued cooling trajectory of inflation, which was dominated by falling energy prices. Traders immediately drastically cut their expectations for the Federal Reserve to restart interest rate hikes in July. Currently, mainstream interest rate hikes in the interest rate futures market have declined sharply from July to December.

Investors are still actively evaluating the prospects for nickel mining quotas in Indonesia. The country accounts for more than 60% of the world's nickel supply. The miners were originally scheduled to apply for an increase in production quotas at the beginning of this month, but the government has yet to give any clear quota instructions on this.

The Southeast Asian country unexpectedly proposed an aggressive plan in May this year to unify freight operations for important commodities such as palm oil, coal, and ferroalloys through a state-owned holding entity, which will be managed by a sovereign wealth fund.

As of 12:53 p.m. Singapore time, nickel prices had risen 2.4% on the London Metal Exchange to $17,210 per tonne, the highest level since June 24. The price of aluminum rose 0.6% and the price of copper rose 0.5%. The price of lead rose 0.6% after three consecutive days of falling. People familiar with the matter revealed that the Toker Group delivered a record amount of lead to the London Metal Exchange warehouse for the second time on Wednesday, which is also the core logic that has led to the recent weakening of lead prices.

Interest rate hike expectations are declining, Indonesian policy uncertainty, and AI data center infrastructure construction is joining forces to ignite nickel prices

The June CPI and PPI jointly sent a signal that inflation has cooled marginally and that the urgency of raising interest rates has declined recently. According to the latest statement by New York Federal Reserve Chairman Williams, the third person in the Federal Reserve, he admits that current inflation is still “unquestionably too high” at about 4%, but judging that the supply and demand gap caused by tariff price shocks, housing inflation, energy costs, and artificial intelligence investment may gradually ease. Overall inflation is expected to fall to about 3.25% by the end of the year and return to 2% in 2028.

Wall Street financial giant Citi's latest forecast shows that the agency expects that as inflation continues to cool down, the Fed will not shift to an interest rate hike position, and is betting that the Fed will cut interest rates by 25 basis points each in October and December 2026. The third rate cut will occur in January 2027; previously, it was expected to cut interest rates continuously in September, October, and December 2026.

For industrial metals such as nickel, which have high inventory financing costs, are highly sensitive to the US dollar, and where short positions were previously concentrated, lower interest rate risk means that holding costs, dollar pressure, and forward discount rates improve simultaneously, so the price response is often greater than immediate changes in physical demand. In other words, this round of the market is first and foremost valuation repair and shortfall trading due to a decline in macroeconomic discount rates. It cannot simply be equated with global manufacturing demand entering a strong upward cycle.

What really gives nickel prices high flexibility is Indonesia's transformation of the global nickel market from a traditional commodity cycle to an approximate “single policy supply curve.” Indonesia currently contributes more than 60% of the world's nickel supply, and its 2026 mining work plan and budget quota is about 250 million to 270 million wet tons, which is significantly lower than the approved scale of about 379 million wet tons in 2025; at the same time, the annual ore demand from local smelters is expected to reach 340 million to 350 million wet tons.

The market originally anticipated that quotas might generally be raised in July. However, the Indonesian government has been slow to come up with clear arrangements, and there are even signs that it will not fully relax, causing traders to recapitulate the probability of ore shortages, reduced smelter production, and rising marginal costs. It should be noted that quotas are measured in wet tons, and differences in moisture content, inventory releases, Philippine imports, and subsequent additional approvals will all reduce the nominal production reduction. Therefore, the current increase is essentially a significant increase in Indonesia's policy uncertainty premium, rather than an absolute supply gap confirmed by inventory data.

AI data center construction forms a medium- to long-term demand narrative, but it is not the direct engine of this sharp rise in nickel prices. The IEA anticipates that global power generation to power data centers will increase from about 460 terawatt-hours in 2024 to more than 1,000 terawatt-hours in 2030, which will increase capital expenses for transmission and distribution, backup power, UPS, battery energy storage, cooling systems, and corrosion-resistant stainless steel equipment; nickel can be indirectly benefited from high-nickel battery cathodes, stainless steel, and some energy infrastructure.

The direct connection point between AI data centers and nickel demand is mainly reflected in battery cathode materials: data center UPS is responsible for providing short-term seamless backup power at the moment of power failure, BESS (data center battery energy storage system) undertakes longer backup power supply, AI load fluctuation buffering, peak and valley filling, and power grid adjustment; when the two use nickel-based lithium batteries such as NMC or NCA, nickel is used as the cathode, which can increase energy density, reduce battery footprint, and extend battery life in the same space. However, about 70% of the current demand for nickel still comes from stainless steel, and the battery side accounts for only about 10%. The most direct and strongest metal demand in AI data centers still mainly falls on copper, aluminum, indium, gallium, and rare earths, rather than nickel. As a result, the Indonesian government's quota discipline and the Federal Reserve's interest rate path are still viewed by traders as the core of mid-term nickel pricing.