Unrest in New Caledonia has compounded a crisis in the nickel industry of the French overseas territory, casting uncertainty over mining group Glencore’s attempt to divest from a major smelter there.

The South Pacific archipelago was the world’s third largest supplier of nickel in 2023 and has the world’s fifth largest reserves of the metal but has faced increasing difficulties amid a glut in the global market.

While nickel prices rallied in the wake of the New Caledonia riots, which have halted mining operations, disruptions to supply coming out of the island was unlikely to significantly “shift the dial” in the near term, said Angela Durrant, principal at base metals analyst CRU.

“I would expect that we would have to wait to see the market surplus come down further to have a meaningful impact on longer term pricing,” said Durrant.

But, long term, New Caledonia’s woes could have an impact, said Benchmark Mineral Intelligence analyst William Talbot, particularly on ferronickel used in the stainless steel market. Only a minority of the island’s exports go to the battery industry, he said.

“The scale of New Caledonia’s nickel industry is such that a shutdown of all mines on the island for a significant period of time could materially affect the global balance, potentially rebalancing the market this year — a significant change from the large surplus the market experienced in 2023.”

Rioting, which has left six dead and paralyzed the island territory’s economy, is a reflection of longstanding tensions between the indigenous Kanak population and Paris. The worsening state of affairs triggered an unexpected visit to New Caledonia this week by French President Emmanuel Macron.

The riots, concentrated near the capital Noumea, were sparked by a law passed by the French parliament last week that would, among other things, grant voting rights to people who have lived in New Caledonia for more than 10 years.

The move angered Kanak leaders, who have long pushed for independence. On the other side of the island’s divide are loyalists, many of whom descend from colonists and wish to remain as part of France.

Visiting the capital Noumea on Thursday, Macron did not directly address the question of the nickel industry, but said, “A return to peace, to calm and to security is the priority of all priorities.”

In February, Glencore announced it would sell its 49% stake in the Koniambo Nickel SAS (KNS) operation. The company is 51% owned by the Kanak-governed Northern Province’s development arm, Societe Miniere du Sud Pacifique SA (SMSP).

Academic Matthias Kowasch said the joint venture, which dates back to 2006, is an important part of “rebalancing” efforts to bring development and revenue to the economically-deprived indigenous communities in the north following agreements to end violent conflicts that flared in the 1980s.

Current tensions made finding a new partner harder, said Kowasch, who studies the sector. “Of course when there’s unrest, it’s very difficult to find a new investor,” he said.

Durrant agreed. “The geopolitical risk has obviously now just gone through the roof and I think nobody will really have appetite for that,” she said.

Glencore spent $9 billion on Koniambo but the venture never made a profit. The site is now in a six-month transition period where the smelters are kept warm and the workforce is employed for six months. 

The suspension and sale set off speculation that a company from China, the biggest customer for the territory’s nickel, would fill Glencore’s role, something opposed by leaders in the South Province, a loyalist stronghold.

Such a scenario is also likely to be of concern to France, which is seeking to boost its influence in the region where Beijing is increasing its reach. “The French government has definitely been trying to find alternative investment,” said Frederic Grare, a senior research fellow at the Australian National University.

But its current priority, he said, was to save the industry, which is linked to 25% of private sector jobs and responsible for more than 90% of exports.

High labor, energy and transport costs have long plagued the sector, which includes two other major players. Doniambo, run by Societe le Nickel (SLN), has a smelter that produces ferronickel and also exports ore. Goro, run by consortium Prony Resources, makes nickel hydroxide. SLN, which monopolized the industry under colonial rule, is a subsidiary of Eramet, while Trafigura is an investor in Prony.

All three companies have struggled to make a profit and relied on bankrolling from France, said Talbot. The situation has worsened amid a glut in low-cost supply from Indonesia, where Chinese-backed companies, benefiting from inexpensive salaries and cheap energy, have boosted output. Indonesia supplied more than 50% of the global market last year, according to the International Energy Agency, followed by the Philippines with 11% and New Caledonia with 6%.

In a report published this month, the IEA said the downturn has put about 25 operating or potential mines around the world at risk, leading to a drop in production and threatening investment. This, said the IEA, creates risks for the future supply of the metal, which is traditionally used in stainless steel and as a key ingredient in lithium-ion batteries.

Jean-Louis Thydjepache, who works in community relations for KNS, said KNS has pitched to 70 potential buyers and expects their feedback in June. He said some South Korean companies have indicated possible interest in getting involved, but there had been “nothing tangible.” Glencore declined to comment on the sale. 

Thydjepache said he wants to see a clearer “road map” for the industry, including better access to the EU market.

“It’s up to Europe to come forward. We’re here, we’re ready. We have the raw material, it’s up to them to secure their supply via France — the Nickel Pact doesn’t do that,” he said.

The Nickel Pact is a 200 million euro rescue package proposed by France in November that would subsidize energy costs in exchange for reforms to the sector. The plan has met resistance from Kanak politicians and is yet to be signed.

The industry’s divisions that trace New Caledonia’s political fault lines make reaching a solution difficult, said Thydjepache.

‘We have a mixture of subjects that are colliding,” he said.

The limbo adds to uncertainly also clouding the future of SLN. Eramet, which is backed by the French state, had its credit rating downgraded in April by Fitch, which cited SLN’s woes and noted the French conglomerate had committed not to further fund its troubled subsidiary.

“We view it as unlikely that SLN will return to meaningful profitability over the next four years,” Fitch wrote.

Eramet spokesperson Fanny Mounier said the Doniambo nickel smelter was being run at a technical minimum to maintain its integrity while its mines — and the vast majority of those in New Caledonia — were shut down.

A joint statement from SLN’s seven unions said the situation was dire. “Without a resumption, in the next few days, of ore shipments to all our mining centers, the Doniambo furnaces, due to a lack of ore of sufficient quality and quantity, will be irreparably damaged and will stop operating for good,” it read.

Goro has activated a crisis unit to maintain its facilities, said Talbot from BMI. Prony Resources, which has signed an offtake agreement with U.S. company Tesla, did not respond to requests for comment.

Durrant of CRU, said mining operations will likely bounce back when the unrest settles and prices rise. However there is a longer-term question mark over New Caledonia’s ability to compete downstream due to its high costs.

“I still think fundamentally that mining can certainly continue in New Caledonia, it’s just whether the further processing can be made viable,” she said.