TOKYO, April 8 (Reuters) - The global nickel market is expected to see a larger surplus this year due to continued production expansion in Indonesia, Japan's largest nickel smelter Sumitomo Metal Mining ( STMNF ) said on Tuesday.

The surplus is projected at 215,000 metric tons in 2025, compared to 173,000 tons last year as Indonesia's output of low-grade nickel pig iron is expected to rise 5.7% to 1.62 million tons, SMM said during its half-year market outlook presentation.

Global nickel demand is forecast to grow 3.2% year-on-year to 3.42 million tons this year, while supply is likely to increase 4.3% to 3.64 million tons, SMM said.

The forecast does not factor in potential impact from U.S. tariffs as it is difficult to predict, SMM Executive Officer Yusuke Niwa said.

"But there is a risk that global demand could weaken if the U.S. economy slows, affecting demand for nickel-based special alloys used in aircraft engines," Niwa said.

Nickel is primarily used in stainless steel, but is also a key component in lithium-ion batteries that power electric vehicles (EVs), where demand was expected to grow.

However, growth is slowing as lithium-iron-phosphate (LFP) batteries, which are cheaper than nickel-rich alternatives, gained market share, Niwa said.

LFP batteries have become the rising stars of the industry, accounting for two-thirds of all EV sales in China in 2023, according to the International Energy Agency.

These batteries rely solely on lithium as a critical metal, requiring neither nickel or cobalt, making them more cost-effective and environmentally friendly than other battery chemistries.

SMM, which supplies cathode materials for the Panasonic ( PCRFF ) lithium-ion batteries used in Tesla EVs, predicted that global nickel demand for batteries will rise to around 480,000 tons in 2025, up only 10,000 tons from 2024. (Reporting by Yuka Obayashi; Editing by Varun H K)