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Indonesia plays hardball with its nickel

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A worker processes nickel, Sulawesi, Indonesia, 8 January 2014 (Photo: Reuters/Yusuf Ahmad).

In Brief

Nickel has become increasingly important beyond its traditional use in stainless steel manufacturing as the base metal is a key component in lithium-ion batteries, including the kind used in electric vehicles (EVs). As the world’s big automakers begin scaling up the production of EVs, nickel and the batteries it goes into are expected to be in high demand. With the largest reserves of nickel deposits in the world, Indonesia is no longer content to simply export its raw ore.


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Indonesia wants to take a central position in the value-added links in the EV supply chain — from mining the ore, to refining it, to manufacturing the batteries and eventually to building the cars. And because Indonesia controls the raw input, it turns out it has a lot of leverage. Ten years ago, Indonesian nickel exports began accelerating in earnest, reaching 64.8 million tons in 2013. The following year, the outgoing Susilo Bambang Yudhoyono administration banned exports of unprocessed ore, with the explicit goal of expanding the downstream industry by forcing companies to refine the ore in local smelters.

Starving global markets of raw nickel turned out to be an effective strategy. From 2014 to 2020, over US$6.5 billion in foreign direct investment has flowed into the construction of nickel smelters and other downstream processing activities in Morowali Regency. Morowali is located in the nickel-rich central part of Sulawesi and is the site of an industrial park specifically earmarked for refining activities. In Morowali, GDP more than tripled in just six years from Rp 6.9 trillion (US$480 million) in 2013 to Rp 24.3 trillion (US$1.7 billion) in 2019, almost all of it driven by investment in downstream nickel processing.

Building up domestic refinery capacity in this manner had the effect the government hoped for. In 2013, the domestic market absorbed only 52,000 tons of raw nickel. In 2019, the domestic market absorbed 26.5 million tons, nearly half of the 60.9 million tons produced in total that year. Moreover, locally-processed raw ore increases Indonesia’s viability as a potential manufacturing hub for the real prize: the lithium-ion batteries that power electric vehicles.

While there has been a lot of media coverage of Indonesian President Joko ‘Jokowi’ Widodo and Coordinating Minister of Maritime and Investment Affairs Luhut Binsar Pandjaitan’s attempts to woo Tesla, other battery and auto manufacturing companies have already quietly gone about signing Memorandum of Understandings (MoU) or building factories.

In 2019, Toyota committed to investing US$2 billion in the Indonesian auto manufacturing sector, including for the production of electric vehicles. Late in 2020, South Korea’s LG Group signed an MoU for battery production, reportedly valued at US$9.8 billion. CATL, a major Chinese battery maker, has inked a US$5.1 billion deal to open a plant in Indonesia, while a Hyundai car factory valued at around US$1.5 billion is already under construction in Cikarang on the outskirts of Jakarta. The factory is expected to produce electric vehicles in the future.

Given that Jokowi’s vision for economic development embraces foreign investment that boosts value-added manufacturing, playing hardball on nickel seems to be paying off. It also checks the economic nationalism box, as the state acquired a 20 per cent equity stake in nickel miner PT Vale last year. Things have been going so well that in 2020 the government doubled down, squeezing nickel exports again in an attempt to accelerate the pace of investment in downstream industries.

Of course, it’s not an unqualified success. Nickel mining can be a dirty business, especially the smelting process. Ian Morse reported on a proposal floated last year to allow some smelters to dump their waste into the ocean. Sustainable nickel mining, like clean coal, is something of an oxymoron. A report by Channel News Asia cautioned that for Tesla a ‘move up the production chain in Indonesia, closer to the mines themselves’ could create reputational risk.

Lax regulatory oversight and weak environmental protections might turn off some of the big EV makers in the long-run. Moreover, the recently passed Omnibus bill on job creation which weakens environmental protections in order to encourage investment will likely exacerbate these risks.

But at the moment, it seems like a clear win for policymakers. Indonesia leveraged its control over the raw nickel supply to make itself an indispensable player in the entire value-added EV supply chain from the point of extraction to when the batteries are made. Although batteries and EVs are not yet rolling off production lines in mass quantities, Indonesia has positioned itself favourably to capitalise on expected growth in demand for EVs and lithium-ion batteries.

For better or worse, this is the kind of economic growth Jokowi and his administration want. Whether the gains will ultimately be equitably shared and whether the cost to the environment can be managed remains to be seen.

James Guild is an Adjunct Fellow at the S Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

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