Indonesia’s Nickel Conundrum

Under outgoing President Joko “Jokowi” Widodo, who took office 2014, Indonesia has pursued with single-minded focus the goal of positioning the country at the forefront of the world’s electric vehicle (EV) revolution. Last November, Jokowi announced his plans to build “an integrated EV ecosystem,” with the aim of producing 600,000 electric cars per year by the end of the decade. Another senior official has expressed hopes that Indonesia can become “one of the top three countries in the world producing EV batteries as well as electric cars” by 2027.

To do so, the Jokowi administration has leveraged its primary advantage: its abundant reserves of nickel, a mineral that is crucial in the manufacture of the large lithium-ion batteries that power EVs. Over the past few years, it has banned the export of unprocessed nickel ore in order to encourage foreign companies to invest in domestic processing facilities and has also introduced a subsidy scheme for EV purchases in order to build a market for electric cars and entice top EV manufacturers to set up factories in Indonesia.

Where nickel is concerned, the results have been impressive. Indonesia is now the world’s top producer of nickel, with a whopping 55 percent share of the global market. This success has relied on a flood of Chinese investment into the nickel mining and processing sector.

In some ways this is unsurprising; prior to the nickel export ban, most Indonesian nickel was being exported to China and processed there. When the Indonesian government announced the ban, which came into full effect in 2020, Chinese firms began rapidly building smelters in Indonesia in order to comply with the new rules. According to Benchmark Mineral Intelligence, an estimated 80-82 percent of Indonesian battery-grade nickel output in 2024 is expected to come from majority Chinese-owned producers.

However, as Prabowo Subianto prepares to succeed Jokowi as president next month, it is becoming increasingly apparent that Jakarta may soon become a victim of its own success. The first problem is that the Chinese-funded nickel mining boom has led to a crash in global nickel prices. As David Uren of the Australian Strategic Policy Institute noted in February, “The surge in Indonesia’s exports of processed nickel and stainless steel has sent nickel prices plummeting from $50,000 a ton in March 2022 to $16,100 now.”

This has forced numerous nickel mining operations in other countries out of business. In July, the mining behemoth BHP announced that it was suspending its nickel mining operations after massive losses, due to “market conditions.” Just three years earlier, the company had made nickel the centerpiece of its new energy minerals strategy. As mining journalist Tim Treadgold wrote in a recent article for Forbes, the low cost of nickel is “good news for Chinese EV makers but bad news for rival miners in other countries and not particularly good for Indonesian miners.”

Nor is it particularly good for the Indonesian government’s ambition to become a global EV manufacturing hub. As things stand, there is little chance that Indonesian nickel producers will manage to gain a foothold in the U.S. market or qualify for the tax incentives that the Biden administration has offered to run down China’s lead in the production of EVs and other emerging technologies. The administration’s Inflation Reduction Act (IRA), which was passed by the U.S. Congress in 2022, contains a generous tax credit for EV purchases that will become available from 2025. However, the credit will not apply to EVs containing batteries and critical minerals sourced from “foreign entities of concern,” including companies with more than 25 percent Chinese ownership.

The IRA also restricts these tax breaks to vehicles in which half of the “value of the components contained” in the battery are “manufactured or assembled in North America” and at least 40 percent of the “value of applicable critical minerals” used in production of the battery are “extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect.”

In March of last year, Japan and the United States established U.S.-Japan Critical Minerals Trade Deal in order to allow Japan to qualify for IRA subsidies. Indonesia is reported to be in talks with the U.S. to establish a similar agreement. But last October, nine U.S. senators sent out a bipartisan letter addressed to the U.S. trade representative, and secretaries of treasury, energy, and commerce, expressing concerns regarding the proposed Indonesian deal. In so doing, they referenced not only the Chinese dominance of Indonesia’s mining industry, but also the poor labor standards and deleterious environmental impacts that have been linked with these Chinese operations.

“If the current trend continues,” Treadgold wrote in his Forbes article, “Indonesia might be left with only one customer for its nickel.” That is, China.

There is some sign that the Indonesian government recognizes the problem and is attempting to address it. Jokowi has promised on several occasions to improve the standards of Indonesia’s nickel mining and smelting operations. There are also indications that it is trying to address the lopsided reliance on Chinese companies. In July, the Financial Times published a report claiming that the Indonesian government “is trying to reduce Chinese investment in new nickel mining and processing projects to help its industry qualify for tax breaks in the U.S.”

Citing three unnamed sources, the FT reported that “Indonesia’s government and industry are now working to structure new nickel investment deals with Chinese companies as minority shareholders.” This would then allow nickel produced from those projects to benefit from IRA tax credits, provided that Jakarta and Washington can agree to a free trade agreement covering critical minerals.

“It’s not just about IRA, but also diversification,” Septian Hario Seto, deputy coordinating minister for investment and mining, told the FT. “This is a very important policy because we do not want to get trapped in geopolitical tensions. We have to look out for national interests.”

The question is whether Chinese firms will agree to these sorts of restrictions. Pressing them too hard could, in turn, lead to tensions with Beijing, which is no doubt pleased with the flood of cheap nickel powering its EV revolution and, like the U.S., views critical minerals and EV manufacturing as a strategic priority.

Indonesia has long taken an active approach to managing its natural resources, and the state has never been afraid to intervene in the workings of the market to ensure that Indonesia derives a substantial benefit. After helping foster a nickel boom, the question now is whether or not the incoming administration can balance the need for economic development with the need to “row between the reefs” in its relations with the U.S., China, and other regional powers.