Collaboration between Jack Anderson and Melissa Oosthuizen

Indonesians will cast their votes on 14 February to select a successor to the outgoing president, Joko Widodo, popularly known as “Jokowi”. The country boasts the largest economy in Southeast Asia and had a population of over 270M people in 2023, making it the fourth most populous nation in the world.

The current president has overseen a bold resource nationalism strategy in the form of raw material export bans over the past decade with the aim of incentivising downstream processing capacity and adding value to the country’s mineral wealth. A ban on the exports of nickel ore and bauxite (aluminium raw material) led to billions of dollars of investments flowing into the country. For nickel, in particular, this resulted in a massive increase in the value of its exports, which increased from US$2.8Bn in 2013 to US$22.3Bn a decade later.

The plan had been several years in the making. The export ban was first issued based on the 2009 Mining Law (Law No. 4/2009) on Mineral and Coal Mining and came into full effect in 2014. Among the requirements of Law No. 4 were the prohibition of exporting unprocessed ores, the obligation to process and refine these ores in Indonesia, and the requirement to pay higher export tariffs for specified mineral commodities. On 12 January 2014, the Indonesian presidential decree came into force, having been signed by President Susilo Bambang Yudhoyono at a cabinet meeting on 11 January.

In this Project Blue opinion piece, we reflect on the impact of one of Jokowi’s flagship industrial policies on the key metals markets of nickel and bauxite (aluminium raw material) and consider how his successor’s continuation or modification of the country’s current industrial strategy will shape investment in the nation over the years to come.

Nickel: Indonesia’s downstreaming success story

Over the last decade, Indonesia has quickly grown to become the world’s largest nickel producer, accounting for over half of global supply last year, according to Project Blue estimates. The country’s rising dominance of global nickel supply stems directly from its ban on shipments of unprocessed nickel ores. Since then, there has been massive investment in the country to develop an integrated stainless steel industry as well as the capacity to produce battery-grade nickel.

In 2013, Indonesia’s exports of nickel (mainly laterite ore, but also nickel matte from PT Vale Indonesia and ferronickel from PT Antam) totalled US$2.8Bn. China’s NPI producers had been the main recipients of Indonesian ore before the export ban, and they responded by building processing capacity in Indonesia itself. Illustrating the speed and success of its export ban, Indonesia’s processed nickel production soared from approximately 100kt Ni in 2013 to 1.9Mt Ni in 2023 – a CAGR of 34%. Following this investment, the export revenues of its processed nickel exports (excluding nickel-bearing stainless steel) rocketed to US$22.3Bn last year.

The majority of this investment has come from the Chinese, led by nickel and stainless steel giant Tsingshan, which developed fully integrated stainless steel capacity, as well as establishing numerous industrial parks across the country’s archipelago surrounding Sulawesi – namely the Indonesia Morowali Industrial Park (IMIP) and the Indonesia Weda Bay Industrial Park (IWIP).

In 2017, the Indonesian government created some unease among investors by introducing a partial relaxation of its initial ban, allowing the export of low-grade ores (with a nickel content below 1.7%) for a period of five years for companies that were investing in Indonesian refining capacity. As a result, nickel ore exports from Indonesia jumped in 2018 and again in 2019. This led to the Indonesian government making a further U-turn on the initial relaxation. The export of these lower-grade ores was, once again, banned from January 2020 instead of January 2022 as was initially planned. The intention this time was to stimulate investment in domestic nickel capacity to target the growing EV battery market.

Indonesia aims to build out an entire EV value chain

Indonesia now hosts four large operating HPAL (high-pressure acid leaching of laterite ores) plants producing mixed-hydroxide precipitate (MHP) largely with investment from Chinese battery materials producers Huayou, GEM, and Lygend Group. These HPALs have now become the blueprint for identical installations in the region. At the time of writing, Project Blue is tracking a further 14 HPAL projects under various stages of development in Indonesia (excluding multiple phases) based on the country’s abundant limonite reserves. The majority of this MHP is shipped to producers of nickel sulphate and nickel metal in China, with some integrated nickel sulphate production taking place in Indonesia. Significantly, these HPALs also produce substantial volumes of cobalt units.

The government has ambitions to extend the value chain to the production of EVs in-country. Whilst considerable efforts to woo Elon Musk to bring Tesla to Indonesia have been unsuccessful, the country has seen significant investments from Asian OEMs. In April 2022, LG Energy, as part of a South Korean consortium, signed a US$9Bn EV supply chain deal in Indonesia to reduce reliance on China. EV manufacturers Hyundai and BYD have both made investments to produce cars in Indonesia, with the latter announcing an investment of US$1.3Bn in January 2024 to construct a manufacturing plant with a capacity of 150,000 units.

A fly in the ointment for Indonesia’s ambitions and a turn-off for many Western OEMs has been the country’s failure to secure a limited free trade agreement (FTA) with the USA, which is required to qualify its nickel for US Inflation Reduction Act (IRA) tax credits. Late in 2023, US President Joe Biden held constructive bilateral talks at the White House with Jokowi on a range of topics, including the potential for a trade agreement. A number of US senators were said to be unhappy at the prospect of Indonesian nickel operations receiving tax incentives, given that the vast majority have been developed through substantial Chinese investment. An additional sticking point for these plants is the US Department of Energy’s updated foreign entity of concern guidance for IRA subsidy compliance. The introduction of the foreign entities of concern ownership limit is significant for critical raw materials, with Chinese ownership exceeding the 25% threshold at key producers of lithium, cobalt, manganese, and nickel, even though these companies are operating assets outside the jurisdictions of concern.

Bauxite export ban reimposed, with refined tin and copper concentrate export bans expected to follow…

Like nickel, bauxite exports were banned in early 2014. The year prior, Indonesia produced a record output of 55.7Mt of bauxite as Chinese alumina producers stocked up in anticipation. China’s aluminium industry is reported to have consumed 97% of the bauxite exported by Indonesia between 2005 and 2014, and so Chinese alumina producers increasingly turned to Australia, Malaysia, and Guinea to fill the void. The ban also resulted in Chinese alumina producers, including China Hongqiao and Nanshan Group, constructing refineries in Indonesia to process domestic bauxite and ship alumina. The ban ended in early 2017, but the Indonesian president announced that another bauxite export ban would be instated from June 2023.

Exports of aluminium and its raw materials amounted to US$1.6Bn in 2013, increasing marginally to US$1.8Bn in 2022. This dropped to US$1.3Bn in 2023, reflecting lost revenues following the mid-2023 export ban.

Exports of tin ores and concentrates were already prohibited since a ban was enacted in 2002 following losses suffered by major operators due to illegal mining. The majority of Indonesia’s tin ore and concentrate is mined both onshore and offshore of the islands of Bangka and Belitung, with the percentage of the local population reliant on income from tin mining operations estimated to have grown from approximately 13% in the early 2000s to up to 70% over the last two decades.

PT Timah Tbk is currently Indonesia’s most significant tin refiner, while its subsidiary, PT Timah Industri, is a significant downstream tin solder and chemical producer. However, PT Timah Industri only has the capacity to absorb 5% of PT Timah Tbk’s total refined tin production.

Recently, the Indonesian government expressed its intentions to ban refined tin exports. If the government wishes to turn Indonesia from a tin metal supplier to a manufacturing hub, the impact on Bangka and Belitung’s mining economy and the ability of the downstream industry to absorb the volume of currently exported tin metal will have to be carefully measured.

According to Project Blue estimates, Indonesia was the world’s second-largest producer of refined tin after China in 2023, with the majority of this material exported to countries including China, Singapore, India, South Korea, and Japan. If Indonesia implements a refined tin export ban in the next year, the tin industry will be impacted significantly, as global supply is not expected to be able to ramp up production fast enough to avoid a market deficit. Furthermore, if foreign companies choose to invest in downstream production, they will have to be enticed by competitive investment costs, low logistics costs, affordable gas prices, and infrastructure availability, which are not guaranteed by current regulations.

Indonesia revealed plans to ban exports of copper concentrate but will exempt copper miners Freeport Indonesia and Amman Mineral Musa Tenggara from the ban as they finish building smelters, the construction of which was delayed by the pandemic.

What are the risks associated with the country’s resource nationalism strategy?

How Indonesia proceeds with regard to its resource nationalism strategy has been a key topic of debate between presidential candidates during the run-up to the election. Three candidates are vying to become Indonesia’s next president and have differing priorities for Indonesia’s future. They are listed as follows:

· Prabowo Subianto – current frontrunner and Minister of Defence of Indonesia. Subianto has pitched himself as the stability candidate and has promised continuity of Jokowi’s development plans. His vice-presidential candidate, Gibran Rakabuming Raka, also happens to be Jokowi’s eldest son.

· Anies Baswedan – former academic and previously the governor of Jakarta. Baswedan is the only candidate not to pledge to continue Jokowi’s plan to move the capital city from Jakarta to Borneo. His running mate, Muhaimin Iskandar, has been critical of Jokowi’s downstreaming policy and was quoted as saying, “We saw in our mining business downstreaming is done recklessly.”

· Ganjar Pranowo – belongs to the Indonesian Democratic Party of Struggle (PDI-P), which is the same party Jokowi belongs to. Pranowo reportedly faced controversy related to a mine development in Central Java while serving as provincial governor.

Given the heavy investment in the country by Chinese entities, the new president will have to navigate the current geopolitical climate if they are to diversify Indonesia’s global markets. Additionally, the continued drive towards resource nationalism via export bans will intensify scrutiny among importing countries, which are expected to grow increasingly critical of this policy. In late 2022, the World Trade Organization (WTO) ruled that Indonesia’s ban on nickel ore exports violated international trade rules. This followed a complaint put forward by the European Union stating that the country’s export ban unfairly limits the access of EU stainless steel producers to nickel and other commodities.

Elsewhere, there are significant limitations to the country’s rapid mineral resource development. A large proportion relates to rising ESG concerns and how downstreaming can be achieved in a sustainable way where local citizens benefit from policies. Environmental concerns include the safe disposal of tailings, clearance of vast swathes of rainforest for mining, and the high carbon intensity of processing metals in Indonesia, given a power mix almost entirely reliant on coal. Extensive environmental damage related to tin mining on the islands of Bangka and Belitung has recently been addressed by PT Timah Tbk through the realignment of its policies to focus on environmental protections.

The commodities included under Indonesia’s export bans have had varying degrees of success, with nickel’s achievement standing out among the rest. This can be explained by a unique combination of factors, namely the stranglehold Indonesia enjoys in the form of global nickel laterite reserves, combined with China being resource-poor for nickel and its rising demand. From an economic perspective, Indonesia also benefitted from China’s willingness to take on investment risk to secure upstream requirements. Specifically, Tsingshan’s determined investment in nickel processing capacity opened the floodgates for further capital to flow into the country.

The country’s new leader will be eager to replicate nickel’s success for other commodities, but it will be more challenging to leverage its dominance elsewhere. It remains to be seen whether Indonesia will be able to expand its downstream industry effectively across multiple commodities to become a fully-fledged industrialised nation and compete with some of the world’s biggest players.

16

13

11

18

30

16

7

31

24