Indonesian Resources, Chinese Profits – The Diplomat

Indonesia’s nickel downstreaming is one of the most debated industrial policies in the world today. With strong backing from Tsingshan Holding Group and Jiangsu Delong Nickel Industry Co Ltd, two major Chinese steel manufacturers, the Indonesian government has pursued an ambitious nickel-based industrial strategy, often framing it as a step toward EV battery leadership.

Indonesia’s nickel processing uses the country’s abundant reserves of low-grade nickel to produce two main products: Nickel Pig Iron (NPI) and ferronickel, which are primarily used for stainless steel, and Mixed Hydroxide Precipitate (MHP), an essential ingredient in EV batteries.

Despite Indonesia’s push for EV battery production, NPI and ferronickel make up almost 80 percent of its nickel processing, while MHP accounts for less than 20 percent. As a result, only a small fraction of Indonesia’s processed nickel supports EV batteries.

The paradox is that despite massive government incentives for nickel processing, most of the processed NPI, ferronickel and MHP are exported to China rather than supplying domestic industrialization. This raises the question: Are Indonesia’s nickel-based industrial policies – framed as a means of adding value by promoting EV battery manufacturing – truly relevant, or do they represent a policy mismatch?

To address this question, the article is structured into three key segments. First, it analyzes the government incentives in the nickel sector and argues that they are unnecessary and costly for Indonesia. Second, it explores who the primary beneficiaries of Indonesia’s nickel-based industrial strategy are. Finally, it assesses the broader implications of these dynamics for Indonesia’s industrial strategy.

Unnecessary Incentives

The Indonesian government has introduced three key incentives for nickel-based processing: income tax holidays, low nickel ore prices, and energy subsidies.

The tax holiday for nickel processing companies can last from 15 to 20 years, allowing major investors like China’s Tsingshan Group, which has invested nearly $10 billion in Indonesia since 2015, to benefit from 20 years of income tax exemptions.

However, fiscal incentives are not the primary drivers of Chinese investment in Indonesia’s nickel sector. Two key factors make Indonesia attractive: the country’s ban on the export of ore, and its subsidized domestic coal prices.

The 2020 ore export ban significantly increased global nickel ore prices, as Indonesia controls 42 percent of the world’s nickel reserves. While Indonesia has previously imposed partial export restrictions, the 2020 ban marked a complete halt. Although this policy drove up global nickel prices, the Indonesian government regulates domestic nickel ore prices, keeping them much lower than international rates. This provides a strong incentive for companies to establish processing facilities in Indonesia, as raw material costs are significantly cheaper.

Additionally, Indonesia’s energy policy further reduces costs for nickel processing firms. Since almost 70 percent of Indonesia’s power plants run on coal, the government enforces a Domestic Market Obligation (DMO), requiring coal producers to sell 25 percent of their output domestically at regulated prices. For comparison, in 2023, in the wake of the COVID-19 pandemic, the global coal price reached $350/ton, while Indonesia’s DMO price was capped at $75/ton. In normal situations, the DMO prices are 25 percent to 30 percent lower than global market prices.

Nickel processing relies on energy-intensive furnace technology, with coal-fired power plants supplying electricity. As a result, Chinese nickel processing companies in Indonesia benefit from both lower ore prices and lower energy costs, significantly reducing their operational expenses and increasing their profitability.

Are these incentives truly necessary? Indonesian nickel ore is low-grade laterite nickel ore, containing less than 1.8 percent nickel. This means that processing 100 kilograms of ore yields only 1.8 kilograms of NPI; some cobalt and other byproducts are extracted, but the majority becomes waste. Given these conditions, locating processing facilities near nickel mines, rather than in another country, is already a cost-efficient means of minimizing logistics expenses.

Clearly, not all of the current incentives are necessary. A Jakarta-based banker I interviewed explained: “The partial nickel ore ban before 2020 (where ore export permits were granted to companies making progress on smelter development) and securing permits within industrial parks was actually sufficient for nickel processing companies to invest in Indonesia.”

Under the current policy, Indonesia has borne the cost of lost tax royalties from nickel ore exports due to the export ban, not to mention the tax holidays offered to processors. Meanwhile, its miners, who are mostly Indonesian-owned due to the country’s nationalistic approach to mining ownership, are forced to sell their ore at low government-regulated prices. The paradox is that this nationalism applies only to mining, not processing, where Chinese companies dominate.

As a result of uncompetitive pricing, Indonesian miners have little incentive to explore or open new mines. Shockingly, despite holding 42 percent of the world’s nickel reserves, Indonesia since last year has been importing nickel ore from the Philippines. The very incentives benefiting Chinese processing companies have become disincentives for Indonesian miners, undermining the long-term sustainability of the sector.

Who Are the Beneficiaries?

The Indonesian government’s incentives have led to artificially low prices for processed NPI and MHP, making Indonesian nickel processing among the world’s cheapest. While this benefits processors, the biggest winners are Chinese factories, where most exports go. As mentioned, NPI and ferronickel are crucial for steel production, while MHP is key for EV batteries.

Nickel remains the government’s top industrial priority, yet fiscal constraints limit support for technology-driven sectors, such as EV battery production and domestic steel manufacturing.

Despite the government’s strong push for value-added nickel processing, real progress is lacking. BYD’s $1 billion investment in an EV assembly in Indonesia, which relies on LFP (Lithium Iron Phosphate) batteries – a non-nickel alternative that is emerging as a viable alternative to nickel-based EV batteries – directly contradicts the government’s nickel-driven EV strategy, raising doubts about its effectiveness.

China and global EV manufacturers perceive risks in nickel-based EV batteries, primarily due to the rapid expansion of LFP battery production and use. This shift raises concerns, particularly given the high investment costs of MHP production, which typically range between $1.5 billion and $2 billion.

In June of last year, a consortium of Eramet, a French mining company, and BASF, a German chemical company, canceled its planned investment in Weda Bay, an industrial park in eastern Indonesia managed by Tsingshan Group. An Indonesian government source from Jakarta stated, “One of the reasons is that both companies see an oversupply of MHP plants, while demand potential is weakening due to the rise of LFP batteries.”

China will wait and assess MHP’s potential against LFP while continuing to prioritize NPI and ferronickel in Indonesia, which remains far more lucrative for its steel industry.

What’s Next For Indonesia?

Nickel-based EVs and Indonesia’s vast nickel resources still hold potential, but the benefits largely favor Chinese investors, who, like other investors, strategically maximize the benefits they receive from government incentives. The issue lies not with China but with Indonesia’s policy direction – whether its fiscal and non-fiscal incentives truly support industrialization or reflect misaligned priorities.

Indonesia could learn from Vietnam, a resource-scarce country that has successfully developed technology-driven industries. VinFast, Vietnam’s EV manufacturer, has gained global recognition, and Xanh SM Green, a Vietnamese taxi company, has even launched operations in Jakarta using VinFast EVs – a clear sign of Vietnam’s effective tech-focused strategy. Simply having large nickel reserves does not guarantee success in EV battery production, whether nickel-based or LFP, as these industries require distinct expertise and policy frameworks.