Indonesia’s Nickel Industrial Strategy
This commentary is part of Energy Rewired, a project from the CSIS Energy Security and Climate Change Program studying the industrial strategies of major economies for the energy transition. The project examines countries’ big bets on emerging energy technologies and how these will rewire the world’s energy map.
- Nickel demand for batteries, especially for the kind used in electric vehicles (EVs), is growing rapidly. Indonesia holds the world’s largest nickel reserves and leverages those reserves to attract investment in the battery supply chain. In 2014, the country even banned exports of nickel ore to force miners to process the ore domestically and thereby add value to its nickel production.
- Chinese investments have already developed an integrated steel industry and Indonesia is now on track to repeat this success up the EV battery supply chain.
- Indonesia’s first plant to process nickel for use in batteries was commissioned in May 2021, with at least seven more projects in the pipeline. The progress of these high-pressure acid leaching (HPAL) projects will be key to future battery-grade nickel supply, at least in the near term.
Indonesia’s nickel strategy must be seen against the backdrop of the mineral’s key role in the energy transition. Although nickel demand today is dominated by steel production (around 70 percent), batteries needed for the decarbonization of transportation are expected to represent the single-largest growth sectorDemand from batteries is on a trajectory to grow from only 6 percent in 2020 to about one-third of total nickel demand in 2030. As the world’s largest nickel producer and the country with the biggest nickel reserves, Indonesia is aware of the economic opportunities this development provides and increasingly focuses on attracting investments in production capacity along the EV supply chain.
Indonesia’s nickel strategy is part of the country’s commodity-led development strategy. The country’s general approach—sometimes referred to as “resource nationalism”—is guided by the 2009 Mineral and Coal Mining Law (Law No. 4/2009). It is linked to Indonesia’s constitution of 1945, Article 33, which states that land, waters, and natural resources are controlled by the state and shall be used to the greatest benefit of the people. Indonesia aims at attracting investments in smelters and processing plants and thereby adding value to its nickel reserves compared to simply exporting the nickel ore. Over the last years, the country has developed a fully integrated steel supply chain and now wants to become a battery production hub.
The steel- and battery-related nickel products are quite different and generally require separate nickel feedstock, manufacturing processes, and plants. Battery cathode production usually requires Class 1 products that contain a minimum of 99.8 percent nickel. While Indonesia is rich in laterite ore resources that are a good feedstock for Class 2 products used in steel production, it doesn’t have sulfide ore resources, which in general are a good fit for producing Class 1 nickel. However, laterite (or more exactly: limonite) resources can be used as feedstock to produce intermediate products like mixed hydroxide precipitate (MHP) via hydrometallurgical processes such as HPAL. MHP can be further refined to Class 1 nickel. In a new development, MHP is also used directly to produce battery cathodes, skipping the step of refining Class 1 products, which allows better for an integrated supply chain from mine to cathode.
Indonesia’s first HPAL project, a joint venture between China’s Ningbo Lygend and Indonesia’s Harita Group, was commissioned in May 2021. At least two more HPAL projects are under construction and a further five are at the feasibility stage. As Indonesia doesn’t have capacity for domestic battery production at present, the first MHP produced in Indonesia was scheduled to be shipped to China. MHP contains not only nickel, but also cobalt as a by-product, which itself is a key mineral for EV battery production.
With the start of the construction of the country’s first EV battery cell plant, a project of South Korea's LG Energy Solution and Hyundai Motor Group, Indonesia has already taken the next step up the EV supply chain and will eventually be able to use its nickel to make batteries domestically.
Indonesia alone will account for around half of global nickel production growth between 2021 and 2025 and the success of Indonesia’s HPAL projects is key to the future global nickel supply for batteries, at least in the near term. While several other pathways to meet the future nickel demand for battery production exist, they all have drawbacks and would need higher prices to materialize.
To meet the needs of EV companies and their environment-conscious consumers, the government will have to further establish environmental standards for the mining and processing of nickel for EV batteries, (e.g., regarding tailings disposal or emissions-intensive coal-fired power generation).
According to the Mineral and Coal Mining Law of 2009, “the management of mineral and coal must be controlled by the government to give real added value to the national economy.” To do so, the government can “set a mineral and/or coal policy which gives a priority to the domestic interests.” This “can be realized through the control of production and exports.” The law further says that miners “shall process and purify output of the domestic mining.” The Mineral and Coal Mining Law of 2009 was amended by Law No. 3/2020, which introduces revisions that mainly should improve the feasibility of doing business in Indonesia's natural resources sector, but don’t change the general approach.
Historically, Indonesia’s nickel strategy focused on the supply chain of steel production and hence on the construction of smelters to produce Class 2 nickel (e.g., ferronickel/nickel pig iron). According to the Mineral and Coal Mining Law of 2009, mining companies are obliged to process mining minerals in Indonesia (Article 130) and from 2014 on (Article 170). When the mining companies had not built smelters in time and the nickel ore exports reached an all-time high (65 million metric tons in 2013, with 90 percent of them going to China), the government imposed, relaxed, and reimposed an export ban on the unprocessed nickel ore:
- Indonesia first imposed an export ban on nickel ore in January 2014.
- Following a budget deficit in 2016, a steep decline in Indonesian nickel production, and the construction of nine new nickel smelters (there were only two smelters in operation before), the export ban was relaxed in early 2017 with plans to fully reimpose it in 2022.
- However, in 2019 the government brought the start of the reimposed export ban forward to January 2020.
While the export ban meant losing export earnings, jobs, and government revenues in the short term, Indonesia has won its bet on attracting investment in nickel processing and thereby adding value to its nickel resources in the long term: Chinese companies invested and committed some $30 billion in the Indonesian nickel supply chain. The production of refined nickel products, mainly nickel pig iron for the domestic and Chinese steel industry, exploded (from 24,000 metric tons in 2014 to 636,000 metric tons in 2020).
Experts expect that Indonesia will likely not only be the world’s biggest producer of nickel ore in 2021 but also become the largest producer of refined nickel. The number of operating nickel smelters was 2 before the first export ban in 2014, 13 in 2020, and should, according to the Ministry of Energy and Mineral Resources, more than double to 30 through 2023. However, the ministry’s plans have been revised before, and the target of 30 nickel smelters by 2023 could prove to be too ambitious.
Indonesia’s export restrictions have not gone unnoticed by the international community. The European Union filed a complaint at the World Trade Organization (WTO) in 2019. The European Union claimed that the restrictions unfairly limited EU producers’ access to nickel ore. The WTO’s decision on the case is pending. China, on the other hand, deals with the export ban by investing in nickel processing in Indonesia, circumventing it to some extent, and importing more nickel ore from the Philippines.
Increasingly, Indonesia’s nickel strategy has become part of the country’s goal to create an integrated EV supply chain (from mining and processing to battery production and eventually EV production). This is shown by the nickel HPAL projects, the start of the construction of the country’s first battery plant, and several government measures. For instance, Presidential Regulation No. 55/2019 mandates the development of a domestic EV industry as a national priority; in March 2021, four state-owned companies signed an agreement to form the Indonesia Battery Corporation (IBC), with two of the four companies (MIND ID and Antam) from the mining industry; IBC is expected to collaborate with foreign partners and to attract investment; the government is considering an export tax on nickel products with less than 70 percent nickel content (like ferronickel/nickel pig iron, but also MHP); the government might also limit the construction of smelters producing nickel pig iron or ferronickel for steel production to optimize the use of its nickel resources for products for battery production; and according to the local press, the Ministry for Energy and Mineral Resources has announced a grand strategy on coal and minerals to push the development of downstream industries.
As of 2020, Indonesia has 292 nickel mining permits. Most of the concessions are in Sulawesi, as the island hosts most of the national nickel reserves. Central Sulawesi Province is home to the Indonesia Morowali Industrial Park (IMIP), an integrated nickel hub for steel production, where a supply chain for battery production is planned. At least two HPAL projects (PT Huayue NiCo and PT QMB New Energy Materials, both developed by Chinese companies) are under construction at IMIP and expected to be commissioned in December 2021 and in 2022 respectively. As they are planned to leverage existing infrastructure, their capital cost is estimated to be 60 percent of the average for a typical HPAL project.
The country is developing another nickel hub, Indonesia Weda Bay Industrial Park (IWIP), on Halmahera Island in North Maluku Province, which is the northern part of Indonesia’s Maluku Islands east of Sulawesi. The construction commenced in 2018 and early production started in 2020. Indonesia’s first operating HPAL project (PT Halmahera Persada Lygend) is located on Obi Island, which belongs to North Maluku Province. There are projects to establish further nickel hubs, like the Konawe Industrial Zone in Southeast Sulawesi Province.
Indonesia’s first EV battery cell plant is under construction near Jakarta, Indonesia’s capital and economic center on Java Island, about 1,000 miles away from nickel-rich Central Sulawesi.
As Indonesia is the world’s biggest nickel producer and national production is concentrated in Sulawesi, global nickel supply chains may be affected significantly by physical events or policy changes in Indonesia.
Isabelle Huber is a visiting fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
This commentary is made possible by support from the Hewlett Foundation.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2021 by the Center for Strategic and International Studies. All rights reserved.