Prosperity at a Price: The Dual Edge of Indonesia’s Nickel Boom.

Industry Overview:

Indonesia is the world's largest nickel producer, ahead of the Philippines, New Caledonia, and Russia. Its exports contribute significantly to the GDP, attracting foreign investors drawn to its vast resources. One of the most prominent mining companies operating in Indonesia is PT Vale Indonesia which has three projects operating in areas in Sulawesi Island. The parent company, Vale, domiciled in Brazil, completed a divestment obligation in February 2024, which left the company with a 33.9% interest in its Indonesian assets and state-owned holding company, MIND ID, with a controlling stake of 34%. The divestment of foreign-owned mines is part of a wider policy by the government to capture more of the value in the supply chain, a flip from exporting unprocessed material to finished products and controlling the underlying assets. 

China is a key partner.  And has taken a keen interest in the potential of Indonesia's resources with notable investments from Tsingshan Holding Group, Contemporary Amperex Technology, and China Molybdenum. Investments have paid off, with Indonesian exports booming for many types of nickel products, including ferro nickel, used for making stainless steel and other ferrous alloys.

The trade balance data for Indonesia, spanning nearly a decade, consistently shows a trade deficit with China, reflecting Indonesia's status as a net importer in this bilateral relationship. The deficits were particularly high from 2018 to early 2019, reaching their peak in November 2018. There has been a marked improvement from this peak with occasional surpluses in early 2021 and 2022, with nickel exports and the 2020 export ban of ores and concentrates forcing the industry to invest upstream into higher-value products, a major contributor to this. Overall, however, these figures suggest a significant influence of external economic conditions and policies on Indonesia's trade balance with China.

Nickel serves a diverse array of applications across multiple industries, notably in battery production and stainless steel manufacturing. Its essential properties significantly enhance battery efficiency, enabling electric vehicles to achieve longer ranges. Utilised in everything from construction materials to surgical instruments, nickel remains a critical resource poised to drive future industrial development.

Production continues to grow. In a press release on 24 April 2024 the International Nickel Study Group (INSG), an intergovernmental organisation, stated it expected that different types of nickel products in Indonesia would continue to ramp up production. Including, nickel pig iron (NPI) and ferro nickel, mixed hydroxide precipitate (MHP) from high-pressure acid leaching (HPAL) plants, nickel matte converted from NPI, nickel cathode, and nickel sulphate.

On a global level, INSG expects world primary nickel production to increase by 6% year-on-year in 2024, compared to 10% in the previous year, while world primary nickel usage is forecast to increase by 8% year-on-year. The robust demand growth is despite a “slow-down in nickel use in batteries for electric vehicles (EV) where sales have been affected by the removal of subsidies, competition from non-nickel batteries (mainly lithium iron phosphate), and a recent relative preference in demand for plug-in hybrid EVs over battery EVs''. That said, the nickel market, according to INSG, is forecast to be in surplus in 2024, for a third consecutive year. This has put pressure on nickel prices, with concerns that higher-cost mines, but in some cases, mines with smaller environmental footprints risk closure. On 12 July 2024, mining giant BHP announced it would begin suspending operations at the Kwianan nickel refinery in Perth, pointing to poor market conditions to blame for its decision. Around 1,600 of its front-line workers are at risk of redundancy and hundreds more contractors impacted.

Environmental Impact of Nickel Mining:

Demand for nickel is increasing, and Indonesia’s nickel mines have cleared more than 75,000 hectares of forest to extract nickel.

Deforestation marks the start of activities to clear the area and allow access to the nickel ore, which is exploited by open-pit mining methods. The topsoil, rich in nutrients essential for tree and plant growth, is also obliterated, leading to severe soil degradation. This impacts food and water sources. Organisms in the soil that play a vital role in fertilising the ground to stimulate the forest's growth no longer have any effect. And without these vital living creatures, forests will struggle to recover. Sulawesi Island has already seen devastating levels of deforestation. Based on data from Global Forest Change Maps Sulawesi lost 10.89% of its forest cover, or 2.07 million hectares, between 2000 and 2017.

Knock-on effects from deforestation will heavily affect communities that live and survive on the resources that forests provide them. Tribes for example live in the forests and hunt wildlife to survive, local fishermen rely on lakes and rivers to earn money for their families. People may have no choice but to move away from lands that they are entitled to, their rights overlooked. The cumulative impact of these practices not only undermines the ecological balance but also jeopardises the well-being of countless species and human communities dependent on these ecosystems.

Contamination is also a major concern with toxic waste carried by the rain from mining sites into the sea. These contaminants can persist in the environment, posing long-term risks to aquatic ecosystems and human health​.

Regulatory Environment:

Law No. 32 of 2009 on Environmental Protection and Management is a foundational piece of environmental legislation in Indonesia. The goal of any piece of legislation of this nature is to sustainably grow industries while still taking care not to emit high levels of pollution and to protect the environment for the future. Article 98 outlines severe penalties for non-compliance, including financial sanctions and criminal charges. Specifically, it mandates imprisonment of three to ten years and fines ranging from three to ten billion rupiah for those who violate ambient air, water, and seawater quality standards, or cause environmental damage.

While having the legislation in place is positive, it shows that the government is acknowledging the situation and is trying to reduce harm. The actual practice and implementation is just as important. Conflict between economic interests and environmental protection often becomes an obstacle. As nickel mining projects proliferate and foreign investment continues to flood in, the efficacy of the legislation is increasingly tested. The government's willingness to incentivise foreign companies to establish mining operations often undermines the intended protections of the law. By offering tax breaks, exemptions, and incentives, the government aims to attract both domestic and foreign investment, positioning Indonesia as a key player in the global EV market. The incentives include a removal of the luxury tax on EVs for 2024, the waiver of import tax until 2025, and a reduction in value-added tax on the sale of EVs.

The Future:

Indonesia's nickel industry is poised for continued growth and dominance in the global market, but it faces important challenges related to environmental concerns and the need to balance economic development with sustainability goals.

The new EU Deforestation Regulation (EUDR) is a comprehensive legislative measure aimed at mitigating the EU's contribution to global deforestation and forest degradation, it aims to sanction imports such as cattle, palm oil and rubber that have been produced on land that has been deforested. Such measures would compel Indonesia to adopt more sustainable practices in its mining operations, ensuring that economic gains do not come at the irreversible cost of its natural ecosystems.

There may be potential for this to expand to mining minerals in the future and would act as an effective deterrent to prevent excessive deforestation.

Moving forward, Indonesia should strive to balance its economic ambitions with sustainable practices, ensuring that the exploitation of its nickel resources does not irreparably harm its natural ecosystems. Achieving this balance will require a concerted effort from the government, industry stakeholders, and international partners to adopt and enforce more robust environmental protections.