Indonesia harnesses Chinese capital and innovation to dominate world nickel production

Indonesia’s success in deploying Chinese capital and innovation to become the dominant force in the global nickel industry has been achieved in the face of concerted opposition from the European Union through the World Trade Organisation.

Over a decade, the high value-added share of Indonesia’s nickel exports has gone from 8% to 100%. Its mine output has risen nine-fold, and it is putting rivals, including nickel miners in Australia, out of business because they cannot begin to match the capital and operating costs of the Indonesian operations.

Enabling Indonesia to transform its place in one of the most important new energy industries could be seen as the most significant achievement yet of China’s Belt and Road program. President Xi Jinping underlined the strategic importance of Indonesia to China by launching the ‘maritime’ component of the Belt and Road program in an address to Indonesia’s parliament in 2013.

While Indonesia is expected to retain its non-aligned status under incoming president, Prawobo Subianto, the help China has given Indonesia to achieve a primary economic objective is likely to cement a bilateral relationship bearing some similarity to that between Japan and Australia.

The government of former Indonesian president, Bambang Yudhoyono, resolved in 2009 to raise the country’s returns from its raw materials by restricting exports of unprocessed ores, giving miners a five-year transition period. In the case of nickel, export of the raw ore was banned from 2014, with a grace period provided only if the mining company was investing in processing. By 2020, the ban on nickel ore exports was complete.

While Indonesia had profited from the global resources boom from 2005, its government argued that most of the benefits had been captured by the mining companies and had not contributed to Indonesia’s development.

Before the ban, Indonesia was extracting 71 million tonnes of nickel ore annually, of which 65 million tonnes was exported in its raw form. Most of the exports went to China, where it was smelted and used to manufacture stainless steel.

Chinese companies, led by the privately-owned Tsingshan Steel Group, responded to the proposed export ban with the construction of smelters in Indonesia. The Belt and Road program helped with the funding of an industrial park where the smelters were located, near the nickel mines. While raw nickel ore exports dropped to zero, Indonesia’s sales of nickel pig iron (an intermediate product) and stainless steel soared.

While many resource-rich nations, including Australia, aspire to add value to their raw materials, export bans are not permitted under World Trade Organisation rules and, in 2019, the European Union launched an action against Indonesia.

It said Indonesia’s policy was unfairly limiting the access of European steel mills to nickel ore and was effectively subsidising Indonesia’s exports of stainless steel. Some other Western countries, including the United States and the United Kingdom joined the dispute as third parties, backing the EU arguments.

While the WTO considered the EU’s case, Indonesia’s nickel mine production rose exponentially. It jumped from 200,000 tonnes in 2016 to an estimated 1.8 million tonnes last year, which accounted for about half the global total. Indonesia’s production has doubled in the last two years and processed nickel and stainless steel are now Indonesia’s biggest exports.

The surge in Indonesia’s exports of processed nickel and stainless steel has sent nickel prices plummeting from US$50,000 a tonne in March 2022 to US$16,100 now.

In 2021, the world’s biggest mining company, BHP, made nickel the centrepiece of is new energy minerals strategy but now says it cannot foresee any profit from the business before 2030 and it’s considering putting its Australian-based nickel division into mothballs.

The problem is not just the volume of processed nickel metal coming out of Indonesia: it is also the cost. Indonesia’s nickel smelting and processing operations have been built using novel technology for a fraction of the cost of nickel plants elsewhere and can undercut all other producers.

China’s Tsingshan Holdings, a family-owned business led by a husband and wife team, revolutionised the manufacture of stainless steel by using an intermediate product, nickel pig iron, to feed the steel mills rather than higher cost pure nickel metal. They used a rotary electric kiln furnace to provide a continuous flow to the stainless steel mill.

Applying this technology to Indonesia’s nickel slashed the cost to such an extent that its Chinese state-owned competitor Taiyuan Iron & Steel sought and won anti-dumping protection in the Chinese market.

Chinese resource groups have also brought new efficiencies to the manufacture of battery-grade nickel, which demands greater purity than needed for stainless steel.

Three Chinese businesses, including Tsingshan, have built Indonesian plants to manufacture battery-grade nickel for under US$1.5 billion each. The plants took only three years to build and 12 months to reach full capacity.

By comparison, the Ravensthorpe plant in Western Australia, with a similar output, cost US$2.2 billion and took nine years to build and reach production capacity. The Goro plant in New Caledonia cost US$5.9 billion and took 17 years to reach capacity.

The energy and resources consulting firm Wood McKenzie estimates that the capital costs of Indonesia’s new plants are US$35,000 per annual tonne of nickel produced, compared with more than US$100,000 at western plants. In the brutal logic of commodity markets, it is the highest cost producers that go out of business first in an over-supplied market.

In late 2022, the World Trade Organisation found in favour of the European Union and ordered Indonesia to remove its ban on raw nickel exports. Indonesia immediately lodged an appeal, in the knowledge that the WTO’s appeal panel had lost its quorum and ceased to function in 2019 after the US Trump administration vetoed the replacement of retiring judges.

President Jokowi Widodo rejected the WTO finding saying Indonesia had a right to develop its industry, just as had the European Union.

‘Our country wants to be a developed country. We want to create jobs. If we are afraid of being sued and prefer to retreat, well, we will not become a developed country,’ he said.

Indonesia’s nickel boom has raised some domestic issues. There is a long history of tension between native Indonesians and Indonesians of Chinese origin. The use of imported Chinese workers in building the industrial park brought this to the fore. There have also been environmental issues, with criticism of the use of coal-fired power by the nickel smelters, and concerns about the management of tailings.

However, the model of banning exports to force the development of higher value processing is seen as a success, with the outgoing government of Jokowi Widodo planning to extend it to bauxite and possibly copper. It will be looking to Chinese companies to make this happen.

How this translates in geopolitical terms remains to be seen, but a possible direction is Australia’s relationship with Japan, which was the product of Japanese companies facilitating the development of Australia’s iron ore in the 1960s, coal in the 1970s and both LNG and rare earths over the last two decades.

Australia and Japan have their differences—Japan does not feel constrained from openly criticising Australian policy when it feels its interests are jeopardised, while Australia was a leading voice in international forums against Japan’s whaling. But Japan’s role as not just an important customer but the foundation investor for much of Australia’s resource sector means there is an expectation that each government’s doors will be open to the other and there will be consultation on matters of mutual concern. China would expect no less of Indonesia.