The growth of Indonesia’s nickel industry must not be left unchecked. In crafting new policies, Indonesia must also prioritise stronger social and environmental safeguards.
The nickel industry is an important driver of Indonesia’s economic growth. The country’s nickel ore reserves are enormous, estimated to be around 21 million tons — or 20 per cent of the world reserves — according to the 2023 U.S. Geological Survey. Acknowledged as a key industry in the National Mid-Term Development Plan 2015-2019, the industry has witnessed significant investments, especially from China. Chinese companies such as PT Indonesia Guang Ching Nickel and Stainless-Steel Industry and PT Indonesia Tsingshan Stainless Steel have established nickel smelters in the Morowali Industrial Park, a key project of China’s Belt and Road Initiative in Indonesia since 2013. Chinese investment in the industrial park totalled US$1.6 billion over three phases between 2016 and 2018. These investments in nickel smelters have enabled Indonesia to substantially increase its share of the global export market for Class 2 nickel, rising from 20 per cent in 2015 to over 80 per cent by 2020, according to the International Nickel Study Group.
Figure 1. Indonesia’s Nickel Production (2015-2021)
Indonesia’s policy direction for the nickel industry appears to be uncertain and possibly misguided. Ferronickel, an iron-based alloy typically containing 20-30 per cent nickel, and low-grade nickel ore (nickel pig iron, or NPI), constitute the vast bulk of production (Figure 1). The government implemented a ban on nickel ore exports in 2020 with the aim of advancing the industry’s value chain. However, this strategy faces limitations due to the quality of the nickel ore reserves, which primarily consist of laterite ores with purity of less than 99.8 per cent, commonly known as Class 2 nickel. While laterites are suitable for stainless steel production, they are less ideal for manufacturing batteries for electric vehicles (EV) that requires Class 1 nickel. Converting laterite ores into a form suitable for EV batteries is a capital-intensive, technically complicated, and time-consuming process.
The growth of the nickel smelting businesses has been left unchecked. There were proposals for a moratorium on NPI and ferronickel smelters producing these lower-grade nickel outputs, as well as the elimination of tax holidays for smelters, but such policies have not materialised. The unchecked growth of Class 2 nickel production from Indonesia could cause oversupply in global markets and suppress the commodity’s price, as happened from 2011-2017. Indonesia had benefited from the commodity boom triggered by the Russian-Ukraine conflict and the easing of China’s zero COVID policy. However, this boom has clearly come to an end. As a result, there is a pressing need for the formulation of post-commodity boom policies in Indonesia to navigate the changing economic landscape.
Figure 2. Indonesia’s Progress on New Nickel Smelters (2015-2022)
In crafting new policies for growing the nickel industry, Indonesia must also prioritise stronger social and environmental safeguards. Environmental impact assessment (EIA) standards and corporate social responsibility (CSR) practices are inadequate. A 2021 report by WALHI, a leading environmental advocacy group, found contamination in the coastal ecosystem surrounding the nickel-focused Morowali Industrial Park. This contamination has resulted in the degradation of mangroves and a decline in local fish populations. The Morowali government has acknowledged these environmental concerns, including instances of companies operating without proper environmental permits and the lack of enforcement of environmentally-friendly practices. There is a need to move beyond waste management and pollution control measures toward crucial mitigating measures such as setting emission ceilings for the nickel industry.
The lack of attention to social and environmental safeguards may adversely affect foreign direct investment in the industry.
In addition, the industry must address work safety deficiencies. Two workers died in January 2023 amid social unrest in PT Gunbuster Nickel Industry. Another two workers of PT Indonesia Guang Ching Nickel & Stainless-Steel Industry died in late April while releasing nickel waste. Insufficient social and work safeguards caused these four workers employed in Indonesia-China joint ventures in Morowali to lose their lives. Additionally, a landslide accident killed four workers from PT Total Prima Indonesia in mid-March 2023.
The importance of work safety is further amplified by the geological hazards that exist beneath or surrounding nickel mining sites. Based on Indonesia’s Disaster Risk Index in 2022, all four nickel industrial parks are situated in earthquake-prone areas. Half of them are at especially high risk, including Morowali of Central Sulawesi and Konawe of Southeast Sulawesi. In a recent publication, experts estimated that the Matano Fault could threaten the Morowali Park with a predicted earthquake of up to 7.4 magnitude. The majority of the nickel industrial parks are also highly vulnerable to tsunamis.
The lack of attention to social and environmental safeguards may adversely affect foreign direct investment in the industry. A promising meeting between Tesla and President Widodo in June 2022 was later overshadowed by a public letter by Indonesian and American green groups asking Tesla to stop investing in Indonesia’s nickel industry given the latter’s notorious track record.
In formulating its policies for the nickel industry, Indonesia must remember that its competitiveness rides on three critical ingredients: disaster resilience, climate- and environmental-friendly standards, and respect for human rights. The country needs a regulatory sandbox that enables nickel companies to faithfully comply with the infrastructure code, emission ceilings, and workforce regulations.
It is high time for Indonesia to adopt a whole-of-nation approach and multi-dimensional assessments regarding its strategic natural resources. Going forward, the country could start issuing annual reports on critical minerals to fully inform prospective investors and properly account for the industry’s progress and shortfalls.
Muhammad Habib Abiyan Dzakwan is a researcher at the Department of International Relations and a fellow in the Disaster Management Research Unit, CSIS Indonesia. His research areas cover sustainable development, critical minerals, and emerging technologies.