A few years ago, Indonesia banned the export of nickel ore. The explicit goal of this policy was to boost downstream industrial capacity by forcing companies to build smelters in Indonesia and refine the nickel locally. Because Indonesia has the largest reserves of nickel ore in the world, the idea was that if the government forced companies to refine the ore locally, Indonesia could position itself as a battery production hub and key link in global clean energy supply chains.
Historically, nickel ore mined in Indonesia has been exported to other countries where it would be refined and used to make things like stainless steel or batteries. This means even though the ore was extracted in Indonesia, most of the value was added elsewhere. The export ban is an attempt by the state to capture and keep more of that value in Indonesia, and they have been willing to disrupt markets and take short-term losses in pursuit of this ambition.
The first stage of the plan largely achieved the desired aims with billions of dollars, primarily from Chinese industrial giants, pouring into nickel smelters and industrial parks in and around the nickel-rich island of Sulawesi. Not everyone would call it a success, as the smelter boom is having major negative environmental and social impacts, and a huge amount of new captive coal energy has been built to power all of this industrial activity.
Nevertheless, the government feels the policy is achieving its intended aim, and the global market has been flooded with Indonesian nickel. But the real end-game for this policy was never just to build smelters. It was always to produce batteries, and to establish a foothold in the production of electric vehicles. Locating the refineries in Indonesia was simply the first step in a long-term plan to position Indonesia as a global battery and clean energy production hub.
To a large extent, the success or failure of Indonesia’s nickel downstream policy will be judged by whether or not it leads to more high-value manufacturing. If it doesn’t help Indonesia gain more battery manufacturing, it will be hard to call it a success, especially given the environmental and social costs being incurred. When South Korea’s LG Energy Solution (a subsidiary of LG) announced that it would not be moving forward on a massive new battery project in Indonesia, many took it as a warning that Indonesia’s downstream industrial ambitions are on shaky ground.
LG explained they were not moving forward at this time because of investment and market conditions, such as increased uncertainty from ongoing trade tensions and weakening global demand for EVs. The project, reportedly worth over $7 billion, aimed to create a fully integrated supply chain from mining to smelting to battery production. Negotiations had apparently been stuck for a while over several issues.
Although LG’s exit from the mega-project is a setback, a number of smaller-scale initiatives are already operating or under development. This includes a joint venture between LG and Hyundai to build Indonesia’s first EV battery plant, which opened last year. Another production facility is being co-developed between Chinese battery-maker CATL and the Indonesia Battery Corporation, a consortium of big state-owned mining and energy firms. Chinese EV giant BYD is also building a factory in Indonesia.
It has been reported that Huayou Cobalt, a Chinese industrial firm that is already invested in Indonesian nickel smelters, will replace LG in the mega-project. It’s too soon to know how that will play out, but it nevertheless sends a signal that the door is open for China to integrate itself further into Indonesia’s green manufacturing ecosystem, especially if other foreign firms are pulling out.
Rather than conclusive proof that Indonesia’s downstream policy is flailing, this is probably more of a cautionary sign that when it comes to technologically advanced industries, like batteries and EVs, foreign partners looking to commit billions of dollars to mega-projects will try to strike hard bargains. They will be less tolerant of rent-seeking, regulatory confusion, red tape, and unfriendly market conditions.
Indonesia cannot build batteries and EVs without capital, technology and know-how from foreign partners, only a few firms in the world can provide it. This means even though Indonesia has the nickel, as it seeks to move higher up in the value chain, it doesn’t hold as many of the cards.