Mandala Insight: Nickel Industrialization Race against time

In recent years, industrialization, especially in the context of global Electric Vehicle (EV) adoption, has been a hot topic. The number of EV users has skyrocketed from 1 million in 2017 to 10 million in 2022 globally, in stark contrast to the slower growth from 100,000 to 1 million between 2012 and 2017. One of the most critical aspects of EVs is nickel, as it serves as the primary source for batteries. As the country with the largest reserves in Nickel, Indonesia finds itself in the spotlight. The increasing demand for nickel has prompted the government to invest in building smelters for nickel production within the country, before exporting it, mainly to China. This initiative has sparked a significant debate: Is mining nickel and constructing smelters the right course of action?

Supporters of nickel development emphasize the need to make the most of nickel’s value as a crucial component in EV batteries. They believe that doing so can significantly boost economic growth and technological progress.

On the other hand, critics of the nickel industry argue that its advantages primarily benefit China, a major player in this field, and they express serious concerns about its impact on the environment. For instance, Mr. Ito, a fisherman from Bahodopi, Central Sulawesi, highlights the environmental consequences of nickel extraction by sharing his experience of a 70 percent income reduction due to water pollution from nickel mining activities.
At the national level, the Compound Annual Growth Rate (CAGR) of the nickel sector from 2017 to 2022 has exhibited a remarkable 29% increase per year. This substantial growth is further underscored by the astounding growth in Non-Tax State Revenue (PNBP), which surged from a mere US$49 million in 2016 to an impressive US$784 million in 2022.

On the regional front, the economic landscape in nickel-rich areas across Indonesia has experienced substantial expansion. Take, for example, Morowali in Central Sulawesi, where the average economic growth rate from 2015 to 2022 stands at a remarkable 11.7%. Moreover, the GDP stemming from manufacturing in this region has soared by an impressive 73%, a substantial contrast to the modest 8% growth observed in 2010.

Interestingly, there has been a notable shift in Foreign Direct Investment (FDI) patterns. Historically, FDI was concentrated in Java, but now, 58% of FDI comes from regions outside of Java. This shift in economics presents a strong case for the government to support and promote the growth of the nickel industry and other mineral sectors across the entire archipelago.

Addressing the government’s stance on the nickel industry, it’s crucial to note that economic and export advantages may not directly benefit Indonesia. An analysis of smelting company ownership from the Ministry’s website reveals a significant foreign majority, with some entirely owned by foreign entities, raising concerns about local control and benefits. Additionally, transparency is lacking in certain registered companies. Mandala’s assessment estimates direct financial gains for Indonesia, excluding broader economic impacts, ranging from 18% to 27%.

Environmental concerns are pronounced in nickel smelting, where a mere 1.7% of extracted material is utilized, leaving a staggering 98% as waste—far exceeding the waste generated by gold (1%) and coal (18%). Despite waste-related regulations in Indonesia, such as the ban on deep-sea tailings, recommended practices like dam use for dry stacking are costly, at approximately $22 per ton for managing nickel waste.

Indonesia’s current nickel processing methods contribute significantly to environmental issues, leading to high emissions. The nation’s role in emissions-heavy stages of the battery development chain has earned it the moniker “dirty kitchen” of China. The construction of a coal-fueled “captive plant” exclusively serving industrial or commercial energy needs exacerbates emissions, raising concerns about the overall environmental friendliness of Indonesia’s EV battery production.

The social dimension adds another layer of complexity. Disparities between local and foreign workers often lead to conflicts, as foreign workers typically hold superior positions. Numerous instances have arisen where disputes among workers have necessitated police intervention and the separation of the opposing sides. In many cases, foreign workers are segregated in distinct complexes apart from the local community to mitigate potential conflicts.

The lingering question that demands our attention is: Why embark on this endeavor now rather than waiting for Indonesia to have both the capital and knowledge for optimal nickel resource development?

The urgency arises from the surge in non-nickel batteries, especially Lithium Iron Phosphate (LFP) batteries. These cost-effective alternatives, favored by major players like Tesla and Ford, pose a threat to Indonesia’s nickel reserves. With 65% of batteries in China already LFP-based, our analysis, referencing IEA and Financial Times data, indicates a potential 35% decrease in nickel demand from batteries by 2040 if LFP adoption persists. The EU’s battery mandate for 6% recycled nickel by 2031 and 15% by 2036 further underscores the time-sensitive nature of the situation.

Indonesia has a ten-year window to establish itself in the EV battery industry, necessitating urgent nickel mining and utilization. While addressing challenges, the focus must be on sustainable mining practices, increasing local ownership in smelting and batteries, and ensuring community benefits from nickel development.

To achieve this, Indonesia should transition from traditional industrialization to an advanced, sustainable model. Harvard economist Dani Rodrik’s criteria guide this shift: (1) Maximize synergies with complementary strategies. (2) Foster innovation, education, and sustainability. (3) Promote high-quality products and advanced technologies like IoT and AI. Innovations, such as Toyota’s robotic assembly and Unilever’s sensor monitoring, should inspire the nickel industry’s modernization, emphasizing technologies like waste heat recovery and process automation for efficiency and reduced energy consumption.

Given the fast-paced changes in battery technology trends and regulatory landscapes, Indonesia must swiftly use its nickel resources to stay relevant. The undeniable ‘race against time’ directly affects Indonesia’s ability to maximize the benefits of nickel mining and industrialization. Recognizing this urgency, the government must adopt a strategic and sustainable approach, such as a high-road industrialization strategy.

Author: Rachmat Fathoni (rachmat@mandalaconsulting.id)

Nickel Industrialization Race against time

The lingering question that demands our attention is: Why embark on this endeavor now rather than waiting for Indonesia to have both the capital and knowledge for optimal nickel resource development?

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