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Indonesia’s big bet on nickel is at risk of turning sour, as plunging prices and a supply crunch of ore force refiners to reduce output and lay off workers.
The country, which boasts the world’s largest nickel reserves, invested heavily to meet surging demand for the metal, which is critical to stainless steel and electric vehicle batteries.
But the resulting swell of supply has sent nickel prices to five-year lows on the London Metal Exchange, hurting global competitors, and in recent months, Indonesia itself.
Nickel is one of Indonesia’s main economic drivers, and is central to President Prabowo Subianto’s plans to boost growth. Jakarta says nickel accounts for about 10 per cent of the country’s annual exports, equivalent to more than $30bn, and the industry employs tens of thousands of people.
“What [Indonesia] has done is they have overexpanded,” said Jim Lennon, an analyst at Macquarie. He estimated that Indonesia had 1.5mn tonnes of refined nickel production in the pipeline, in addition to the 2.2mn tonnes it produced last year.
Indonesia rapidly seized a dominant position in the nickel processing market, controlling almost two-thirds of the global supply of the refined metal, up from just 6 per cent a decade ago, according to Macquarie. That was mainly thanks to Prabowo’s predecessor Joko Widodo’s move to block exports of nickel ore in 2020, prompting companies to set up onshore processing plants.
But now, Indonesia cannot keep up with demand for ore from the growing number of refiners who rushed in to take advantage of the country’s vast reserves.
While Indonesia’s overall refined nickel output is still expanding — with Jakarta expected to control three-fourths of the global supply by the end of the decade — some producers are shutting refineries and cutting output, industry participants said.
“The supply from our mining is very limited now compared to the demand from the smelters and processing facilities,” said one government official.
More companies are at risk of reducing production or shutting down operations, the official warned. “There will be natural selection of the smelters.”
Nickel facilities supplying the stainless steel market have been particularly affected. Most refined nickel is destined for stainless steel, and some of the world’s biggest steelmakers, including China’s Tsingshan Holding Group, have cut production in recent months.
Tsingshan is not operating at full capacity at the Indonesia Morowali Industrial Park, the world’s largest nickel site on Sulawesi island, people familiar with the matter said. Huadi Nickel Alloy and Wanxiang Nickel Indonesia have also shut down some production lines, they said.
Huadi Group, a joint venture between China’s Shanghai Huadi Co and Indonesia’s PT Duta Nikel Sulawesi, has laid off at least 70 workers, according to local media reports and labour unions.
Indonesia has 49 rotary kiln electric furnace (RKEF) smelters that turn nickel ore into raw material for steel, and five high-pressure acid leach (HPAL) facilities that convert low-grade nickel ore to battery-grade metal, according to the Indonesian Nickel Miners Association (APNI).
Another 35 RKEF and 3 HPAL plants are under construction, while permits for 55 additional processing facilities have been issued, according to the association.
But competition for supply has also driven up domestic prices of raw nickel ore in Indonesia, raising production costs and squeezing margins for refiners. Indonesia recently raised royalty rates on metal producers in an effort to increase revenue, piling further pressure on refiners.
Excessive rain in the nickel-producing island of Sulawesi has also affected nickel ore supply this year.
Many RKEF smelters are no longer profitable, according to Meidy Katrin Lengkey, APNI’s general secretary. If price pressures and ore shortages persisted, “the smaller smelters will shut down”, she said.
One senior industry executive said that up to 400,000 tonnes of nickel production could be at risk of shutdown.
Another risk is weakening demand for EV batteries. Global growth of EV sales is slowing, and nickel batteries are losing market share to cheaper lithium iron phosphate batteries.
The APNI and other industry players have called on the government to stop approving new nickel investments to protect current players’ access to supply.
Some companies are expected to resort to importing raw supplies from the Philippines, from which Indonesia imported about 10mn tonnes last year, Lennon, the APNI and other industry figures said.
Some processing companies are trying to get mining licences to secure supplies for their current and future projects, they said.
Indonesia’s ministry of energy and mineral resources did not respond to requests for comments on production cuts. Tsingshan and other companies did not reply to requests for comment.
In local media, ministry official Tri Winarno said that reported production cuts by Tsingshan were not worrying and would not affect the government’s efforts to encourage the nickel downstream sector.
But nickel producers were not reassured.
“How can you make huge investments without securing raw material supply?” said one official at a nickel processing company who asked not to be named as they were not authorised to speak to the media. “How can you survive?”
Data visualisation by Haohsiang Ko
