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Growing resource nationalism in nickel-rich Indonesia is likely to boost the country's stainless steel industry.
Indonesia mined 38% of global nickel output and produced one-third of the world's primary nickel in 2021, according to S&P Global Market Intelligence. Indonesia's nickel ore export ban in 2020 and China's push to expand overseas operations through the Belt and Road Initiative have prompted Chinese companies to build plants in Indonesia to smelt ferronickel, mainly used for stainless steel, from nickel laterite ore.
But Indonesia's stainless steel industry has struggled to keep up with surging ferronickel capacity: Since 2020, around half of Indonesia's ferronickel output has flowed to China, according to investment bank China International Capital Corp.
In a bid to move the country's mining sector up the value chain, Indonesian President Joko Widodo said in August that the government was considering an export tax on NPI and ferronickel this year.
"If Indonesia imposes tariffs on ferronickel, companies from China and other countries will have more incentive to build stainless steel plants in Indonesia," Wang Cong, a nickel analyst at consultancy Shanghai Metals Market, said in an interview.
Indonesia's push to stimulate production of value-added products could put pressure on China's stainless steel industry.
The trend "would be negative for Chinese stainless steel producers, which have become more reliant on Indonesian NPI and ferronickel as domestic output of these has been constrained by lower nickel ore supply levels due to Indonesia's export ban," Jason Sappor, senior analyst at S&P Global Commodity Insights, said in an email interview.
Chinese companies shifting ferronickel and NPI production to Indonesia has accelerated since the 2020 nickel ore export ban. In the first seven months of 2022, Indonesia's exports of ferronickel, including NPI, more than doubled year on year to $7.6 billion, surpassing the annual record set in 2021.
Stainless steel exports, meanwhile, grew at a slower pace, rising 41.3% to $6.9 billion, data from the S&P Global Market Intelligence Global Trade Analytics Suite showed. Stainless steel exports to China mainly came from the country's Tsingshan Holding Group Co. Ltd. and Jiangsu Delong Nickel Industry Co. Ltd. projects in Indonesia.
China's efforts to reach its climate targets and prevent a repeat of the power crunch in 2021 have also dealt blows to its emissions-intensive steel industry, but they may prove a boon for Indonesian producers.
Beijing is encouraging steel and iron alloy imports while limiting exports to promote industrial transformation and achieve carbon neutrality. This move could help Indonesia become the main driver of NPI globally, China International Capital Corporation analyst Yang Wenyi wrote in a May 30 note. The bank expects China's annual NPI production to fall to 250,000 tonnes and Indonesia's output to rise to 1.58 million tonnes in 2025.
China's energy intensity and carbon emission controls could also limit capacity growth of stainless steel, SMM's Wang said. China has been a net exporter of stainless steel, but the expected rise in domestic consumption could narrow that surplus and result in Indonesia's global market share growing thanks to lower costs and looser environmental regulations, Wang said.
Foreign investment challenges
Indonesia's mining sector is hoping to escape the so-called resource curse — where resource-rich countries fall short of their economic potential — despite many obstacles. The strategy aims to extract more tax revenue, spur investment in the downstream sector, create higher-paying jobs and increase exports of higher-value nickel products, said Bernard Aw, economist for Asia-Pacific at trade insurer Coface.
But significant hurdles stand in the way. "The business environment remains challenging for foreign investors," Aw said. "Indonesia needs to prepare the workforce for such changes to the quality and nature of jobs, if the economy is to move up the value chain."
Sappor also said uncertainty surrounding Indonesia's "ever-changing nickel export policy" could make it harder for the metals sector to attract Western investment.
The nickel ore ban first came into effect in 2014. In January 2017, Indonesia lifted the ban as domestic smelters failed to absorb surplus ore, forcing miners to sell nickel at deep discounts. Three years later, the ban on exports was once again put in place.
Chinese companies echoed this concern over regulatory uncertainties.
Lygend Resources & Technology Co., which operates nickel-cobalt smelters on Obi Island in Indonesia, flagged in its initial public offering prospectus in September that "the evolving regulatory environment and perceived prevalence of corruption and bribery" could "adversely affect" operations in Indonesia, hindering the government's attempts to attract foreign investment and stimulate the economy.
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