Indonesia’s nickel boom

Sascha: [00:00:02] Welcome to The Dive, a podcast that asks Who says business news needs to be all business? Two weeks ago we did an episode on Mining's decarbonisation opportunity and it got a lot of interest, in particular in Indonesia's opportunity here in Australia. Indonesia is our largest neighbour. It's home to 270 million people directly to our north. It's the fourth largest country in the world by population after India, China and the United States and it's the world's largest supplier of nickel, a critical metal for the world's push towards net zero. Basically, Indonesia is going to be a critically important partner, not just for Australia but for the world. And Indonesia is flexing its muscle and using its vast natural resources to bring billions of foreign investment to its shores.

Audio clip: [00:00:56] Indonesia is ramping up its strategy to capture more of its commodity value chain. The latest mineral to face restrictions is bauxite. 

Sascha: [00:01:04] It's a story worth paying attention to, and there's plenty that other countries, including Australia, could learn from. Today I want to know how is Indonesia creating a new blueprint for resource rich nations? To talk about this today. I'm joined by my colleague and the co-founder of Equity Mates. It's Alec Renehan. Alec, welcome to the Dive. Well, I'm very impressed. I can't speak any other languages, so I'm assuming, hopefully, that you've just said hello to me. 

Alec: [00:01:35] I have. I have. That's probably the first time I've used my minor in Indonesian that I did at uni. So glad it's coming handy. 

Sascha: [00:01:44] How many years later you can finally go? Oh, finally a place for that. Look, this story indicates that there might be much more use for your Indonesian in the future, especially if we're going to have a really close relationship with Indonesia and such a reliance on Indonesia 100%. 

Alec: [00:02:01] Learn Indonesian, everyone. They're going to be critically important, not just because of this story, but 270 million people just to our north. 

Sascha: [00:02:09] Yeah. Look, let's start with where I think the natural beginning of this story is today, and that's the importance of nickel. 

Alec: [00:02:18] So nickel has always had a role in our world, not a very sexy or exciting role. It's been critical in the manufacturing of stainless steel. So, you know, we all interact with nickel day to day, but nickel has got a lot sexier recently because it's critical for batteries, for electric cars. Now, some people may quibble and say there's new technology coming that you don't need as much or any nickel. But right now, nickel is critical and Indonesia knows. Global sales of electric cars quintupled between 2019 and 2022, surpassing 10 million units last year. So a lot of growth. Still not huge numbers relative to internal combustion engines, but we expect that to grow. And right now, you can't have an electric vehicle boom without nickel. The world produced 3.3 million tonnes of nickel last year. And here's the kicker, Sascha, 3.3 million tonnes around the world. Indonesia produced 1.6 million of them. Wow. The next highest was the Philippines with 330,000 tonnes. 

Sascha: [00:03:26] So daylight between those two. 

Alec: [00:03:29] Put another way, Indonesian production amounted to 48% of the global total. In 2022, the Philippines was next with 10%, Australia was third with 5%. Indonesia is the £800 gorilla in the nickel game. Today, 70% of the world's nickel goes to making stainless steel. But the biggest driver of demand is batteries, particularly electric vehicle batteries. Shanghai based consultancy CGI Group believes nickel demand will reach 4.3 million tonnes by 2027. So from 3.3 million in 2022 to 4.3 in 2027.

Sascha: [00:04:08] And Alec, Indonesia isn't just the world's largest producer of nickel. It also has the largest stores of nickel still in the ground. 

Alec: [00:04:16] Yeah, that's right. So the United States Geological Survey looks at different mineral deposits around the world. It reported that the global reserve of nickel, how much nickel is in the ground around the world, 89 million tonnes in 2018 was their assessment. They judged Indonesia to have 21 million of those tonnes. So almost a quarter of the world's supply of nickel is in Indonesia. Side note, Australia close second, 20 million tonnes, A theme that you're going to hear more and more in the decarbonisation story is that Australia is incredibly blessed. And um, yeah, we can talk about Australia some other time. Macquarie Group. The Australian Investment Bank thinks that by 2025 Indonesia could supply 60% of the world's nickel, up from the 48% today. And they estimate that between 2022 and 2029, Indonesia's nickel production will account for more than 75% of the global supply. So Indonesia is important and as demand for nickel increases, Indonesia is going to become more important. 

Sascha: [00:05:30] But I, like a lot of countries around the world, will extract raw minerals out of the ground and sell it overseas, where then it's refined and it's made into finished products like stainless steel. And that's been the Australian story when it comes to iron ore. But here's the fascinating part. Indonesia's taking a different route. 

Alec: [00:05:49] MM That's right. Australia is really good at digging things out of the ground and sending it overseas for the value to be added elsewhere. Iron ore. You mentioned Saudi Arabia, their oil boom. They were very good at getting the oil out of the ground and letting it be refined elsewhere because they made enough money just from getting it out of the ground. But Indonesia, you're right, is taking a different route. President Joko Widodo was first elected in 2014 and he tried to ban the export of nickel. Then it kind of fell over in 2017, but then it was reaffirmed in 2020. And they have basically said you can't export the raw nickel out of the ground. Instead, you have to refine it and then make it into new products. Here in Indonesia. 

Audio clip: [00:06:38] Price of nickel or has surged to a five year high and it comes after the world's largest nickel producer, Indonesia announced an export ban of the raw commodity from as early as January next year, two years earlier than it had planned.

Alec: [00:06:52] It's a policy designed to kick start a battery manufacturing industry in Indonesia. It's a policy known as downstream, where you bend the export of the raw materials to force global firms to invest and build factories in your country. It is unorthodox. The world hasn't responded well, and we can get to that. But it has secured over $20 billion of investment so far. They've also put a number of other policies in place to try and encourage foreign companies to come to Indonesia. They've promised decades long income tax holidays a discount on mining royalties, exemptions from value added tax and export duties. And they've also compelled nickel miners to sell nickel refiners or below the market rate. Basically, Indonesia is pulling out all stops to have the value be created in Indonesia. 

Sascha: [00:07:46] And you kind of hinted at this very clearly just before allied. But the world is not particularly happy with this strategy, are they? 

Alec: [00:07:54] No, particularly the European Union. They have taken Indonesia to the World Trade Organisation because of this nickel export ban. The European Union has a lot of stainless steel manufacturers who now can't get their hands on nickel. WTO has ruled in the EU's favour. But I was trying to read about the case before. Indonesia are appealing the decision, but for some reason the appeals board isn't sitting at the moment, so the case seems to be in a bit of limbo until they decide to meet again. 

Audio clip: [00:08:25] The Government will continue to implement downstream mineral and mining policies, despite intervention from the World Trade Organisation. The Minister of Investment Balilo had earlier say that the Indonesian Government is not afraid of the ruling out from the World Trade Organisation regarding the nickel export ban. 

Sascha: [00:08:45] Okay, so let's put a pin in that for now and turn back to this policy. What has it led to in Indonesia? What are we seeing? 

Alec: [00:08:54] Yes, so the number of nickel smelters in Indonesia has increased from 15 in 2018 to 62 as of April 2023. So what, more than a four fold increase. But they're not done yet. Another 30 smelters are under construction as we speak, and another 50 are in the planning stages. Wow. So once they come on line, it will go from 15 to well over 140. In the three years since 2020, when the nickel export ban was properly introduced. Indonesia has signed deals worth over $15 billion for electric battery production in particular. Just a quick round up of some of the foreign companies that are investing in Indonesia in 2020. German company BASF and French mining giant Emira signed a $2.6 billion agreement to develop nickel and cobalt refining in the country. Also in 2020, South Korea's LG signed a $9.8 billion memorandum of understanding with the Indonesian government in 2021. Two South Korean companies, LG again and Hyundai began developing Indonesia's first battery cell plant, worth 1.1 billion last year. South Korea again, LG Energy Solutions and China's Seattle each broke ground on new Indonesian smelters. Another South Korean company, POSCO, announced they would build a nickel processing plant this year in March. US carmaker Ford has teamed up with a Chinese firm and a local Indonesian firm to build a 4.4. $5 billion nickel processing plant. Recently, the Indonesian government announced a $9 billion investment, which included the Swiss commodities trader Glencore and a few other companies. And here's the big fish. It's not landed yet. But if that list of companies from Germany, France, South Korea, the US, Switzerland wasn't enough. Indonesia have the two big fish on the hook. They haven't reel them in yet. But Indonesian cabinet officials have said the Government are close to sealing deals with Tesla and bid to build electric vehicles in Indonesia. And for Indonesia, getting the biggest EV makers in the world to build in Indonesia is the the Holy Grail.

Sascha: [00:11:15] That's what I imagine the point of this policy really was to try and get companies of that ilk on their shores.

Alec: [00:11:22] Yeah, that is I mean, building electric vehicles for them is the dream. Even if they can just build batteries and then they're exporting batteries overseas, that is still a big win for them. Important geopolitical note here, Sascha. For every dollar American firms have invested in Indonesia since 2020, Chinese firms have invested nearly four. That is a story that is reflected across a lot of the global South. A lot of these key mineral states, the Congo, where about 70% of the world's cobalt comes from. That is a similar story there. China is massively outspending the United States in a critical battery mineral state. And we're seeing it again here in Indonesia. To give you an idea of what this has meant for the Indonesian economy, they're now exporting higher value finished products, refined nickel finished products themselves. Exports of Indonesian nickel products last year were worth $30 billion. That's more than ten times what they were worth in 2013. 

Sascha: [00:12:24] Wow. That's a great snapshot of where things are at the moment, Alex. I want to turn now to what's next. But let's talk about that after the break. Welcome back to the Dive. Today we're talking about nickel and Indonesia and we're really looking at how Indonesia is creating a new blueprint for resource rich nations. Alec, before the break, I asked what's next? Can you tell me after that snapshot of where we are at the moment? 

Alec: [00:12:59] Yeah. So Indonesia are very happy with this policy for obvious reasons. The European Union are hoping that they can win at the World Trade Organisation. And as with all of these WTO rulings that the countries involved actually follow their rulings, because actually you could say that the EU want their nickel back breaking and terrible. Let's try to figure out how I could get that in. I thought of it over the.

Sascha: [00:13:26] Well done. Well done. I'm going to tell that pun. That's a good one. 

Alec: [00:13:30] But for Indonesia, the name of the game is, as I said before the break. Building electric vehicles. Jokowi, Joko Widodo, the Indonesian president, has said that they want to produce 1 million electric cars and 3.2 million electric motorcycles in 2035. That is the big national goal. To do that, he's actually extended a hand and invited Australia to help and has said that we could potentially integrate to develop electric car batteries and EVs together. It is important to note between Australia and Indonesia. So Indonesia, 21 million tons of nickel, according to the US Geological Survey. In Australia we have 20 million tonnes that together 41 million tonnes is about half the known 89 million tonnes that exist around the world. So if you think Indonesia's powerful Australia and Indonesia together have about half the world's reserves. Now estimates are that if Indonesia stays on this path for the next decade, and it's important to note that the nickel story is only part of Indonesia's economic story. It's a big part, but the emerging middle class, the embracing of technology and we've seen some really interesting technology companies come out of Indonesia. Tokopedia and Gojek merging and then listing in 2022 was a big moment for Indonesia, but also the demographic dividend that they're enjoying at the moment. All of those things combined. Estimates are that if Indonesia stays on this path of economic growth for the next decade, it could could become one of the world's ten biggest economies. And I'll let this sentence from the Economist sum it up much more succinctly than I could. Quote If it succeeds, Indonesia will improve the lives of a quarter of a billion people and spur on a growth starved world. It could even alter the global balance of power. 

Sascha: [00:15:26] It's a big statement from The Economist and really giving me food for thought. I could keep on unpacking that with you for ages, Alec, but let's move on in the interest of time. I am really curious about this new blueprint. Other countries embracing this model of resource nationalism. 

Alec: [00:15:44] Yes, in a nutshell, a number of other countries are looking at it. The probably the most obvious example to point to right now is Chile. 

Audio clip: [00:15:51] President Gabriel Boric announced a shock move in a televised address on Thursday, saying it's the country's best chance at, quote, transitioning to a sustainable and developed economy. 

Alec: [00:16:02] They nationalised their copper industry back in the day. Don't ask me to year because I didn't write it down. But they have some of the world's biggest lithium stores between Bolivia, Chile and Argentina. The lithium triangle is the home of lithium outside of Australia. Again, that story of Australia being blessed comes up. But Chile have announced they're going to nationalise the lithium industry. All of the privately owned lithium mines, they're going to take over government control and the government's going to make that money. So that's another model of resource nationalism. We're saying it's a little bit different to Indonesia's. Chile wants the government to own the production of the mineral, whereas Indonesia just wants foreign investors to come to Indonesia. So a little bit of a different model, but driven by, I guess, the same overriding feeling, which is we want to capture more of this value rather than just digging it up and exporting it and taxing the companies that dirty it up. We're in a transition in the world, and that's what we spoke about in that last episode about mining's decarbonisation opportunity. And there are a group of companies known as the Green Commodity super powers. And according to The Economist, again, they've calculated that these green commodity super powers, or as they call them electro states, get it from, you know, how Saudi Arabia is like a petro state. Electro states. 

Sascha: [00:17:30] I know. It's like it's an economist making a joke. It's Lawford. 

Alec: [00:17:35] Barker? Well, the Economist thinks those electro states could pocket more than 1.2 trillion in annual revenue from energy related metals by 2040. 

Sascha: [00:17:45] That's massive. Yeah. 

Alec: [00:17:47] Yeah. And so the countries we're talking about are countries that we don't often speak about. Australia, top of the list. Quite The economist. Australia has troves of every metal included in our sample. Love to say it, but Chile, home of 42% of the world's lithium reserves and a quarter of its copper deposits. The Congo has 46% of global cobalt reserves and today produces about 70% of the world's cobalt output. China is home to a lot of aluminium, copper and lithium. Indonesia, which we've been speaking on about today, and also Peru, holds nearly a quarter of the world's silver. These are some of the countries that, as the Economist have dubbed it, the electro states. And while I don't expect Australia to embrace this level of resource nationalism, these are the countries to watch. 

Sascha: [00:18:40] It's just a fascinating story of opportunity, I think Alec and that court is going to be really ringing around my head for a little while. You know, it could alter the global balance of power when you have $1.2 trillion of resources still in the ground. I mean, it's going to be a fascinating couple of decades. 

Alec: [00:18:59] Yeah. And like The Economist has sometimes been known to hit the high for hyperbole, I guess. So you have to take it with you have to take it with a grain of salt. But I think the the analogy is think about what Saudi Arabia and some of those petro states were pre the discovery of oil. And no one is saying that this green metal boom is going to be on the same scale as Saudi. Arabia's oil boom. But even if it's a fraction of what happened when Saudi Arabia emerged, particularly in those like post-World War two years into the seventies and eighties, like even if it was just a fraction of how ground shifting that was for geopolitics and for the world economy like that, that's going to matter. It's going to be some of the defining stories of our lifetime. 

Sascha: [00:19:50] Well, I think that's a perfect place to leave it today. Thanks so much for joining me here on the dive. Quick favour to ask you if you enjoyed this episode, just send it to a friend. Send it to someone who you think might enjoy it. Bring another member to your club. Smallest action from you. It really does. I know I say this every episode, but it really does make all the difference to us and we really appreciate it. Alec, thanks so much for joining me. Until next time. 

Alec: [00:20:15] Sascha, thank you.