Resource nationalism appears to be on the rise in Indonesia, potentially spelling uncertainty in the metals sector with the country appearing to be moving towards nationalizing several of its key mineral producers, Australian multinational bank ANZ said.
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Register Now"Indonesia appears to be doubling down on its long-held plan to develop downstream industries aimed at supporting its economy," ANZ analysts led by senior commodity strategist Daniel Hynes said in a research note Jan. 20.
Resource nationalism is a government's assertion of control over a country's natural resources.
Indonesia is a major producer of several key metals. The country has around 25% of the global share of tin, 17% of nickel ore and 6% of bauxite, with the three being the most impacted by export bans, ANZ said.
"Bans on exports of raw materials in the form of nickel and copper ore are being followed up by increasing tariffs and taxes," the analysts said.
Global nickel demand is largely driven by the stainless steel sector, which accounts for over 70% of all nickel demand.
The mineral is also set to play a pivotal role in energy transition due to the growing market for nickel-cobalt-aluminum batteries used in electric vehicles.
With 22% of global share, Indonesia has one of the world's biggest reserves of nickel.
Nationalization
The country has begun taking steps towards nationalizing a number of its key mineral producers by placing bans on the export of certain raw materials, ANZ said.
ANZ analysts said mining, including metal products, makes up 20% of Indonesia's export revenue.
"During the annual meeting of the nation's central bank in late 2021, President Joko Widodo revisited a plan to eventually stop exports of all raw materials and ship only refined goods," the Australian bank said.
Along with its ban on nickel ore exports, Indonesia is looking into taxing nickel products and extending bans to copper and tin. The country is planning to stop exports of bauxite from end of 2022, copper ore from 2023 and tin ore from 2024, the analysts said.
As a result, the supply uncertainty this may cause for the global market may potentially cause "consternation," ANZ said, adding that inventories worldwide were currently low and supplies were not meeting firmer demand.
"The impact restrictions will have on global markets will depend on Indonesia's percentage share of total global exports," the analysts said.
The London Metal Exchange three-months spot nickel price was trading at $23,850/mt ($10.82/lb) as of 6:59 pm GMT Jan. 20.
Early Jan. 20, nickel prices hit $24,000/mt, their highest level in 11.5 years, on tight supply and Chinese monetary easing, Berenberg analysts said in a note.
The Shanghai Futures Exchange nickel price had reached "its upper limit," said Commerzbank's analyst Daniel Briesemann, adding that it was trading "at a record high equivalent to nearly $28,000/mt, though the contract was only introduced in 2015."
Shanghai warehouse inventories of 4,700 mt were nearing record lows, analysts at UK brokerage SP Angel said.
Downstream processing
Indonesia has had some success in building nickel downstream processing, ANZ said.
Foreign investment from China has been noticeably active in looking for avenues to circumvent the exports restrictions. The capital expenditure for nickel refineries has shot up from $825 million in 2014 to more than $3 billion in 2019, the Australian bank said.
"Indonesia's nickel pig iron (NPI) production has increased from 30,000 mt in 2015 to nearly 600,000 mt in 2020. China's Tsingshan Holding Group, which developed the 165,000 mt capacity Morowali Industrial Park, has led that growth," the analysts said.
"Indonesia's nickel production has increased from 300,000 mt in 2018 to 950,000 mt and has the potential to reach 1.6 million mt by 2030," they said.
Additionally, Tsingshan has commenced output of nickel matte from NPI, as announced in Q1 2021, ANZ said.
"It has agreed to provide Chinese electric car battery makers 75,000 mt of nickel, and is planning to nearly triple its output, which will ease the tightness of the battery-grade nickel market," the analysts said.
EV industry
One of the Indonesian government's national priorities in 2021 was the development of a domestic electric vehicle (EV) industry, and this was done in the form of a signed deal to form the Indonesia Battery Corporation (IBC), ANZ said.
"However, if this policy is not managed carefully, Indonesia may not see the full benefit," the analysts said.
Indonesia is expected to face pressure to reduce the environmental impact of production, as the majority of its nickel industry uses coal-fired power, the Australian bank said.
At COP 26, the Indonesian government signed up to a pledge to end coal use, though it did not support a clause calling to halt construction and financing of new coal-fired power stations, ANZ said, adding that China committed not to build coal-fired plants overseas.
In July 2021, Tesla CEO Elon Musk said: "Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally-sensitive way."
"So, even with a plentiful pipeline of projects to increase production to 1 million mt, the carbon footprint of coal-powered plants in Indonesia may put off manufacturers of batteries and electronic vehicles who are chasing a green nickel supply," ANZ said.