Indonesia’s pivotal moment for critical minerals
Jakarta’s “downstreaming” policy positions the nation as a key player in global supply chains, but challenges lie ahead.
In a nutshell
- Indonesia has banned raw nickel exports to encourage domestic processing
- The policy has attracted foreign investment and spurred economic growth
- Environmental concerns and regulations could complicate government plans
“We’re not protectionist; what we’re doing is very logical,” Indonesia’s president Prabowo Subianto declared in May. He was defending his government’s policies to boost domestic processing of critical minerals, which have dominated headlines and solidified Indonesia’s position as the world’s top nickel supplier.
Observers worldwide are closely monitoring Indonesia’s nickel boom. Under Mr. Prabowo’s leadership, the path forward for resource management in the world’s fourth most populous nation remains uncertain given the challenging geopolitical and economic environment.
Jakarta views the country’s critical mineral prospects as a key part of its aim to become one of the world’s top five economies by 2045. Under the two terms of Joko “Jokowi” Widodo, Indonesia adopted a policy known as “downstreaming.” This approach focuses on encouraging foreign companies to invest directly within Indonesia, allowing Jakarta to gain greater benefits from its own resources compared to earlier, more extractive arrangements.
Facts & figures
What is downstreaming?
Downstreaming refers to the process of moving beyond the mere extraction and export of raw materials. The goal is to develop domestically industries that also process and add value to locally extracted materials prior to export. This approach helps nations retain more of the economic benefits associated with their natural resources.
Chief among these downstreaming measures is a ban on exports of raw nickel ore amid skyrocketing demand for the commodity, which is needed for electric vehicle batteries. This strategy has cemented Indonesia’s dominance of the nickel industry. The country now accounts for more than half of global nickel mining by one count, driven largely by Chinese-owned and operated smelters.
Official government estimates indicate that the added value of nickel production has increased from $1.4 billion to $34.8 billion from 2020 to 2023, and mining now accounts for just under a tenth of overall gross domestic product (GDP). More broadly, it has spurred growth in the downstream industrial sector, which has occasionally accounted for over a quarter of total investment realization. Given the inroads made so far, Mr. Prabowo has suggested that commodity downstreaming could play a pivotal role in increasing Indonesia’s growth rate to as much as 8 percent in just a few years.
Yet this downstreaming approach has not been without challenges. The World Trade Organization has ruled that Indonesia’s export ban violates international regulations, siding with the European Union, which balked at Jakarta’s move. The presence of Chinese firms in the country has led to scrutiny over how Indonesia’s dominance is fueling a global nickel glut. This has sparked supply concerns, depressed prices, halted some Western operations, and strengthened Beijing’s control over key supply chains.
China’s influence in the area is unmistakable, most notably showcased in the Morowali Industrial Park in Central Sulawesi, a flagship project of Beijing’s Belt and Road Initiative. Indonesia’s nickel industry is also riddled with documented human rights and environmental issues, including inadequate citizen consultations, deforestation and water pollution.
More by Prashanth Parameswaran
- Vietnam’s new leader faces a delicate political balance
- Cambodia’s Funan Techo Canal fuels Mekong fears
- Thailand’s twin BRICS-OECD bids confront challenges
The depletion of high-grade nickel deposits could force Indonesia to extract low-grade ores, affecting its ability to meet its climate commitments. All of these concerns have already shown signs of complicating some of Indonesia’s efforts to diversify its roster of international partners, as evidenced by its inability to secure a critical minerals agreement with the United States thus far.
Scenarios
Most likely: Indonesia doubles down on its downstreaming efforts
This scenario would see Indonesia expand its downstreaming efforts in other areas. Indonesia’s investment ministry has already unveiled a roadmap identifying more than 20 commodities across eight sectors, including oil and gas, minerals and fisheries. Both Mr. Prabowo and Jokowi’s son, Vice President Gibran Rakabuming Raka, have also suggested including other industries, like the maritime and digital domains.
This could mean more downstreaming, even though plans remain vague. It is unclear how such a strategy would fit in with Mr. Prabowo’s broader economic policies, which comprise new social assistance programs and an increased focus on food security. Beyond sector-based expansion, Indonesia could strike new partnerships with China. These could include previous plans to advance cooperation with select countries in the Global South in areas like battery technology and critical minerals.
Jakarta may also try to advance its interests in concert with more like-minded partners within minilateral groupings such as the Indo-Pacific Economic Framework and even in multilateral fora like the United Nations.
Less likely: Downstreaming fails in some sectors
This scenario would see mixed prospects for Indonesia’s downstreaming efforts, with some continued gains on nickel but challenges with other sectors.
Domestically, Indonesia could face heightened challenges in managing production and constructing necessary infrastructure, as evidenced by difficulties in downstreaming for commodities beyond nickel, like bauxite and copper. Significant hurdles, including fragmented regulatory policies and entrenched vested interests, could further hinder the country’s ability to advance its downstreaming strategy effectively.
Internationally, some countries could impose more restrictions on specific industries. Washington has recently added Indonesian nickel to its lists of goods produced by children or forced labor. New regulations would limit Jakarta’s ability to build critical partnerships with key countries to advance its downstreaming approach.
Global market trends could further slow down demand for certain commodities. In the nickel industry, falling prices from supply gluts and the growing adoption of nickel-free battery chemistry, such as lithium iron phosphate, have already affected demand.
Least likely: Indonesia rolls back its downstreaming policy
A full-scale reversal is unlikely at this point, since downstreaming is deeply tied to populist economic nationalism and attracted significant investments during Jokowi’s two terms. But if challenges build and opportunities dry up, certain policies could be reconsidered, as discussed during the election campaign. A spike in major safety and health incidents in Indonesia could cause a surge in popular discontent against downstreaming, shifting the anger from foreign forces seeking to exploit the country’s resources to a domestic government unable to manage the nation’s riches.
These circumstances may prompt some firms to leave Indonesia, redirecting their efforts toward alternative markets or entirely different opportunities. Additionally, they could dampen the flow of substantial investments needed for downstreaming, estimated by the government at $545 billion by 2040 for priority sectors alone.
Relentless pressures from both domestic and international fronts could prompt a reassessment of strategies to secure sustainable support for Indonesia’s resource development, essential for achieving its ambitious growth targets in the decades ahead.
For industry-specific scenarios and bespoke geopolitical intelligence, contact us and we will provide you with more information about our advisory services.
Sign up for our newsletter
Receive insights from our experts every week in your inbox.
