Indonesia: Flip-flopping its way to EV supremacy

Key sectors: mining; metals

Key risks: policy uncertainty; business risks

On 28 October the government ordered a temporary immediate ban on exports of unprocessed nickel ore. The move followed reports that several companies had violated export regulations and came as importers scrambled to secure the material ahead of an official ban starting on 1 January 2020, two years earlier than expected. The surprise ban announced in October and the expedition of the official ban originally planned for 2022 has cemented Indonesia’s reputation for policy flip-flopping, which risks derailing President Joko ‘Jokowi’ Widodo’s plans to transform the country into an electric vehicle (EV) powerhouse.

Indonesia is the world’s biggest nickel ore producer, accounting for 26 per cent of global nickel ore supply in 2018. Wresting control of natural resource wealth to add value to the economy has been a major goal for President Jokowi, who was re-elected for a second five-year term in April. Nickel ore contains lithium and cobalt, which are used to produce batteries for EVs. Nickel demand is forecast to increase 16-fold during the next decade as global carmakers shift towards EV manufacturing. As such, Jokowi wants to build domestic smelters to develop EVs and autonomous vehicles manufacturing at home in a bid to transform the country into Southeast Asia’s auto hub. A major stumbling block in this plan rests in the fact that Indonesia lacks the necessary technical expertise and infrastructure. The ban on nickel exports aims to attract high-value investment. Toyota has already committed US$2bln through 2023 to scale up EV manufacturing, while Hyundai is also eyeing Indonesia to expand its business. According to the Coordinating Minister of Maritime Affairs, investment in domestic downstream nickel projects, including smelters, has already reached US$9bln and should increase to US$20bln by 2024.

However, the path to EV supremacy has not been straightforward. Over the last five years, the government has shifted between imposing, reversing, and bringing forward bans on exporting unprocessed nickel ore. In 2014 Indonesia announced its first ban on exports, only to reverse course and relax it in 2017. The new cut-off date to ban nickel exports was set for January 2022, but on 2 September the government stated that it was bringing the date forward by two years to 1 January 2020. The announcement sent metal prices surging to a near five-year high. The three-month nickel contract on the London Metal Exchange rose as much as 5.3 per cent to US$18,850 a tonne on 2 September, its highest in nearly five years, adding to a 9 per cent gain on 30 August, when prices surged over speculation about the expedited ban. The government’s decision on 28 October to put an immediate stop to nickel ore exports came as buyers rushed to secure material before January. The ban is scheduled to last two weeks in order to give authorities time to investigate alleged foul play among nickel industry players.

Indonesia is holding its natural resource wealth hostage to lure investment from the auto industry, but policy uncertainty and radical decisions could have the opposite effect by scaring away investors. Jokowi is already considering similar restrictions on the export of other commodities such as aluminium and bauxite. It remains to be seen whether the auto industry will disregard the lack of government policy reliability and consistency in exchange for a share in what could become Southeast Asia’s EV manufacturing centre.