Nickel Industrialization: Race Against Time, Sustainability, and Inequality

The rapid industrialization in recent years, largely driven by the global adoption of electric vehicles (EVs), has sparked a surge in nickel demand, a critical component for EV batteries. The number of EV users worldwide surged from just 1 million in 2017 to an impressive 10 million in 2022, marking a significant shift to “greener” transportation. Nickel—a key component for EV batteries—has been at the center of this boom, and Indonesia, with its world-leading nickel production of 1.8 million tons in 2023-2024 and massive reserves estimated at 5.2 billion metric tons, is playing a critical role in meeting global demand. Indonesia’s nickel is vital for export revenue and makes up ~55% of global production. The Indonesian government has responded by fast-tracking the construction of nickel smelters to boost value-added exports, particularly to key markets like China. However, the pressing question is: How can Indonesia ensure that its rapid nickel industrialization is sustainable and aligned with long-term economic, environmental, and social goals in the evolving global market?

However, the two pressing questions catapulting the nickel industry. Firstly, how can Indonesia ensure that the rapid industrialization is able to address the ultimate challenge of economic growth goal—combating inequality. Second, how can Indonesia ensure that in the journey of capitalizing its resources it still protects the environmental, social, and governance (ESG) aspects, especially in the long term.

Nickel as a Catalyst for Economic Growth

The rapid industrialization of Indonesia’s nickel sector, bolstered by the introduction of Law No. 3 of 2020, has significantly boosted the nation’s economic growth. Since the implementation of the law, Indonesia has seen a dramatic trade surplus, with nickel exports surging from US$3 billion in 2019 to an impressive US$33 billion by 2023.3 Nationally, the nickel industry grew at a Compound Annual Growth Rate (CAGR) of 29% between 2017 and 2022, with Non-Tax State Revenue (PNBP) from mining skyrocketing from US$49 million in 2016 to US$784 million in 2022.

In key regions such as North Maluku and Central Sulawesi, the downstream development of nickel has had a transformative effect on local economies. North Maluku recorded a remarkable GDP growth of 22.9% in 2023, while in Central Sulawesi, particularly in the nickel-rich area of Morowali, employment in the nickel sector surged from just 1,800 workers to 71,500, showcasing the powerful effect of Indonesia’s downstream nickel strategy. The local economy in Morowali has also experienced sustained growth, averaging 11.7% annually from 2015 to 2022, while manufacturing GDP in the region surged by 73% over the same period, solidifying its role as a key industrial hub.

The shift in Foreign Direct Investment (FDI) patterns further highlights nickel’s importance to Indonesia’s economy. Historically focused on Java, 58% of FDI is now directed to regions outside Java, particularly those rich in nickel and other minerals, reflecting the impact of government policies aimed at promoting broader and inclusive growth.

As the world’s leading nickel producer, controlling over 50% of the global supply, Indonesia plays a vital role in the international market. The rapidly expanding EV sector, projected to grow from US$163 billion in 2021 to US$823 billion by 20308, continues to drive the demand for nickel. According to data from the Coordinating Ministry for Maritime Affairs and Investment, by 2030, the total nickel market is expected to reach 4.3 million tons, with EV battery demand rising significantly to 30%, up from just 8% in 2020.9 This underscores the growing importance of nickel in the global green energy transition.

Nevertheless, Indonesia’s impressive growth in nickel industrialization has not led to a corresponding improvement in income equality. Nationally, the Gini coefficient, a key indicator of inequality, has edged up slightly over recent years, reaching 0.388 in 2023—a signal of modestly rising income disparity. In Central Sulawesi, inequality has seen a small but steady decline, with the Gini ratio falling from 0.327 in 2019 to 0.316 in 2023. Meanwhile, in North Maluku, the opposite trend is evident: the Gini coefficient rose from 0.311 in 2019 to 0.312 in 2023, peaking at 0.313 in 2022. This increase likely reflects the uneven distribution of economic benefits from industrial activities in areas like Weda Bay, where gains are not evenly shared across income groups, contributing to an uptick in inequality.

Shifting the perspective from capital-versus-labor debate to the government’s role as a wealth distributor is necessary. Economists often explain this disconnect between industrial growth and inequality reduction by pointing to the capital-intensive nature of nickel projects, which generate wealth but limited direct employment opportunities. However, with growing non-tax revenues and exports from the sector, it is ultimately how these funds are redistributed by the government that will determine their impact on inequality and poverty reduction across Indonesia.

The Sustainability Concerns

The future of Indonesia’s nickel industry hinges on its ability to navigate significant economic, environmental, and social challenges while maintaining its vital role in the global supply chain. Despite the significant benefits nickel production has brought to the country, the industry faces mounting pressures.

One of the primary economic challenges is nickel price volatility. In 2023, prices fluctuated dramatically, soaring from US$20,000 to over US$45,000 per metric ton before plunging to US$17,000. These sharp price swings complicate long-term investment strategies, as rapid increases may boost short-term revenue, but sudden drops can erode profitability and deter long-term commitments, adding another layer of uncertainty to the industry’s future.

Source: Kompas, 2024

Environmental challenges are equally pressing, particularly Indonesia’s reliance on coal-powered nickel smelting, which significantly increases carbon emissions and hinders global efforts toward greener technologies. Although nickel is vital for EV batteries and renewable energy, the coal-intensive smelting process undermines these sustainability goals by contributing heavily to greenhouse gas emissions. Furthermore, the process is highly inefficient, with only 1.7% of extracted nickel being utilized and 98% becoming waste—far exceeding waste levels in other sectors like gold (1%) and coal (18%). This positions nickel production as one of the most environmentally taxing sectors.

The financial burden of managing nickel waste is substantial, with dry stacking—an environmentally responsible disposal method—costing up to US$22 per ton. While regulatory measures like the ban on deep-sea tailings are intended to minimize environmental harm, they have shifted the focus to costly land-based waste management solutions. Furthermore, implementing sustainable technologies and infrastructure requires significant upfront investments, not just for managing immediate waste but also for long-term site rehabilitation.

Compounding these challenges, foreign ownership of nickel smelters complicates Indonesia’s economic sovereignty. Many of the country’s smelters are partially or wholly foreign-owned, raising concerns about how much of the profits remain in Indonesia. According to Mandala’s analysis, only 18-27% of financial gains from nickel smelting stay within the country, excluding broader economic impacts. This situation fuels debates about whether Indonesia is fully capitalizing on its vast natural resources and raises questions about the long-term benefits of its nickel boom.

On the social front, the impacts of nickel production, coupled with labor tensions between local and foreign workers, present serious challenges. In regions like Bahodopi, Central Sulawesi, local communities bear the brunt of environmental degradation, with residents like Mr. Ito, a fisherman, experiencing a 70% drop in income due to water pollution from nearby mines. This highlights the social costs of industrial expansion and its pressure on livelihoods. Additionally, labor tensions arise as foreign employees often secure higher-paying positions, while local workers are relegated to lower-wage roles, exacerbating inequality and unrest.

A fundamental barrier to sustainability in the nickel industry is the lack of a premium for “green” nickel. Industry insiders interviewed for this study report that, without financial incentives, many companies deprioritize ESG practices. For those with strong ESG commitments, motivations stem either from stock exchange mandates or substantial profits that allow for investments in cleaner nickel production.

Moreover, despite the ban on new coal-fired power plants, regulations still permit captive coal power plants within industrial parks. As a result, many facility managers of industrial parks opt for coal power, the most economical option. Alternatively, nickel smelter producers who use PLN electricity benefit from low coal prices due to domestic market obligations. This issue is crucial, as electricity remains a major operating expense for smelters.

Until the demand side genuinely values green nickel, offering more than just symbolic recognition, achieving sustainability in nickel industrialization will remain a formidable challenge.

A Shrinking Window of Opportunity

The global shift towards alternative battery technologies, including lithium iron phosphate (LFP) and the rising sodium-ion battery technology, is rapidly narrowing the window for Indonesia’s nickel strategy. LFP batteries, which are more cost-effective and abundant than nickel-based batteries, are rapidly gaining favor among major electric vehicle (EV) manufacturers such as Tesla and Ford. Similarly, Sodium-Ion batteries are emerging as a promising alternative due to the abundance of sodium and its potential to lower costs while bypassing the need for nickel and lithium altogether. These developments threaten to reshape the demand for nickel, with projections indicating that global demand for nickel in batteries could fall by as much as 35% by 2040. China, a leader in battery production, has already shifted 65% of its production to LFP-based batteries, further signaling the potential decline in nickel’s dominance.

In addition to the technological shift, regulatory changes in key markets like the European Union compound the challenge. The EU has set ambitious targets to reduce the reliance on newly mined nickel, mandating that by 2031, at least 6% of the nickel used in EV batteries must come from recycled sources, increasing to 15% by 2036. This regulatory push not only reduces the demand for newly mined nickel but also accelerates the search for and adoption of alternative battery technologies that are both more sustainable and rely on more abundant materials than nickel.

Given these global shifts, Indonesia faces a critical 10-year window to secure its position as a key player in the EV battery supply chain. Without decisive action, Indonesia’s vast nickel resources risk losing their competitive edge as non-nickel alternatives like LFP and Sodium-Ion batteries, coupled with recycled materials, take center stage. If Indonesia fails to act swiftly, its nickel industry could become less relevant, as the world increasingly embraces greener, cheaper, and more abundant alternatives.

The global nickel market, particularly for smelter by-products, is now facing an oversupply largely driven by Indonesia’s aggressive expansion of smelter development and production. As shown in the accompanying price chart, nickel prices have trended downward, currently hovering around $16,000 per ton on the London Metal Exchange (LME)–a stark drop from the $28,000 levels seen one to two years ago. Some smelter by-products, like nickel pig iron (NPI), are trading at a steep discount, up to 35% below the LME benchmark. This is not merely a cyclical dip in commodity prices; it reflects the sheer volume of new smelter investments, driven either by market euphoria or a rush to capitalize on current momentum before the opportunity fades.

Nickel Time Attack: Racing for a Sustainable Future

In the global race for dominance in the electric vehicle (EV) battery market, Indonesia must urgently prioritize sustainability, embrace cutting-edge technologies, and address the social and economic challenges stemming from its rapidly growing nickel industry. To cross the finish line as a leader, swift action is needed to stay ahead of the competition.

First, Indonesia should expand selective incentives for industries that adopt energy-efficient, cutting-edge technologies. Incentives like tax holidays and tax allowances should be strategically directed towards sectors with low internal rates of return (IRR), such as the nickel industry. While nickel smelters currently benefit from 7 – 10 year tax holidays based on investment size, additional fiscal support could further accelerate the adoption of sustainable practices, including the modernization of production machinery, advanced waste management technologies, and clean energy solutions for nickel processing.

Second, Indonesia must enhance the enforcement of business regulations. Ensuring that industries meet national environmental standards is essential as the country modernizes its nickel sector. Consistent monitoring of compliance, particularly with global environmental standards, will help Indonesia solidify its role as a leader in sustainable nickel production.

Finally, Indonesia must ensure the effective realization of its technology transfer commitments by developing a structured and systematic plan to advance its strategic national industries. This plan should prioritize the employment of foreign experts who possess the necessary knowledge and skills to support the growth of these industries. Pairing these foreign workers with local employees is essential for facilitating effective knowledge transfer and building long-term capacity within the local workforce. By implementing these measures, Indonesia can strengthen local expertise and accelerate the development of its national industries.

In conclusion, Indonesia’s nickel industrialization is a race against time. As global demand for EV batteries evolves, Indonesia must adapt its nickel strategy to stay competitive. By focusing on sustainability, technological innovation, and equitable growth, Indonesia can maximize its resources and secure a leading position in the future of the EV industry—before time runs out.