Other countries may reel from the shocks of an energy crisis, weakened China growth from zero-Covid, and rising interest rate, but not Indonesia – the archipelagos find its bargaining power rising as it benefits not just from higher demand for coal but also having the minerals necessary to energize the world in decades from now. Beyond the boost to trade from the energy crisis, specifically due to the rise of fossil fuel demand, the global supply crunch cemented countries’ commitment to diversify energy supply mix, and Indonesia is key to that equation as it is the largest producer of nickel – a mineral essential to electric vehicle (EV) batteries and hydrogen. The IEA estimates that demand for nickel, using Stated Policies Scenario (STEPS), will rise 6 times by 2040. Meanwhile, existing supply has not grown as fast, necessitating more investment to meet future demand.
 

After announcing nickel ore export ban in 2020, President Jokowi wants to further be part of the global value chain of electric vehicles by imposing the export tax to nickel pig iron (NPI) and ferronickel in 2022, both are stainless steel inputs that were still allowed after the nickel ore ban in 2020. The nickel ore ban in 2014 initially backfired as it hurt export earnings and employment as investment was slow to come, which was reversed in 2017. But China eventually invested in onshore processing of nickel ore, and NPI and ferronickel exports increased. As the largest producer – 1 million metric tonnes annually or 37% of total global supply in 2021 – and home to the largest reserves, Indonesia aims to capture more of the value chain, namely using nickel for EV batteries.  And after Western sanctions on Russia’s nickels, Indonesia certainly has more bargaining power, especially in the short-term. The tax on NPI and ferronickel will likely tilt the usage of nickel towards EV battery from stainless steel but comes at a cost such as reduced export value, government taxes and employment for the hope of better onshore investment and higher value-added exports in the future.
 

So far, the ban has worked in attracting more investment as Tesla announcing a USD5bn deal to secure nickel and FDI inflows surging to record high in Q2 2022 to USD11bn, primarily in mining and petrochemical. Our M&A Monitor shows that Indonesia attracted the second largest inflow of completed deals into Asia, only behind India. While M&A is primarily in ICT, greenfield investment, according to official data, is primarily in mining and fossil fuel. It shows that not only is Indonesia attractive for its resource-rich economy but also for its burgeoning domestic demand.
 

Despite being in a sweet spot, Indonesia has two major challenges to overcome: a) mining is capital intensive and employs only 1% of total Indonesia labor force and Indonesia needs to expand employment opportunities for its underutilized 185 million working age population; b) thus labor-intensive manufacturing is needed and more work is required to loosen restrictive FDI policies, labor laws, improve skills gap and infrastructure to broaden growth opportunities.