[Dongeul Dongeul] The Ordeal of the World's Largest Nickel Depositor... 'Export Routes Blocked Due to Dependence on Chinese Technology'

Indonesia Ranks First in Nickel Reserves
Partners with Chinese Smelting Technology to Expand Market
US IRA Poses Export Threat to US Market

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Readers who have closely followed international news may have heard of rare earth minerals. In 2010, when China and Japan engaged in a territorial dispute over the Senkaku Islands, China restricted rare earth exports, forcing Japan to surrender. China has used these rare earths as an economic weapon, manipulating exports to countries with which it has diplomatic conflicts.

Recently, following China, Indonesia's nickel has become a strategic resource wielded in the global economy. This is because nickel has become a key material for manufacturing electric vehicle batteries, leading to a sharp increase in global demand.

However, Indonesia's nickel market has recently been stalled by the United States' Inflation Reduction Act (IRA). It is widely interpreted that the U.S. introduced this legislation to check China's influence in the mineral market. Why has Indonesia's nickel market been hit amid the whale fight between the U.S. and China?

◆China with Smelting Technology and Partners... High Value-Added Nickel Production

Indonesia holds the largest nickel reserves in the world. The nickel reserves buried here amount to a staggering 21 million tons, accounting for 22% of the world's reserves.

However, Indonesia is not the only beneficiary of these mineral deposits. China also gains significant profits through Indonesia's nickel industry. Most of the ore mined in Indonesia undergoes smelting processes by Chinese companies before being exported.

Nickel

For the mined minerals to be used as raw materials for advanced products such as batteries, they must undergo smelting. Smelting is a technology that extracts metals from ores through heat, electricity, or chemical methods. In the past, Indonesia lacked smelting technology and only exported raw ore. However, realizing that smelting processes allow the export of higher value-added products, Indonesia banned raw ore exports in 2014 to develop its domestic mineral industry.

Chinese companies with advanced smelting technology seized this opportunity and massively entered the Indonesian market. China's Jiangsu Delong Nickel Industry and Tsingshan Group invested KRW 41.9 trillion to build large-scale smelting facilities in Morowali and Weda Bay, Indonesia. Tsingshan Group also purchased mining rights in Indonesia in 2009.

Nickel smelting plant established by Tsingshan Group in North Maluku Province, Indonesia. [Image source=Screenshot from Tsingshan Group website]

The combination of Indonesia's abundant mineral reserves and labor force with China's smelting technology led to rapid growth in the mineral industry. Thanks to this, Indonesia, which had focused on exporting nickel pig iron used in stainless steel, was able to shift its focus to producing nickel intermediate products (MHP) in line with the rising demand for electric vehicles. Indonesia, which previously only exported raw ore, could now earn high value-added profits from nickel exports.

Indonesia currently has three factories capable of producing about 164,000 tons of MHP annually. Soon, an additional 26 factories are expected to be built. Of these, 23 factories, excluding three, are all related to Chinese companies.

China has also enjoyed significant economic benefits through cooperation with Indonesia. Foreign Policy, a U.S. diplomatic magazine, estimated that most of the MHP produced in Indonesia is exported to Chinese companies at low prices. Securing large amounts of nickel is a major advantage as China intensifies efforts to capture market share in the electric vehicle sector. The UK-based commodity market research firm Benchmark Mineral Intelligence predicted that significant conflicts will arise between China, which holds large nickel reserves, and countries facing nickel shortages.

◆Uncomfortable U.S., Stalls with IRA... Indonesia Pursues FTA

The U.S., which is in conflict with China, was likely displeased with the cooperation between the two countries. Indonesia's thriving nickel industry was stalled by the passage of the U.S. IRA.

The Biden administration announced the IRA last year, stating that electric vehicle batteries must be made from core minerals exported and processed in the U.S. or countries with which the U.S. has a free trade agreement (FTA) to qualify for a tax credit of $3,750. This guideline applies to 40% of minerals this year and 80% from 2027, but the problem is that Indonesia has not signed an FTA with the U.S.

U.S. President Joe Biden is signing the 'Inflation Reduction Act' (IRA).

The 'foreign entity of concern' clause stipulated in the IRA is also a major obstacle for Indonesia. This clause excludes electric vehicles equipped with battery parts produced and assembled by foreign entities of concern from subsidy eligibility. The U.S. administration has declared that any company in which Chinese individuals or Chinese companies directly or indirectly hold at least 25% ownership will be considered a concern entity. Given that nickel intermediate products are produced in cooperation with Chinese smelting companies, it is highly likely that they will not qualify for U.S. tax credits.

Bloomberg explained that the U.S. implemented these measures primarily to prevent China's growing dominance in the core minerals for electric vehicle batteries.

Nickel Mine in Indonesia

In response, Indonesia hurriedly began preparations to sign an FTA with the U.S. Indonesia's Coordinating Minister for Maritime Affairs and Investment, Luhut Panjaitan, stated, "We must resolve the isolation of Indonesian nickel," and announced plans to propose an FTA agreement limited to key minerals.

However, not only the U.S. but also the European Union (EU) has started implementing the 'Critical Raw Materials Act' to reduce dependence on China for raw materials.

As Western countries pursuing an anti-China stance cut off mineral supply chains with China, the future of Indonesia's mineral market has become even darker. Today, all eyes are on how Indonesia, the world's largest nickel exporter, will navigate this challenge.

This content was produced with the assistance of AI translation services.