EV transition drives Indonesia’s ‘dirty’ nickel boom

In just four years, Indonesia’s nickel industry has undergone a transformation — becoming a pivotal supplier of the commodity critical to electric vehicle batteries. But, as its importance grows, so has the south-east Asian nation’s reputation as a producer of “dirty” nickel.

Indonesia is now the world’s dominant supplier of the metal, following a boom triggered by President Joko Widodo’s ban on exports of raw nickel ore, in a bid to force foreign businesses to invest in the country and set up domestic processing plants.

Chinese companies responded promptly, pumping in billions of dollars to secure supplies of a metal crucial to the transition away from combustion engines. This reshaping of the car industry has boosted Indonesia’s exports, brought in record amounts of foreign direct investment, and transformed its current account balance.

But critics say that has all come at a huge environmental cost and accuse the government of prioritising nickel extraction over the archipelagic nation’s rainforests.

They are now urging the industry and government to adopt more sustainable practices, pointing to the mass deforestation caused by mining and the almost exclusive use of coal-fired power stations to power nickel smelters. They also accuse processing plants of polluting water sources.

Sayyidatiihayaa Afra, a researcher at environmental group Satya Bumi, wants the government to put a cap on nickel production. “The most significant issue in the environmental aspect is deforestation in the high biodiversity area and in high carbon stock forest,” she says.

A recent slump in global nickel prices has brought fresh scrutiny to Indonesia. With the world’s largest reserves and its low costs of production, the country is expected to increase its dominance of global supplies as mines elsewhere scale back production in response to the drop in prices.

It already accounts for 57 per cent of the world’s refined nickel, and its share is forecast to rise to 69 per cent by 2030, according to Benchmark Mineral Intelligence.

Industry executives say they are under increasing pressure from Western buyers to act on coal use and other environmentally harmful practices.

In response to the criticisms, the government in Jakarta announced earlier this year that it would set out a “decarbonisation road map” for the nickel industry by early 2025.

“We should find the best way to accommodate all our objectives, not only economic, but also environmental,” says Nizhar Marizi, the director of energy, mineral and mining resources at the Ministry of National Development Planning.

Indonesia emits an average of 58.6 tonnes of carbon dioxide for every tonne of nickel produced, 10 tonnes more than other nickel producers, Nizhar points out. He says the government is prepared to help finance green initiatives but the private sector is also expected to play its part.

Some companies are already looking for alternatives to coal, by building solar plants to power smelters. But a fuller transition to renewables is still decades away. The government has set 2060 as its net zero emissions target and industry and heavy transport will be among the last sectors to make the transition, according to Nizhar.

The government has repeatedly said that the switch to net zero should not come at the cost of economic growth and has identified natural gas as the fuel to reduce its emissions during the energy transition.

However, one nickel industry executive — while acknowledging the country needs to prioritise environmental, social and governance (ESG) concerns — warns that natural gas is more expensive than coal, and would undermine Indonesia’s cost advantages.

In addition, any shift to gas and, ultimately, renewables would be slow, as many nickel mines are in remote locations, making it harder to build infrastructure, he adds. “We have no choice but to use coal for now,” the executive says. “Some locations are very remote. There are simply no other alternative sources.”

We have no choice but to use coal for now. Some locations are very remote. There are simply no alternative sources

Nizhar concedes that the infrastructure for gas is not yet in place but insists that, once the pipelines and ports are built, prices will fall. “Coal is cheaper because the gas market is not fully developed yet in Indonesia,” he says, suggesting that “cleaner” nickel could be sold at a premium.

Ahmad Zuhdi Dwi Kusuma, an industry analyst at Bank Mandiri, says Chinese companies invested in Indonesian nickel will also have to take the initiative to make the sector greener. “Their main goal, so far, has been trying to be more competitive, not ESG.”

But sustainability could become a priority if more western companies invest in Indonesia, he argues, although he cautions there is unlikely to be a big switch in terms of cleaner energy sources over the next decade. “A lot of infrastructure needs to be built before the nickel industry can be weaned off coal.”