Indonesia's nickel industry has undergone a remarkable transformation, thanks to China's financial backing and expertise. In just a decade, Indonesia has become the world's largest nickel producer, a boom that was fueled by China's demand for the metal. However, the story takes an intriguing turn as China's appetite for nickel seems to be waning, leaving Indonesia's nickel sector in a precarious position.
The Nickel Boom: A Chinese-Built Success Story
China's initial investment in Indonesia's nickel reserves was primarily focused on stainless steel production, as nickel is a key component in this industry. This first wave of investment saw a significant amount of nickel ore being shipped to China for processing. However, when Indonesia banned the export of unprocessed ore in 2020, the trade shifted to nickel pig iron, a more processed form of the metal.
The second wave of investment was driven by the demand for nickel as a battery metal. With encouragement from the Indonesian government to develop downstream processing capacity, Indonesian operators began producing a range of nickel-based products, including matte, mixed hydroxide, and even refined metal. Most of these intermediates were then sent to China for further processing into nickel sulphate, a form widely used in electric vehicle (EV) batteries.
The Battery Revolution: A Shift in Chemistry
Here's where it gets controversial. Chinese EV manufacturers, once avid supporters of nickel-chemistry batteries, are now pivoting away from them. Instead, they are increasingly adopting lithium-iron-phosphate (LFP) batteries, which are cheaper, safer, and can deliver impressive power. Chinese battery makers, such as CATL, have developed highly powerful LFP products, challenging the notion that these batteries are only suitable for small city vehicles.
The LFP battery's dominance in the Chinese market, the world's largest, is a game-changer. As Chinese EV exports grow, the LFP battery is gaining a larger share of the global market too. While battery demand for nickel is still rising, it's primarily due to the rapid expansion of the global EV market. The amount of nickel used per newly sold vehicle has increased by just 1% year-on-year in September, compared to a 7% increase for lithium, according to Adamas Intelligence.
Markets of Last Resort: The Overflow of Nickel
This shift in battery chemistry has led to a notable change in the market. Chinese processors, who once produced nickel sulphate, are now focusing on refined metal, which can be delivered to markets with excess demand. As a result, Chinese-brand nickel has made its way into the London Metal Exchange (LME) storage system, with a significant presence of 173,000 tons as of October 2023. Indonesian metal has also been directly shipped to LME warehouses, with 11,300 tons registered last month.
The excess supply of nickel isn't limited to the LME. It's also seeping into the Shanghai Futures Exchange warehouses, with stocks reaching their highest level since 2018 at 40,782 tons. This rising inventory is keeping nickel prices pinned to the production-cost floor, estimated at around $15,000 per ton by Macquarie Bank. LME three-month metal has struggled to maintain even this level, dipping to $14,330 per ton in November, its lowest point since April.
Indonesia's Big Bet: A Risky Proposition
Despite signs of the Indonesian government wanting to slow down the rapid expansion of its nickel sector, Chinese miners and processors continue to operate at full throttle. Macquarie estimates that another million tons of high-pressure acid-leaching refinery capacity could come online by 2030. Unless stricter measures are implemented, the bank predicts at least five more years of global oversupply due to Indonesia's overproduction.
The International Energy Agency shares this outlook, projecting that the market will only move into a supply deficit from 2030 onwards. By that time, there could be a substantial amount of nickel sitting in LME warehouses, waiting to be absorbed by the market.
Indonesia is gambling on the belief that demand will eventually catch up and absorb this excess inventory. However, it's a risky bet, especially considering the rapid pace of change in the battery industry. Even if nickel remains a core battery input, Indonesia's buyers will likely shift from Chinese to European or American markets. Nickel chemistries are still dominant in Western EV markets, and China's recent restrictions on LFP technology exports have given nickel a temporary boost. But Western buyers are more environmentally conscious, which poses a challenge for Indonesia's coal-powered nickel sector.
Indonesia's resource nationalism has inspired other mineral-rich countries to follow suit, aiming to retain a larger share of the value-added benefits. However, Indonesia now finds itself in a different kind of resource trap, with its economic fortunes tied to China's waning appetite for nickel batteries.
The story of Indonesia's nickel boom and potential bust is a fascinating insight into the complexities of global supply chains and the rapid evolution of industries. It leaves us with a thought-provoking question: Will Indonesia's nickel sector be able to adapt and thrive in a changing market landscape?
