The Dynamics of Global Value Chain in Indonesia’s Nickel Industry

Indonesia is one of the countries with the largest nickel reserves in the world. In 2021, there are 21 million metric tons of nickel reserves recorded in the country. With this fantastic number, it is not surprising that Indonesia is the largest nickel producing country in the world with one million metric tons. Indonesia is also the best producer of nickel in the world which is needed for the development of electric car batteries. According to the International Energy Association (IEA), the renewable energy trend will increase demand for nickel in the global market. Especially with the demand for environmentally friendly vehicles that use electric batteries. By 2040, electric vehicles are projected to account for 58 percent of global vehicles.

According to the Central Statistics Agency page, Indonesia’s nickel export volume reached 297.76 thousand tonnes with a value of US$ 2.45 billion in the first half of 2022. This figure has increased by 574 percent yoy (year-on-year) and the export value has grown by 462 percent yoy. Based on this report, China is the largest destination country for nickel exports from Indonesia with a volume reaching 233.8 thousand tons and a value of US$ 1.71 billion in the first semester of 2022. Meanwhile, the export volume to the bamboo curtain country accounts for 78 percent of the total volume of national nickel exports and their value is 69 percent of the total national export value.

In 2021, Central Statistics Agency predicts the estimated age of Indonesia’s national resource assets based on the ratio of physical stock to the level of extraction in recent years. From the report, it is known that the estimated age of bauxite and nickel assets in the country is still sufficient for more than a hundred years of production. It is estimated that the national bauxite stock can be exported for the next 258 years, while nickel can be used for the next 108 years for ore production. If you look at it, the age of bauxite and nickel assets is much higher than other mineral resources, such as tin, copper and silver.

With the high quality of nickel commodities owned by Indonesia and the increasing global market potential in the world electric automotive industry, there is a need for greater efforts in upgrading the global value chain in the nickel industry itself. With development and improvement from the upstream to downstream sectors, the nickel industry can increase the added value of its processed products, increase competitiveness in the global market, and create millions of new jobs.

The Upgrading of Global Value Chain in Nickel Industry

In general, the nickel industry value chain structure is divided into the following groups: upstream industrial chain, namely the mining chain and mining products in the form of nickel ore. This nickel ore is used as raw material in processing and refining processes. Processing and refining products are varied from Nickel Pig Iron (NPI), ferronickel, and matte nickel, depending on the technology used. Then, these products are further processed into intermediate/upstream products in the form of batteries, nickel alloys, nickel plating, and various stainless-steel products. These products will serve as raw materials for their respective downstream industries. Ultimately, they will be distributed to end users in the form of household appliances, ships, construction, agriculture, electronics foundries, defense, oil and gas transportation, vehicles, and trains.

The development of the nickel industry in Indonesia is one of the Government’s strategic priorities in an effort to increase added value and competitiveness of the manufacturing sector. Upgrading the Global Value Chain (GVC) of the nickel industry is needed by implementing protectionist policies to control the abundant natural resources in this country. Through the ban on exports of raw nickel ore which has been in effect since 2020, Indonesia is trying to encourage the processing of nickel ore into finished products with added value within the country. This step aims to reduce dependence on exports of raw nickel ore and increase processing activities and production of products such as batteries, nickel alloys and stainless-steel products that have higher added value.

Regulations and prohibitions on the export of raw minerals were previously regulated in Law Number 4 of 2009 concerning Mineral and Coal Mining in Article 102. It states that holders of Mining Business Permits and Special Additional Business Permits are obliged to increase the added value of mineral and/or coal resources in implementing mining, processing and refining as well as utilization of minerals and coal.

Apart from the export ban on raw nickel ore, efforts to improve Indonesia’s economy targeting the global value chain were demonstrated by the MIND ID group. On March 16 2021, four BUMNs in the mining and energy sector that formed MIND ID, Aneka Tambang (ANTAM), PT Pertamina, and PT PLN signed an agreement to form Indonesia Battery Corporation (IBC). Each of them has 25% ownership in the holding company. IBC will function as a holding company to manage the battery industry ecosystem. Each BUMN is assigned a different key role from upstream to downstream:

1) Inalum & Antam (upstream) – nickel mining and refining

2) Pertamina (medium) – construction and operation of precursor factories, cathode factories, battery cells and battery packs.

3) PLN (downstream) – distributing batteries and recycling batteries with Pertamina.

The Indonesian government itself is very confident that this global value chain is able to increase the comparative advantage of superior export commodities. GVC is a production system revolution in the 21st century where the production and distribution of goods is carried out jointly by several countries. In GVC, one production stage of a single production process unit is carried out in one country while the next stage is carried out in another country. GVC is likely to increase with the revolution in communications and logistics technology. Currently, Indonesia has developed 10 main commodities, including: textiles and textile products, electronics, rubber and rubber products, palm oil, forest products, footwear, automotive, shrimp, cocoa and coffee. Apart from that, Indonesia has 10 potential commodities which are also in demand by the international market, such as: leather products, medical equipment, medicinal plants, processed foods, essential oils, fish and fishery products, handicrafts, jewelry, spices and office equipment.

Although in recent years, Indonesia has benefited from high demand and prices for its export commodities, a long-term concern for policymakers is the low “value-added” content of Indonesian exports and weak integration into global value chains in manufacturing. Although Indonesia participates in global value chains, its participation is centered on the mining and minerals industry.

In this regard, the share of domestic value added is very high in mining and quarrying exports due to the low nominal value added in this sector. Indeed, among Asia-Pacific economies, Indonesia has the highest share of domestic value added in the sector. This is typical of developing countries that export raw materials and natural resources, and although a high share of domestic value added could be misinterpreted as positive, it could also imply that there is little advanced processing activity taking place within the sector. This happens because developing countries generally lack domestic capacity for such upstream and downstream activities. Therefore, in general, industries in more technologically advanced developing countries are more likely to have a higher share of foreign value added.

Sekarsari Sugihartono
Sekarsari Sugihartono
I am an international relations master's student at Gadjah Mada University. My interests are SDGs and International Trade Dispute.