How Indonesia cornered the nickel market

0:00Camilla Hodgson: What happens next in the story of money? Nuveen has spent over 125 years helping clients answer this question. By investing in the growth of businesses, real estate, infrastructure and natural capital, we continue to deepen our expertise across income and alternatives so investors can confidently write the next chapter of their own portfolio stories. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. We're starting today in a region called Bahadopi. It's located on an island in the eastern part of Indonesia.

0:39A. Anantha Lakshmi: So for a long time, this area was covered by dense rainforests. And there were only a few thousand residents living in and around Bahadopi. And most of them made a living out of farming or fishing.

0:52Camilla Hodgson: Only a decade ago, driving through this area was pretty much impossible.

0:57A. Anantha Lakshmi: So there were no paved roads here, no electricity. When mining executives first started coming to Bahadopi to explore for nickel, they stayed in inns or small huts. One executive said he was given a candle by an innkeeper when he first visited here.

1:16Camilla Hodgson: But late last year, when my colleague Anantha Lakshmi drove through the main town in this district, she experienced something totally different.

1:25A. Anantha Lakshmi: I was quite surprised by how fairly developed it was. The main street in the town was lined with dozens and dozens of shops selling food, vegetables. There were small restaurants, shops, money exchange, massage parlors, and even like a karaoke bar. This road did not exist a decade ago.

1:47Camilla Hodgson: Bahadopi's dramatic transformation from thinly populated rainforests to bustling towns, All comes down to one key commodity, nickel.

1:58A. Anantha Lakshmi: Nickel has completely transformed this town, which is now the epicenter of global nickel production.

2:05Camilla Hodgson: Back when Bahadopi was made up of more dense rainforest, Indonesia only accounted for 6 % of the world's supply of refined nickel. And now that number's climbed to 61%.

2:19A. Anantha Lakshmi: Most of the nickel that's made in Bahadopi is used widely for electronics, to make smartphones and for kitchen appliances. And then more recently, of course, nickel is also being used in batteries for electric vehicles.

2:34Camilla Hodgson: All that's to say the demand for nickel around the world right now is massive. And that's caused an explosion of nickel mining and processing in places like Bahadopi. This has been great for the Indonesian economy. But it's also led to major problems for other foreign members of this supply chain.

2:54A. Anantha Lakshmi: Indonesia has been processing and producing nickel at such a rapid pace over the last decade that it has led to a sustained oversupply in the market. And that supply glut has driven down prices globally and forced mines elsewhere to effectively shut down. Even mining giants such as BHP have paused nickel mining simply because they cannot compete with Indonesian production anymore. Indonesia has the world's largest reserves of nickel and it is by far the most dominant producer of this critical mineral. So it almost feels like the world does not have a choice but to use Indonesian nickel.

3:38Camilla Hodgson: But what consequences come along with a single country controlling such a critical commodity?

3:49Camilla Hodgson: I'm Michaela Tendera from the Financial Times. Today on Behind the Money, we're examining how Indonesia became a nickel superpower and what it means when one country controls a commodity's supply chain.

4:21Camilla Hodgson: Indonesia's dominance of the world's nickel supply can be traced back to an important decision roughly a decade ago.

4:29A. Anantha Lakshmi: So it goes back to 2014 when the Indonesian government first banned the exports of raw nickel ore. The reason they banned it was to boost the value of their commodities exports and bring in foreign investments.

4:44Camilla Hodgson: Here's the thing. Before nickel ends up in the smartphones or EV batteries that Anantha mentioned, the raw ore she's talking about has to be processed or refined. And before Indonesia announced this ban in 2014, that refining process wasn't really happening inside Indonesia, even though, get this.

5:04A. Anantha Lakshmi: Indonesia has the world's largest reserves of nickel, so it was the single largest source of nickel ore. So Indonesia was initially just exporting a raw nickel ore, which is a lot cheaper than the processed form of the metal. And much of that ore was sold to China, where the raw material was processed into a form that could then be used for stainless steel. And from China, it was exported all over the world.

5:30Camilla Hodgson: China exported that refined nickel for a lot more money. And Indonesia notices that. Why export the less valuable raw nickel ore when you could make a lot more selling the processed stuff instead?

5:44A. Anantha Lakshmi: So they banned the exports of ore, essentially forcing companies, mainly steel and nickel producers, to set up processing facilities within Indonesia.

5:56Camilla Hodgson: That means that now anyone who wants to play a role in this supply chain has to do all the processing and refining within Indonesia. But it's not Indonesian companies that are leading the charge in the processing and refining business like you might expect. It's actually China.

6:14A. Anantha Lakshmi: Chinese companies were involved in Indonesia right from the start. So before the ban in 2014, they were the biggest buyer of Indonesian nickel ore. And then when Indonesia banned the exports of the ore, they were the most impacted. and they ran out of nickel. So they acted immediately and started investing in processing facilities in Indonesia. So there's one recent study that said that 75 % of Indonesia's nickel refining capacity is controlled by Chinese stakeholders. And Indonesian government officials have also said in recent months that Chinese companies control over 90 % of Indonesia's nickel industry.

6:57Camilla Hodgson: China's setup of these nickel processing facilities is something that the U.S. and other Western countries couldn't do as easily.

7:04A. Anantha Lakshmi: What Chinese companies are able to do that others can't, I think it's been mainly about technology. They made major advancements in nickel processing and also the ability of Chinese companies to build the processing facilities quickly and in a lucrative manner.

7:24Camilla Hodgson: Those advancements were in technologies that helped turn nickel ore into raw material for steel, or low-grade nickel ore into battery grade. And so with that, China helps Indonesia turbocharge its nickel industry, pouring billions into the country.

7:41A. Anantha Lakshmi: Indonesia was really happy with the investments that were coming in from Chinese companies. So it's been rapid growth. It's much cheaper to process nickel in Indonesia. Mining costs are cheaper, sore labor costs. Coal, which is used at the smelters, is heavily subsidized. So electricity costs are also cheaper. All that has made nickel production in Indonesia much more profitable than anywhere else in the world.

8:12Camilla Hodgson: And all these factors, the Chinese investment, the ban on the raw nickel exports, the very cheap processing, it's resulted in one thing for Indonesia, a monopoly on the world's nickel supply.

8:29Camilla Hodgson: Now, I wanted to know more about the stakes when one country controls so much of an important commodity like nickel. But as we've learned, it isn't just Indonesia in this game. It's China, too. China's worked very hard to take control of a lot of critical minerals supply chains, and there are lots of examples from around the world. That's CFT's commodities correspondent, Camilla Hodson. She tells me that China's hopped into the supply chains of key commodities in other places, too. For example, gold in Ghana. They're very heavily involved in the mining of cobalt in the Democratic Republic of Congo.

9:08Camilla Hodgson: also lithium mining in South America. It's really something that China has deliberately worked on and it's thought to make itself very dominant across critical minerals, across the whole supply chain really, from mining to processing. Well, Camilla, why does China want that power over these critical minerals and metals? It's a kind of long-term bet, which seems to be playing out in their favour by China, that they need to be involved, heavily involved in the supply chains for all the major future industries. So whether that's, you know, electric vehicles or whether that's other critical defense technologies or, you know, smartphone and chip technologies.

9:49Camilla Hodgson: I think the play here is really, they want to be a dominant global power. And this seems to be quite a clever way to do it by really embedding themselves in the supply chains for so many really essential industries. That play by China, though, hasn't been well received in the West. As China sets up these kinds of relationships with commodity rich countries like Indonesia, Ghana and the Democratic Republic of Congo. Western nations now are really scrambling around trying to figure out what to do because there's been this sort of late onset realization that a lot of these supply chains really are reliant in one way or another on China.

10:29Camilla Hodgson: And in the context of a trade war, that is not so good. And so Western countries at the moment are trying to figure out a way to bring some of that industry back home. But it's not easy because these factories take a very long time to establish. They're not necessarily profitable. The energy prices in Europe in particular make it difficult to operate, for example, aluminium smelters or other smelting facilities. And so it's really not a quick fix, but it is something that Western governments are increasingly focused on. And some Western companies have already tried this. So, for example, Eremet, which is a French miner which has operations in Indonesia, they said last year that it was virtually impossible for them and for Western companies to run profitable nickel processing operations without China's help.

11:18Camilla Hodgson: And that's because over many years, China has invested a lot of money into getting these processes to be as streamlined and cost efficient as possible. So basically, Western companies have to rely on China to be involved in the nickel supply chain. Yeah, exactly. And for a long time, companies weren't really concerned about that. But now things are changing. What a lot of countries are now looking to do is try to wean themselves off China. I think there's a growing awareness that being critically dependent on one country poses a serious risk. And we saw that during the start of the Ukraine war, when it became very obvious the extent of Europe's dependence on Russia for energy.

12:00Camilla Hodgson: And there was this kind of immediate scramble to figure out how to reduce that and the risks that it poses to have that dependence, because you are in a vulnerable position if an enemy country or a country that is not aligned with your goals is really in control of something so vital. So I think there's a growing awareness among companies and countries that they need to be more self-sufficient and that China in this example in the nickel space and also more broadly in the critical mineral space is a partner that they want to move further away from. Ananta Lakshmi says that for a while, Indonesia's been really pleased with its relationship with China as its nickel industry has grown.

12:45A. Anantha Lakshmi: But I think more recently, as geopolitical tensions have escalated, Indonesia has had second thoughts about that over the past year or so. They've tried to encourage more and more Western companies to invest in its nickel industry. But Indonesia has not been massively successful on that front so far. It's still very much dominated by Chinese companies.

13:16Camilla Hodgson: The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. So both Indonesia and China have been benefiting from this boom in nickel production.

13:52Camilla Hodgson: But its rapid rise has really been affecting the global price of this metal.

13:58A. Anantha Lakshmi: So there's been an oversupply in the global nickel market for years now because Indonesia's production has just expanded so rapidly. And because of that oversupply, prices have dropped. And because of that, Indonesia itself is feeling the heat from that. Profit margins for a lot of Indonesian producers have dropped. And some of the smaller players are also struggling to make profits at these prices.

14:24Camilla Hodgson: And the effect on producers and their profit margins isn't the only challenge that's come with Indonesia's quick rise into nickel power. There are other costs, too.

14:34A. Anantha Lakshmi: There have been accusations over the years of massive deforestation for the mining, air and water pollution. So in Bahadoki, when we went, it used to be a fishing village. There are still a few families that make a living out of that, but they were complaining that they're not able to catch as much fish as they did before, because a lot of the water around the industrial park, they say, has been polluted. And in local media, you can see lots of reports also of, you know, rivers running red. And there's also lots of concerns about how waste from the nickel mining and processing is being disposed.

15:11Camilla Hodgson: Indonesia has disputed claims about nickel being dirty due to things like deforestation. But along with the environmental hazards Ananta described, there are also worker safety issues, specifically at Indonesia's largest metals complex. It's called Morawale Industrial Park in Bahadopi.

15:31A. Anantha Lakshmi: There have been frequent accidents at the Morawale Industrial Park and other nickel facilities in Indonesia, In Bahadopi, we spoke to dozens of workers of the Morawale Industrial Park who described frequent accidents almost daily, lacked safety practices, inadequate protective equipment, and also efforts by employees to cover up accidents at the facilities.

16:00Camilla Hodgson: During her reporting on worker safety in Indonesia, a labor union sent Ananta a video from an accident inside the Morawale Industrial Park.

16:09A. Anantha Lakshmi: So this accident happened in October last year. And there was an explosion at a waste cooling area of this company called Dexin Steel, which is a Chinese company running an operation there.

16:31That explosion trapped this young worker called Gunawan, who was operating a crane just nearby or just above the cooling well.

16:47Camilla Hodgson: In the video Ananta received, you can see a fire burning and plumes of smoke rising into the air.

16:54A. Anantha Lakshmi: There were panicked workers standing around and watching the scene unfold as firefighters were trying to put out the fire. There were some workers who were sobbing loudly. Others were praying. Some were calling out Gunawan's name. So there's really a lot of panic and fear that you can hear from the dozens of workers who were witnessing that scene.

17:19Camilla Hodgson: The trapped worker named Gunawan died later that day. And he's not the only fatality that Indonesia's nickel industry has seen.

17:29A. Anantha Lakshmi: So there's no official data available from the government or from the companies running the facility on a number of accidents. But several nonprofit organizations who are tracking the incidents from media reports or from interviewing workers, they say there are dozens of these accidents that take place every year and many lives are lost.

17:49Camilla Hodgson: When Ananta did her original reporting on this, the spokesperson for the Morawale Industrial Park told her that the park complies with all Indonesian laws and regulations, and that the park and its tenants have made, quote, several efforts, end quote, to reduce accidents. The company that owns Dexin and the Indonesian Ministry of Manpower and the Ministry of Investment and Downstreaming did not respond to requests for comment. Neither was it possible for Ananta to reach Dexin itself.

18:25Camilla Hodgson: So it seems, I mean, putting many of these factors together, thinking about environmental problems, worker safety, a lot of things are kind of coming together. It sounds to me a bit unsustainable.

18:39A. Anantha Lakshmi: I actually, I'm not sure I would describe it as unsustainable because Indonesia has the world's largest reserves of nickel and it is by far the most dominant producer of this critical mineral. So despite these problems, it almost feels like the world does not have a choice but to use Indonesian nickel. So one of the questions that Indonesia and a lot of the nickel buyers globally will have to navigate is how do they deal with these issues in Indonesia when they clearly still have high demand, high appetite for nickel. Demand for stainless steel, for instance, globally is still growing. Demand for EVs overall is still growing.

19:28A. Anantha Lakshmi: Nickel-based batteries are actually predominantly used in the West and the U.S. and European markets. So it's a situation where the Sino-Indonesian partnership is producing a lot of the nickel that the West needs. So even though there may be concerns about the environmental impact or worker safety, I think the West will still have to rely on Indonesia for nickel.

19:52Camilla Hodgson: Wow. Well, with that in mind, does Indonesia have to be careful about how much it relies on Chinese companies and investment? I mean, would there be a scenario where Indonesia needs to move further away from China to avoid ostracizing the West, given that they're their biggest customers?

20:10A. Anantha Lakshmi: I think they might be forced to be in that situation. And to some extent, I feel like they already are, because one of the reasons why they've not been able to strike critical minerals deals with the US is because of the Chinese dominance. But they've really struggled to attract non-Chinese players. So there's no obvious solution. Maybe Indonesia will have to offer more incentives, will have to improve its ESG practices in the industry to be able to attract Western companies.

20:45Camilla Hodgson: Now, the other key piece here is how Indonesia navigates price and supply.

20:51A. Anantha Lakshmi: So Indonesia's dominance is much more than even what OPEC controls of oil. OPEC at its peak only controlled about 50 % of the oil market.

21:01Camilla Hodgson: What Anatha's talking about here is the group of 12 countries that make up the oil cartel OPEC. Indonesia, as just one country, controls even more of the world's nickel. So it's a huge amount of power. Camilla Hodson, our commodities correspondent, tells me that how Indonesia navigates this could be similar to how OPEC handles oil. OPEC is very careful to try to manage supply and demand because the producer countries are conscious that higher oil prices up to a point is a good thing, but they don't want crazy price spikes and they don't want crazy price falls. And Anatha tells me that Indonesia is floating different ways to manage how much nickel it mines and produces.

21:49A. Anantha Lakshmi: So early this year, Indonesia realized that its industry was being affected and they needed to take some action. So government officials have been considering a possible cut to mining quotas so they can lower production and therefore boost global prices and profits for the Indonesian companies. but they have not made any final decision yet. I think they will try to control the production as much as they can, but not to a point where it also starts to hurt the government's revenue. Like I said, it's a key source of revenue for the government, and so they still need that source of revenue.

22:28Camilla Hodgson: Now, I want to ask about the tariffs that U.S. President Donald Trump announced back in April. We're in this 90-day holding period at the moment, But how might those impact Indonesia? And will the nickel sector be affected by them?

22:44A. Anantha Lakshmi: So the tariff rates of Indonesia are at a high 32 percent and China as high as 145 percent. So Indonesia does not sell a lot of nickel directly to the U.S. It goes via China. So either way, I think demand for nickel would be hit if the tariffs do stick. But I think the bigger risk for nickel demand now is Trump's retreat from clean energy targets, which is also triggering a slowdown in demand growth for electric vehicle batteries. And as demand for electric vehicles slow down globally, that will have an impact on demand for nickel and Indonesia's economy. So just looking ahead then, where do you see this going, Anantha?

23:30Camilla Hodgson: I mean, what are you hearing maybe from your sources in Indonesia, just to make a prediction here?

23:36A. Anantha Lakshmi: So there's no doubt that Indonesia will continue to dominate in the short to medium term. But there is a lot of uncertainty now on several fronts. The kind of rapid growth and production that we saw over the last few years will probably slow down as the government tries to boost prices of the metal. There's also a lot of uncertainty, not just because of the prices, but also because of the geopolitical tensions and the global trade war. I think Indonesia will have to put in more effort to try to attract investments from the West. So they have some kind of diversification and hedge against the Chinese investments in the industry.

24:18A. Anantha Lakshmi: I think there'll be more and more pressure to do that as they try to break into the Western market.

24:28Camilla Hodgson: Behind the Money is hosted by me, Michela Tindera. It's produced by me, Safia Ahmed, and Katya Kumkova. Sound design and mixing by Sam Giavinko. Original music is by Hannes Brown. Our executive producer is Flo Phillips. Topher Forges is our acting co-head of audio. Thanks for listening. See you next week.

24:59Camilla Hodgson: The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.