In 2020, Indonesia banned raw nickel ore exports entirely. This was done with the intent to increase domestic nickel-related value-adding activities and to develop its electric vehicle (EV) industry. The policy succeeded in spurring new economic activities including the development of new smelters. However, the policy also came with significant challenges such as environmental, social and governance (ESG) issues, concerns over the equitable distribution of economic benefits, a World Trade Organization (WTO) dispute with the European Union, and the risk of over-dependence on Chinese investment.
Successes
Because of this policy, nickel-related industries in the Indonesian economy grew fivefold between 2013 and 2022. Indonesia had supplied only $6 billion of nickel ore in 2013, which grew to $30 billion of nickel and nickel-based products by 2022. By 2023, Indonesia also accounted for a dominating 42% of global nickel reserves and 51% of global mine production.
Indonesia’s downstream nickel policy contributed significantly to the country’s gross domestic product (GDP). The value-add of nickel-related activities soared from $1.4 billion in 2020 to $34.8 billion in 2023. After dipping to 4.3% in 2020 during the COVID-19 pandemic, the mining sector’s share of Indonesian GDP rebounded to 9.3% by Q1 2023 — a record high. This growth was fuelled by the substantial expansion of nickel production, rising global prices due to geopolitical tensions and post-pandemic recovery. Elevated prices were likely to persist with rising demand for critical minerals like nickel.
In terms of foreign direct investment (FDI), Indonesia successfully brought in new smelters and refining facilities from foreign-owned enterprises. In particular, Chinese enterprises invested a total of $14.2 billion in the Indonesia’s nickel industries over the last decade. This constituted more than a quarter of the total Indonesia’s total FDI of $53.3 billion in 2023 for metals-related industries. Aside from Chinese investments, the South Korean giants Hyundai and LG would jointly develop a $1.1 billion, 10GWh/yr EV battery plant in Karawang regency in West Java. Nickel Industries, an Australian company, also planned to raise $471 million for nickel projects in Indonesia.
Challenges
By 2024, Indonesia had 44 operational nickel smelters, with another 26 under construction or at the study stage. A vast majority of these smelters were Chinese projects. While FDI poured in — especially from China — efforts to attract industry leaders like Tesla, BASF and Eramet (a French MNC) fell short. Indonesia had yet to secure investments from Tesla despite intense diplomatic lobbying, while BASF and Eramet cancelled a $2.6 billion battery project due to opposition from non-governmental organisations because of deforestation risks to North Maluku.
There were also environmental and health costs from increased nickel-based industrial activities. Extensive deforestation around mines polluted river water supply, forcing local communities in Central Halmahera to rely on wells or bottled water. Smelters based on the rotary kiln electric furnace process also worsened air pollution, with estimated pollution-related deaths projected to reach 8,325 by 2060 from 215 in 2020 if left unaddressed.
Local communities also saw benefitted relatively little economic benefit. Research showed that nickel downstream industries disrupted fishing- and farming-based local economies through farm clearance, deforestation and water pollution, destroying local income sources and trapping communities in poverty. Central Halmahera, for example, had one of the highest poverty rates among regencies in North Maluku province (12% in 2023) despite being home to the Indonesia Weda Bay Industrial Park.
Globally, Indonesia’s nickel production surge caused an oversupply that depressed prices, leading to mine closures outside in other countries. Nickel prices went from $25,833/ton in 2022 to under $16,000/ton by late 2024. Moreover, because nickel prices depended on EV battery demand; Indonesia’s nickel industries could be negatively affected if the industry were to shift towards lithium-iron-phosphate battery formulations instead of nickel-based ones.
Yet another challenge was the WTO’s ruling that Indonesia’s nickel export ban violated trade rules. Although Indonesia appealed the decision while standing by its nickel-related industrial policies, this ongoing legal battle added to business uncertainty. There was also growing competition from the Philippines as the world’s second largest producer of nickel ore. The Philippines agreed to work with the US and Japan on closer ties and to accelerate the creation of a less China-dependent nickel supply chain.
Moving forward, some possible policy options for Indonesia to tackle the various challenges stemming from its nickel-based activities are:
#1: Enforcement of stringent sustainability practices and stricter environmental regulations aligned with global best practices
Improving environmental oversight can improve local welfare and attract sustainability-focused foreign investors. However, some smelters may resist change due to weak regulation in the past. To ensure compliance, Indonesia should step up enforcement through regular corporate social responsibility audits and apply penalties — including permit suspensions — for against violations.
#2: Diversification of investment partners
This can reduce the risk of dependence on Chinese enterprises and foster fairer price and technological competition among nickel companies. However, progress may be slow without strong enforcement of sustainability standards, and it may take time to challenge China’s dominant position.
#3: Prioritise downstream activities with a greater local spin-offs
Indonesia could diversify into other clean energy technologies with high growth potential in the current energy transition to make the most of its demographic window before 2040. The country could focus on activities that generate good local employment and spinoffs for smaller local businesses. With Southeast Asia poised to become a competitive solar manufacturing hub, investing in clean energy could enhance energy security, cut emissions and create sustainable jobs; provided ESG standards are upheld.
#4: Expansion of nickel downstream applications beyond EV batteries
This option could mitigate the risk of nickel being replaced in EV batteries. Indonesia could expand into other downstream uses like stainless steel, which has broad industrial demand. Realising this policy would require significant national and foreign investment.
#5: Strategic negotiations to resolve the WTO dispute and an alternative policy scheme
This will improve legal certainty for Indonesia’s nickel industry. Indonesia may need to amend its nickel-related policies, which would take time and effort. Nevertheless, other policy options — like the domestic market obligation scheme applied to coal and palm oil — could be more flexible alternatives.
Adopting a more balanced approach — reducing reliance on foreign investment, strengthening local capabilities, and prioritising sustainability — could help distribute the benefits of nickel-based industries more fairly and improve Indonesia’s long-term national resilience.
Access more case studies from the Lee Kuan Yew School of Public Policy.
Copyright © 2025 by the Lee Kuan Yew School of Public Policy at the National University of Singapore. All rights reserved. This publication can only be used for teaching purposes.