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Indonesia FDI surges on global energy crisis
Double-barrel bonus of rising prices for fossil fuels, net-zero transition minerals
The Asset 29 Aug 2022

Other countries may be reeling from the shocks of the current energy crisis, weakened China growth from zero-Covid, and rising interest rates, but not Indonesia as the country finds its bargaining power rising as it benefits not just from higher demand for coal but from also having the minerals necessary to energize the world in the future, according to a recent report.

Beyond the boost to trade from the energy crisis, specifically due to the rise of fossil fuel demand, the report published by investment bank Natixis finds that the global supply crunch has cemented countries’ commitment to diversifying their energy supply mixes, and Indonesia is key to that equation as it is the largest producer of nickel – a mineral essential to electric vehicle (EV) batteries and hydrogen.

The International Energy Agency (IEA) estimates that demand for nickel will rise six times by 2040. Meanwhile, the existing supply has not grown as fast, necessitating more investment to meet future demand.

After announcing a nickel ore export ban in 2020, Indonesian President Jokowi, who wants his country to be part of the global value chain of electric vehicles, also imposed an export tax on nickel pig iron (NPI) and ferronickel in 2022, both are stainless steel inputs that were still allowed after the nickel ore ban in 2020.

In 2014, Indonesia imposed a nickel ore ban, but it backfired, the report states, as it hurt export earnings and employment as investment was slow to come. As a result, the ban was reversed in 2017. But China eventually invested in the onshore processing of nickel ore, and NPI and ferronickel exports increased. As the largest producer – one million metric tonnes annually or 37% of total global supply in 2021 – and home to the largest reserves, Indonesia aims to capture more of the value chain, namely the nickel used for EV batteries. 

And after Western sanctions on Russia’s nickels, Indonesia certainly has more bargaining power, especially in the short-term. The tax on NPI and ferronickel will likely tilt the usage of nickel towards EV batteries from stainless steel, but this comes at a cost, such as reduced export value, government taxes and employment for the hope of better onshore investment and higher value-added exports in the future.

So far, the ban has worked in attracting more investment, the report notes, as Tesla has announced a US$5 billion deal to secure nickel, and FDI inflows surged to a record high in Q2 2022 to US$11 billion, primarily in mining and petrochemicals.

Natixis’ M&A Monitor also shows that Indonesia attracted the second-largest inflow of completed deals into Asia, behind India. While the mergers and acquisitions are primarily in information and communication technology, according to official data, greenfield investment is primarily in mining and fossil fuels. The data also show that not only is Indonesia attractive for its resource-rich economy but also for its burgeoning domestic demand.

Despite being in a sweet spot, Indonesia, the report finds, has two major challenges to overcome: mining is capital intensive and employs only 1% of the country’s labour force, and the country needs to expand employment opportunities for its underused 185 million working-age population.

Thus, more labour-intensive manufacturing is needed, and more effort must be put into loosening restrictive FDI policies and labour laws, and improving the skills gap and the infrastructure needed to broaden opportunities.

Jennifer Lee
Jennifer Lee
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DBS Hong Kong
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