US May Block Indonesia Nickel On Forced Labor Issues

The industrial parks where the alleged abuses take place are the heart of Indonesia's nickel industry and the Indonesian government's industrial strategy, which focuses on adding value to minerals rather than exporting them as raw materials.

Many have been designated national strategic projects by the government, which bring various benefits, such as accelerated regulatory approval and protection by the military and police.

Locals or workers who protest about the environmental impact or working conditions claim to have faced investigation and harassment by authorities. For some, the US Department of Labor report is more evidence that Indonesia needs to take action to clean up its nickel industry.

“We always demand an end to this crazy nickel project and a thorough evaluation of nickel downstream operations,” said the head of research at Jatam, a Jakarta-based NGO that monitors abuses in the mining industry.“Because the environmental and social costs are too expensive.”

This, however, seems unlikely without an external push. The Indonesian government is betting heavily on a strategy of“downstreaming” its abundant supplies of nickel ore as a path to development. In 2023, Indonesia accounted for 40.2% of global nickel production, according to S&P Global research.

Indonesia's share could rise to as high as 75% in the next 4-5 years as it continues to expand and other global producers are unable to compete with its extremely low prices, according to Macquarie research.

Indonesia already nearly completely dominates global production of MHP, a powdery green mix of nickel and cobalt that has become many battery manufacturers' feedstock of choice.

Indonesia's industry now finds itself caught in the crosshairs of both ESG (Environmental, Social and Governance) concerns and geopolitical tensions.

So far, the industry has been built as a Chinese-Indonesian partnership. China has provided the capital, technical know-how and markets in the form of its booming EV industry. Indonesia has provided the mines and used export bans and tax incentives to entice Chinese companies to develop refineries in Indonesia.

The Indonesian government is now attempting to diversify and move further up the value chain to produce batteries and EVs in Indonesia. Alongside Chinese battery and EV producers like CATL, Wuling and BYD, South Korea's LG and Hyundai have also started production in Indonesia.

With the exception of America's Ford, Western refiners and automakers have dragged their feet on investing in Indonesia. Projects mooted or rumored by companies like Tesla, Volkswagen and BASF have either failed to manifest or fallen apart.

A slew of negative headlines about the industry's environmental impact and labor conditions have not helped matters. Equally important is a reluctance to work too closely with Chinese companies due to the US-led“derisking” of their supply chains from China.

Under the terms of the US Inflation Reduction Act, batteries and EVs are only eligible for generous tax credits if they use minerals from countries with which America has a free trade agreement – something Indonesia lacks. Subsidy conditions also sharply limit the amount of exposure to Chinese companies these supply chains can have.

Meanwhile, the European Union will soon launch a Battery Passport setting strict standards, including due diligence requirements, on social and environmental risks.

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Speaking off the record, senior figures at Indonesian nickel companies say that Western companies are keen to work with them but the regulatory requirements of their domestic governments complicate doing so.

The latest US Department of Labor report will add to those complications. US-Indonesia discussions to strike a“critical mineral agreement” to help Indonesian nickel access US markets and subsidies have stalled.

Influential US senators have also raised concerns about Chinese influence in Indonesia's supply chain. Allegations of forced labor by a federal agency will only be more grist to the mill.

Yet, without Indonesian nickel, America will struggle to hit its targets for EV adoption and decarbonization, according to Tim Bush, chief battery materials analyst at UBS who spoke to Asia Times earlier this year.

EV adoption is already lagging behind projections in America – partly due to the relatively high prices of American EVs, while cheaper Chinese-produced ones are subject to 100% tariffs.

However, Indonesia stands to lose out too. Iron phosphate EV batteries, which use no nickel and are cheaper, are gaining global market share.

Costlier nickel and cobalt batteries will still have their place, but probably mainly in richer markets like the US and Europe, where consumers are willing to pay extra for high performance and greater range. Which means Indonesia's nickel could soon be boxed out of precisely the markets where it's in most profitable demand.

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