Key Takeaways
A decade into nickel downstreaming, Indonesia’s nickel flows remain opaque. Visibility has been very limited on where it actually goes despite hundreds of studies in this field. The Energy Shift Institute unpacks the layers of the nickel trail and makes the following discoveries:
Indonesia has built dominance at the base of the nickel value chain, but not depth beyond it. Nearly all stainless steel capacity sits upstream, 98% in smelting, 70% stopping at slabs and 85% aimed at exports, leaving the country re‑importing finished goods and exposing an inability to link nickel production to its own consumption.
Policy incentives are front‑loaded. Powerful initial push factors have driven smelting investment, but without manufacturing pull measures such as demand engineering, bankability support, higher domestic content requirements or technological transfer enforcement, capacity stalls at shallow processing, creating exclusive enclaves instead of inclusivity of the wider manufacturing ecosystem.
The same capital deployed in tier-2 conversion, such as stamping and precision engineering, generates four to five times the employment and a far deeper supply chain than a smelter or battery plant. A USD1.5 billion smelter employs 3,000-5,000 workers and a USD1 billion to USD2 billion battery plant employs 1,000-2,000 in globally sourced supply chains, while the same USD1.5 billion deployed across 30-50 mid-sized tier-2 fabrication firms would generate 15,000-25,000 jobs that stand to spur wider spillovers into the domestic value chain.
Indonesia’s narrowing window demands urgent course correction as commodity exposure, social strains and global appetite for less‑carbon products rise, while global buyers’ diversification from China, and China’s own manufacturing offshoring, are giving Indonesia a chance to develop industrial depth, but only if it builds tier‑2 capability.
Executive Summary
Indonesia’s nickel transformation is the most dramatic commodity-sector reorganisation in recent years. Mined output amounted to 2.57 million tonnes in 2025, representing more than 61% of global supply and a 158% increase in five years. Operating smelters grew from two before 2014 to upwards of 60 by 2024. Exports of nickel derivatives reached USD38 billion to USD40 billion in 2024, up from USD11.9 billion in 2020. The 2020 enforcement of the ore export ban worked: it forced processing onshore, attracted USD30 billion to USD60 billion in Chinese-led investment, and made Indonesia the indispensable swing producer in global nickel markets.
Despite a 300% increase in nickel processing capacity, Indonesia imports 80% of the finished stainless steel products that serve domestic demand. |
But scale at the first-use stage is not the same as industrial development. Roughly 98% of installed stainless steel capacity sits upstream in smelting and basic steel production, 70% of refinery output stops at the slab stage, and 85% of production capacity is targeted at export markets. Indonesia exports stainless steel in its very early form, as slabs, and re-imports finished kitchenware, fittings and fabricated parts, a structural problem that reflects the absence of a domestic conversion layer. Despite a 300% increase in nickel processing capacity since 2020, Indonesia imports 80% of the finished stainless steel products that serve domestic demand, the gap having widened. Manufacturing value added has fallen from 32% of GDP in 2002 to 19% in 2024, while the country’s Economic Complexity Index ranking has actually regressed from 67 in 2012 to 69 in 2024, the very period during which billions of US dollars flowed into nickel downstreaming.
The framework this report adopts defines three industrial tiers: Tier 3, comprising rotary kiln-electric furnace (RKEF) smelting and high-pressure acid leach (HPAL), tier 2, consisting of conversion and fabrication such as tube mills and precision components, and tier 1, where end manufacturers and original equipment manufacturers (OEMs) deliver ready-to-use products. Indonesia has world-class tier-3 capacity. Tier 2 is the missing middle without which tier 1 cannot develop.
Two structural gaps explain the stagnation. The first is a policy architecture imbalance. Government instruments that force shallow processing onshore, including the export ban, mining quotas, and tax holidays for special economic zone and national strategic project designations, are powerful and effective. However, factors that pull production into deeper conversion and final manufacturing are absent or dormant, such as demand engineering, bankability infrastructure and standards ecosystems. Push without pull produces an enclave equilibrium which truncates wider spillover effects.
The second is enclave industrialisation at the level of park governance. Morowali Industrial Park (IMIP) and Weda Bay Industrial Park (IWIP) are vertically integrated, foreign-anchored, export-oriented complexes whose buyer-structure misalignment, supplier qualification barriers and absence of shared services actively block spillovers into the surrounding domestic business ecosystem, such as small and medium enterprises (SMEs).
Indonesia has built the world’s largest nickel processing base, but must now shift policy to turn nickel volume into industrial depth |
This equilibrium carries three vulnerabilities that are no longer hypothetical. First, commodity cycle exposure. Indonesian nickel pig iron (NPI) and stainless steel producers are price-takers in markets driven by Chinese construction cycles, demonstrated starkly by the 2023-2024 NPI price decline. Second, persistent import leakage. Finished stainless steel goods continue to be imported despite upstream scale. Third, policy shock sensitivity. The equilibrium depends on policy support, for example, continued export restriction, which the European Union’s challenge at the World Trade Organization in 2022 threatens directly. Without a developed domestic absorption layer, any relaxation of the export ban undermines the entire processing investment rationale.
The strategic pivot: One layer deeper
This report proposes three strategic pillars to operationalise Energy Shift’s proposed pivot to deeper industrialisation of nickel. Pillar 1: Synchronise the policy stack. Restructure fiscal incentives into levels, reserving the most generous tax holidays not for more smelter capacity but for firms moving into tier-2 conversion and tier-1 assembly. Make technological transfer requirements enforceable and tied to auditable milestones rather than the contractual formalities in most joint-venture (JV) arrangements. Expand TKDN domestic content rules beyond electric vehicles (EVs) to cover stainless steel-intensive products in construction, water infrastructure, and food processing and industrial equipment, where domestic demand already exists but is now served by imports.
Pillar 2: Turn enclave parks into linkage engines. Require progressive local procurement targets, paired with supplier development programmes that build the capacity of Indonesian SMEs to qualify for entry into anchor supply chains. Establish shared service infrastructure within or next to the parks. Tie the renewal of park fiscal incentives to measurable linkage performance, such as the number of qualified domestic suppliers, local procurement spend as a share of total inputs and workforce localisation rates.
Pillar 3: Build domestic champions and strategic JVs. Develop Indonesian winners from the ground up by supporting the SMEs that broad-based industrialisation requires. At the same time, leverage existing large domestic firms as multi-tier anchors that catalyse the wider ecosystem, with explicit mandates to develop Indonesian SMEs as their tier-2 supplier base. New large-scale JVs should include co-located research and development (R&D) facilities staffed by Indonesian engineers, progressive local procurement targets, and obligations to co-finance shared services such as testing laboratories and tooling hubs that no single SME could afford to build alone.
Why moving step by step downstream is important
Two contrasts make the stakes concrete. First, tier-3 smelter versus tier-2 conversion ecosystem. On tier 3, a USD1.5 billion RKEF smelter in Morowali employs 3,000-5,000 workers in capital-intensive, continuous-process operations, obtains its equipment from Chinese suppliers and sells NPI on commodity spot markets at globally determined prices. Its supply chain linkages to the domestic economy are minimal. On tier 2, the same USD1.5 billion deployed across 30-50 mid-sized fabrication firms, from tube mills to fastener producers, would generate 15,000-25,000 jobs across a far broader skill spectrum. These firms would buy stainless steel coil from domestic tier-3 mills, creating forward linkage demand that does not yet exist. They would engage tooling and calibration services locally, thus spawning backward linkages. And they would sell basic yet specific components to domestic construction, food processing and infrastructure buyers, which form the demand anchoring that buffers the system from global commodity cycles.
Redirecting USD 1.5 billion smelter capex to fabrication firms could create 5× more jobs than smelter/EV build‑outs. |
Second, EV batteries versus metallurgical tier 2. Indonesia’s EV battery ambition is real and the Hyundai-LG and Contemporary Amperex Technology (CATL) milestones are genuine. But a single battery cell plant costs USD1 billion to USD2 billion per 10 gigawatt-hours (GWh), employs 1,000-2,000 workers in cleanroom conditions, and draws from a supply chain that is globally sourced and technology-gated. Metallurgical tier 2 has a different industrial profile entirely, distributed across many firms rather than concentrated in a handful, with entry costs of USD5 million to USD50 million per firm, mature transferable technology, domestically anchorable supply chains and labour-intensive skill-building employment. The maths is decisive: the metallurgical tier-2 route is capable of meeting 70% of global nickel demand, serves a domestic market of 280 million consumers, and can begin generating returns within three to five years. The EV battery route addresses less than 1% of Indonesia’s nickel output and requires a decade or more to build competitive domestic capability. This is not an either/or proposal; Indonesia should pursue both routes. But the allocation of policy attention, fiscal incentives and institutional support should reflect the scale of opportunity.
The runway for course correction is shorter than it appears, because several dynamics are converging at once. On the market side, commodity exposure is set to intensify: S&P Global projects Indonesian nickel output reaching nearly 5 million tonnes by 2035, which will structurally suppress prices and compress margins for an export-dependent processing sector that has no domestic demand buffer to cushion the cycle. Each year of delay in building that buffer is a year in which Indonesian producers absorb more of the downside of their own expansion.
At the same time, the competitive window for tier-2 development is narrowing from the outside, but it is also, paradoxically, opening. Chinese and Indian fabrication ecosystems are maturing quickly, qualifying for global buyer relationships and locking in supplier slots that Indonesian firms could otherwise compete for. The cost of entering conversion industries rises with every year those ecosystems deepen, because the marginal cost of displacing an incumbent qualified supplier is far higher than the cost of becoming one in the first place. Yet the same moment carries a rare strategic opening. Global buyers are actively seeking to diversify away from Chinese-concentrated supply chains, while China itself is migrating up into advanced manufacturing and might offshore more traditional industries to lower-cost jurisdictions. Indonesia sits at the intersection of these two shifts, with the feedstock, the scale and the cost position to absorb the capacity that is leaving China and to occupy the supplier slots that western buyers are creating deliberately.
Indonesia’s window to leverage its resource advantage and cost position for industrial depth is closing, demanding urgent action |
A separate but reinforcing dynamic is the sustainability gate: Europe’s Battery Passport becomes operational in February 2027, and before that, its Carbon Border Adjustment Mechanism (CBAM) is already reshaping the economics of carbon-intensive supply chains. These measures, along with more that will follow, are set to exclude high-carbon, low-traceability intermediates from premium markets. As a result, Indonesian output will be stranded with a shrinking pool of price-only buyers just when the country most needs access to quality demand.
Finally, and most consequentially, the domestic social contract underwriting the entire downstreaming project is already eroding. Communities in Sulawesi and Maluku are bearing the environmental and social costs of rapid industrialisation today, and will see diminishing returns over time from an enclave model that generates export revenue but not the jobs, SME ecosystem or skill development that constitute durable development dividends. Resource nationalism is politically sustainable only as long as the population perceives itself to be a beneficiary. If the enclave pattern becomes more entrenched, that perception will recede.
This paper is the second in a series of analyses on Indonesia’s mineral downstreaming and industrial development. The Energy Shift Institute is publishing this series to highlight key developments, challenges, and opportunities in the sector.
Ahmad Zuhdi Dwi Kusuma is an Associate Principal of the Energy Shift Institute. Zuhdi is a development economist specialising in the mining and energy sectors. He previously spent four years as a mining industry analyst at Bank Mandiri.
Ian Hiscock is a Principal of the Energy Shift Institute. Ian is a mineral economist with a global profile. He started his career in London, spending more than 16 years working for companies, banks and governments all over the world.
Rizky Abietto is a Junior Analyst to the Energy Shift Institute. Abi has a broad range of experience spanning non-governmental organisations, banking and consulting. He holds a bachelor’s degree in physics from the University of Indonesia.
The Energy Shift Institute is an independent non-profit energy finance think-tank driving context, clarity and credibility for Asia’s energy transition pathways.