Potential US-Indonesia agreement could roil nickel markets

Efforts to diversify critical mineral supply chains could become more complicated if the US and Indonesia announce a limited free trade agreement at a Nov. 13 bilateral meeting between the leaders of the two countries.

US President Joe Biden and Indonesian President Joko Widodo are expected to discuss a limited free trade agreement (FTA), which would allow electric vehicles made with battery minerals from Indonesia to meet eligibility requirements for US tax credits under the Inflation Reduction Act (IRA).

Indonesia is the world's biggest nickel producer and is in the process of expanding. A limited FTA would give Indonesia more clout, and it would have strong repercussions for the global nickel market, according to Will Talbot, principal nickel and cobalt analyst at Benchmark Mineral Intelligence.

It could give original equipment manufacturers "IRA-compliant access to the world's largest nickel-producing country at a time when access to the metal will be sorely needed for the West to achieve its energy transition ambitions," Talbot said in an email interview.

This would, in turn, "make it harder for Australia and Canada to attract investment given their higher ESG standards and higher production costs," Talbot said.

China complications

Australia Prime Minister Anthony Albanese signed a compact with Biden in May to add Australia as a "domestic source" to attract US critical minerals funding. However, miners Down Under, already worried about the IRA's market-distorting impacts, say a limited US-Indonesia FTA will only make things worse.

A limited FTA between Indonesia and the US "would be an absolute disaster because it effectively legitimizes and gives the Chinese, via their operations in Indonesia, an endorsement to expand their capacity," Steve Norregaard, CEO and managing director of Australia-based Widgie Nickel Ltd., told S&P Global Commodity Insights on Nov. 10.

In addition, miners are waiting on tenterhooks for the US to define its foreign entity of concern (FEOC) rules that are required by the IRA, which would place limits on the ability of OEMs to import metals from certain countries and companies. Chinese companies are heavily invested in Indonesia's nickel industry, Talbot said.

"The restrictions listed in the IRA have still not been fully clarified. As almost all nickel producers in Indonesia have some level of Chinese ownership, the final decision as to what constitutes FEOC control could limit which producers are eligible under the IRA, even if an FTA is signed," Talbot said.

"Roughly a year after President Biden signed the IRA into law, there also remains ambiguity around the interpretation of the [FEOC] provision, and by extension, whether Indonesian nickel produced or part–owned by Chinese companies will eventually find its way into the US as a qualifying material for IRA subsidies," Huw McKay, vice president of market analysis and economics at BHP Group Ltd., said in the miner's economic and commodity outlook released in August.

ESG-driven bifurcation

Norregaard said a limited FTA could lead to new supply out of Indonesia, putting further pressure on prices, which have nearly halved in the past year. The London Metal Exchange nickel cash price sank to $17,025.50 per metric ton as of Nov. 10, down 34.1% from a year earlier, according to S&P Global Market Intelligence data. Falling prices would lower incentives to build nickel projects outside Indonesia or the Philippines.

"At the current nickel price, I don't believe there's anyone producing nickel sulfide concentrates that are making money," Norregaard said.

Miners are hoping legislation being introduced in Europe mandating the carbon stamping of all batteries in electric vehicles will encourage a premium for nickel sulfide out of Australia and Canada. Nickel from those two countries would likely be more sustainably produced than Indonesian laterite nickel.

"That may ultimately lead to the bifurcation of the nickel market where nickel sulfide producers receive a premium for their product. That's what many in the industry are hoping for," Norregaard said.

Mark Selby, president and CEO of Canada Nickel Co. Inc., told Commodity Insights that discussions are advancing with automakers and other battery supply chain participants due to the need for a "local, safe jurisdiction, zero-carbon nickel and cobalt supply."

The potential FTA is a "sad comment on some car companies and the mining industry for failing to get the required nickel supply in place as nickel demand in the US and Europe is set to more than double by the end of the decade," Selby said.

Such a free trade deal "basically spits in the face of the goals of the energy transition for a cleaner planet, and the IRA, to decouple supply chains from high-risk and Chinese-controlled supply," Selby said. "I don't understand why some car companies want to risk the impact to their brand by sourcing supply from operations which have massive carbon and environmental footprints."

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