Commodities at the Core: Outlook for Indonesia as a Reshoring Center

Commodity dependence slows Indonesia reshoring

Indonesia’s development as a reshoring center has been gradual because exports remain concentrated in raw materials rather than higher-value manufactured goods. Food accounted for 19.5% of exports in the 12 months to May 31, 2026, with palm oil alone contributing 12.5 percentage points. Energy products accounted for 15.5% of exports, led by coal and LNG, while metal ores and processed products represented 19.1%.

This export mix gives the Indonesia economy exposure to commodity-price volatility, climate risk and policy intervention. The government has expanded oversight of strategic commodities, including coal, palm oil and ferro-alloys, while earlier nickel restrictions show how export controls can be used to encourage domestic processing. These actions may support downstream industry over time, but they also create uncertainty for companies planning Indonesia supply chain investment.

Commodity exposure also heightens vulnerability to external shocks. A strong El Niño event could pressure palm oil production and raise food-import costs, while Middle East conflict has already affected selected inputs such as sulfur, which is used in nickel and fertilizer production.

Indonesia trade policy creates mixed signals

Indonesia has an opportunity to support growth through trade agreements, but its external relationships also highlight competitive challenges. The 2025 framework deal with the US reduced a proposed tariff rate to 19%, yet the average US tariff on Indonesian goods stood at 14.2% in June 2026, more than double the 5.9% ASEAN average. That tariff gap matters for manufacturers comparing Indonesia with other ASEAN manufacturing locations.

The EU relationship is improving, with an agreement announced in September 2025 that would remove duties on 98.5% of tariff lines. However, new EU rules could complicate trade. The EU Deforestation Regulation could apply to 10.1% of Indonesia’s EU exports, including coffee, while the Carbon Border Adjustment Mechanism would affect 14.6% of exports, including a large share of hot-rolled coil steel shipments.

Mainland China remains Indonesia’s largest trading partner, accounting for 31.8% of total trade and 24.8% of exports. The relationship is heavily commodity-based: mainland China receives 96.1% of Indonesia’s ferro-alloy exports and 87.9% of nickel mattes. That concentration supports demand for Indonesian output but also leaves trade flows exposed to changes in metals policy and China-linked demand.

Low costs support ASEAN manufacturing competitiveness, but risks remain

Indonesia’s strongest manufacturing advantage is cost. Average manufacturing compensation is US$1.4 per hour in 2026, 39.7% below Vietnam, 49.8% below Thailand and 68.8% below Malaysia. That makes Indonesia attractive for cost-sensitive production and supports its potential role in ASEAN manufacturing relocation.

Compensation is forecast to rise 7.2% annually over five years, while the country faces a shortage of skilled workers: 36% of the workforce had completed only primary education as of 2024. Indonesia also carries the highest policy instability score among six regional peers and elevated labor strike risk following a 2024 Constitutional Court ruling that strengthened worker protections.

Indonesia supply chain outlook

The near-term Indonesia supply chain outlook is likely to remain commodity-led, even as selected manufacturing sectors gain momentum. S&P Global Market Intelligence forecasts real GDP growth of 5.0% annually in 2026 and 2027, but export growth is expected to slow sharply to 2.5% in 2026 from 9.6% in 2025. Metals drove growth in 2025, including steel and nickel, but both are forecast to grow by less than 0.5% in 2026.

Manufacturing activity has shown signs of improvement, but export orders remain weak. Electronics may become a brighter spot, with growth forecast to accelerate in 2027 and 2028 as Indonesia benefits from relocation activity. For now, domestic demand and commodity-linked sectors remain more important growth drivers than broad-based manufacturing reshoring.

How businesses can assess the opportunity

For businesses evaluating Indonesia reshoring, the key question is how quickly its potential can translate into reliable manufacturing capacity. Decision-makers ned to evaluate commodity exposure, trade-policy uncertainty, labor availability, infrastructure plans and sector-specific growth prospects together. S&P Global Market Intelligence data on country risk, trade flows, supply chains, PMI trends and economic forecasts can help companies compare Indonesia with other ASEAN manufacturing locations and monitor shifts in Indonesia trade policy.