Next Indonesian president likely to maintain resource nationalism stance

The winner of Indonesia's presidential election is expected to continue President Joko Widodo's policy of restricting metal exports to draw foreign investment to develop downstream mineral processing, analysts said.

The Feb. 14 general election to decide who will replace the president commonly known as Jokowi is being closely watched by miners and metals investors for any signs of a new policy direction that could affect the supply of nickel and other metals. The country has become the world's largest nickel producer, a key metal used for stainless steel and electric vehicle batteries. S&P Global Commodity Insights has forecast that Indonesia's primary nickel output will account for 45.5% of global production by 2028.

Jokowi successfully implemented the policy with a nickel ore ban in 2020, which attracted foreign investment and technology in mining and smelting, mostly from China.

"It's very likely that President Jokowi's 'downstreaming' policy will continue regardless of the outcome of the presidential election," said Anton Alifandi, the lead country risk analyst for Southeast Asia with S&P Global Market Intelligence.

The benefits of resource nationalism for Indonesia were first felt during Jokowi's term, but the law that mandates domestic processing was passed by parliament in 2009 under Jokowi's predecessor, President Susilo Bambang Yudhoyono. The law gained strong cross-party political support at the time, Alifandi said.

Indonesia's foreign direct investment in the metal and mining sectors reached $16.5 billion in 2023, rising 180% from 2019 levels, data from the Indonesia Investment Coordinating Board showed.

"Given the high level of investment that's been generated since the ban, it's unlikely that whoever wins the election will reverse the ban," Alifandi said. "There may be time-limited exemptions from the ban, but the general direction of the policy is unlikely to change."

Criticism over nickel downstreaming

Three candidates are competing to be Indonesia's next president.

Defense Minister Prabowo Subianto is considered the front-runner and has Jokowi's eldest son as a running mate. Prabowo has been a staunch supporter of Jokowi's downstream development plans. But he might not be able to secure more than 50% of the national vote and 20% of the vote in each province to win the general election outright. In that case, a runoff election between the two top candidates would be held in June.

Prabowo's two challengers have criticized downstreaming policies for causing social and environmental damage.

"Jokowi's downstreaming policy and the nickel sector's fast-paced growth has led to a sharp increase in greenhouse gas emissions and a surge in deforestation," Amelia Haines, a commodities analyst at Fitch Solutions' BMI research arm, told Commodity Insights in an email. "At the same time, concerns have been raised over the safety of working conditions and the impact mining operations have on local communities."

Ganjar Pranowo, former governor of Central Java, belongs to the Indonesian Democratic Party of Struggle, the country's ruling political party in the legislature that has supported Jokowi's last two elections. But Ganjar's camp criticized the slow pace of the current administration's efforts to crack down on illegal mining. Ganjar has promised on the campaign trail to suspend the construction of smelters that produce stainless steel, nickel pig iron or ferronickel to preserve nickel reserves and optimize their use to produce higher-value batteries.

Anies Baswedan is the third candidate and Jakarta's former governor, whose running mate is Muhaimin Iskandar. During a Jan. 21 debate, Iskandar criticized Jokowi's nickel policies for causing environmental damage and workplace accidents, while noting that most of the benefits went to Chinese companies and not to local communities.

"Miners' environmental, social and governance scores remain a top concern for industry players globally," Haines said. "We hold the view that these discussions pose a significant threat to future investment activity. The government will need to implement policies to ensure the socio-environmental impact of mining operations is limited, to continue to see growth in its nickel industry."

Mining safety and environmental protection are among the biggest challenges facing Indonesia's nickel industry, Alfonsius Ariawan, mining and metals lead of Indonesia at the dss+ consultancy, said in an interview. "With the nickel price dropping, we need to be more efficient, more competitive. How do you do that while making sure that safety risk is still managed? If we go overboard on the efficiency, then sometimes we sacrifice the safety, and that's not a good thing," Ariawan said.

Keeping abreast with evolving overseas regulatory requirements will also test the next president. "Certainly, we need to step up the policy, and the verification of compliance needs to be reinforced. But I think one question is that the policy and regulations and all these compliances is just a minimum. What we want is the industry to take more responsibility and proactive action, not just meet the regulatory requirements," Ariawan said.

Resource nationalism's threat

Nickel investors are concerned that the next president will deepen resource nationalism policies, limit resource development, tighten environmental rules, restrict the construction of nickel smelters and increase export tariffs, said Xia Yingying, a metals analyst for Nanhua Futures. This could disrupt supplies and push up the production cost of Indonesia's nickel industry.

Front-runner Prabowo's challengers could constrain nickel resource development, Xia said. Baswedan might prioritize environmental protection over the requests of investors and metals and mining companies, while Ganjar's promise of suspending nickel smelter construction has provided short-term support for nickel prices.

Analysts doubted whether the downstreaming policy would work for unprocessed minerals and metals. Jokowi's administration had planned to ban exports of unprocessed bauxite, cobalt and tin starting in June 2023, but only the bauxite export ban took effect on time. The administration has delayed plans to tax exports, of nickel pig iron and ferronickel, and stopped or slowed the issuance of new mining quotas as slumping nickel prices affected metal producers' profitability.

"Jokowi's export ban on nickel ore exports in 2020 succeeded thanks largely to the abundance of nickel in Indonesia," Haines said. "It is unlikely we will see similar triumphs in other mining sectors, given that Indonesia is not as abundant in other minerals and accounts for a much smaller share of global reserves of these minerals."

Indonesia accounts for 18.8% of global reserves and resources of nickel and for 7.9% of global tin, 7.2% of cobalt, 2.8% of copper and 1% of bauxite, according to Market Intelligence data.

"The introduction of such measures in other mining sectors may not be beneficial and [could] introduce risks," Haines said. "For example, we may see trade partners announce new trade restrictions against Indonesia in response, a decline in foreign direct investment and/or a drop in government revenue. Any new downstreaming policies need to be evaluated against such risks, as their introduction could have a significant impact on the domestic mining sector."