Indonesia is attempting to reduce Chinese investment in new nickel mining and processing projects to help its industry qualify for US tax breaks, as the Biden administration seeks to limit Beijing's influence in the electric vehicle supply chain.
Starting in 2025, generous tax breaks will be available under President Joe Biden’s Inflation Reduction Act. However, these will not apply to EVs containing batteries and critical minerals like nickel sourced from "foreign entities of concern," including companies with more than 25 percent Chinese ownership.
This restriction would impact Indonesia's industry, which has become the world's largest supplier of nickel due to a significant influx of Chinese capital into mining and smelting projects over the past four years.
Indonesia's government and industry are now working to structure new nickel investment deals with Chinese companies as minority shareholders, according to three people familiar with the matter.
Such deals could enable the output from these projects to qualify for IRA tax credits. However, Indonesia would also need to negotiate a trade agreement with the US for its nickel industry to qualify. Jakarta has proposed a limited agreement covering only critical minerals.
Indonesia is in discussions with several potential investors to build smelters where Chinese companies would hold less than a 25 percent stake, according to one source aware of the government’s position.
These efforts come as the industry faces increasing pressure from potential customers in South Korea and Japan to comply with the IRA, with those companies in the supply chain also
wanting to qualify under the new law, the sources said.
Septian Hario Seto, deputy coordinating minister for investment and mining, confirmed the industry's and government’s efforts. “It’s not just about IRA, but also diversification,” he told the
Financial Times. “This is a very important policy because we do not want to get trapped in geopolitical tensions. We have to look out for national interests.”
One new smelter investment, valued at about $700 million, is in the works with a Chinese company holding a minority stake, while Indonesian and South Korean partners hold a majority, he said. He declined to name the companies.
However, Jakarta is not imposing any mandatory limit on Chinese ownership.
Last year, Indonesian government officials asked some Chinese companies if they would be open to taking a minority stake of about 15 percent in nickel projects, according to an executive at a nickel producer.
At least one Chinese company is resisting any attempt to restrict new investments. “We have the technology, we have the market, and we only get a small percentage of the profit? It does not make sense for us,” said the executive.
Reducing China’s influence will be a challenge for Indonesia. About 80 to 82 percent of its battery-grade nickel output is expected to come from majority Chinese-owned producers this year, according to Benchmark Mineral Intelligence.
This stems from Jakarta banning nickel ore exports in 2020 to force processors and battery makers to invest in the country. Chinese companies quickly responded with billions of dollars.
These investments have transformed Indonesia’s economy and made the nation a critical player in the global EV transition. Indonesia accounts for 57 percent of global refined nickel production, and its share is forecast to rise to 69 percent by the end of the decade, according to BMI.
Only a handful of foreign companies that are not Chinese operate in the Indonesian nickel industry. Vale Indonesia has partnered with carmaker Ford on equity investments in a nickel smelter and is in talks with Stellantis about another smelter. China’s Huayou Cobalt is a partner in both projects.
When they met last year in Washington, Biden and Indonesian leader Joko Widodo agreed to work on an “action plan” on critical minerals as a precursor to any free trade agreement.
