A nickel rush in Indonesia by Chinese mining companies over the last decade may come to a halt as falling prices for the metal used in steel production makes processing the material in the Southeast Asian country less attractive for China-based producers.

In September, China Baowu Steel Group, a giant state-owned producer, put on hold its plan to buy nickel assets in the Southeast Asia country from China’s privately owned Tsingshan Holding Group Co. in a deal that could be worth up to $4 billion. The two companies have been in negotiation for more than a year and the proposed deal has been under review by multiple ministries and regulators. Baowu sent its independent directors to inspect Tsingshan’s operations in Indonesia in late September, but hasn’t disclosed their findings.

Tsingshan has led a wave of Chinese mining operations in Indonesia that has helped the country become the world’s second-largest stainless-steel producer after China.

Chinese companies that already have a foothold in Indonesia now face additional challenges including changes in nickel processing technology and uncertainty over local government policy.

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Largest nickel reserve

Indonesia holds the world’s largest nickel reserves, with an estimated 21 million tons, accounting for about 22% of global reserves, according to the U.S. Geological Survey. Also, the country’s relatively young population — about half of its 276 million people under the age of 30 – provides cheap labor and makes the government eager to create jobs for the youth.

In 2013, ahead of a ban on Indonesia’s export of nickel ore taking effective, it took only 45 days for Tsingshan to decide to spend $628 million to build a nickel-iron smelter in the village of Bahodopi in the Morowali Regency of Central Sulawesi Province. At the time, the village was surrounded by an ancient forest and lacked water supply, power and roads. After the first phase of the project was put into operation in mid-2015, Tsingshan quickly achieved positive cash flow as the nickel-iron production costs in Indonesia was at least 20% lower than in China, according to a person familiar with the company.

The Morowali Industrial Park, also known as Tsingshan Park, became a key project of China’s Belt and Road Initiative in Indonesia. Chinese President Xi Jinping and Indonesia’s then-President Susilo Bambang Yudhoyono oversaw the signing of the agreement to establish the industrial park. The success of the first phase attracted financing from China’s state-run banks, commercial lenders and sovereign fund.

Tsingshan subsequently opened the park to investment from other companies. So far, at least 53 companies have invested in the zone, of which about two-thirds are operated by Tsingshan. With a cumulative investment of $18 billion and an annual output value of $26.4 billion in 2022, the park is now the largest nickel-based industrial area in Indonesia.

Over the last decade, Bahodopi has grown from a village of a few hundred residents to the home of 300,000 workers. “It’s running 24 hours a day and looks like Shenzhen in the 1980s,” said Du Yan, chief representative of Indonesia for Tsingshan’s overseas investment unit Shanghai Decent Investment (Group) Co. Ltd.

Chinese firms have also invested in other nickel mines in Indonesia. China-based companies have built more than 90% the country’s nickel smelters, Meidy Katrin Lengkey, secretary general of the Association of Indonesian Nickel Miners, told Caixin. “Once one company came and made money, others followed,” she said.

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Several Chinese companies told Caixin that the cost of building a complete industrial chain in Indonesia is lower than in China because of the cheaper labor, government support and low costs of supporting industries such as building materials and cement.

Tsingshan Park now has the world’s most complete stainless steel production base with annual output of 2.5 million tons of nickel pig iron and 3 million tons of stainless steel. The production lines Tsingshan put up for sale account for about 20% of the park’s nickel pig iron capacity.

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Fluctuating nickel prices

The company wants to sell the production lines so it can transition from producing stainless steel nickel to battery nickel to take advantage of the rise of the electric vehicle market.

For Baowu, the world’s top steel producer, the purchase would boost its struggling Taiyuan Iron & Steel unit known as TISCO. Baowu took a 51% stake in the unit in 2020.

TISCO has higher production costs as it has to import nickel from the Philippines and Indonesia and then produce stainless steel domestically. In the first half of 2023, TISCO’s Shenzhen-listed division, TISCO Stainless Steel Industrial Co. Ltd., swung to a net loss of 495 million yuan ($70 million) from a net profit of 2 billion yuan in the year-earlier period.

As the proposed deal was under review by the National Development and Reform Commission, the State-owned Assets Supervision and Administration Commission and Ministry of Commerce, nickel prices seesawed. The metal rose about 50% from July to December 2022, before falling by almost half to its current level below $16,000 per ton on the London Metal Exchange.

“The market is changing too fast,” said an investor familiar with Indonesian nickel industry.

“When Baowu intended to buy the production lines from Tsingshan, each production line could make a profit of a few hundred thousand yuan per day. Now it’s about breaking even,”

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Tsingshan also owns canteens, power plants, wharfs and other infrastructure facilities in the park that can help average down its overall costs and achieve economies of scale, said a Chinese nickel iron producer in Indonesia.

The company is taking measures to improve its production process and lower energy use to cut costs, Caixin learned from a person familiar with the group. Tsingshan’s strategy is “not to be disturbed by the market, but to focus on pushing its production cost to the lowest in the industry, so there is no need to worry about the problem of excess capacity,” the person said.

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Switch in process method

Nickel can be extracted from nickel ore either by a pyrometallurgical or hydrometallurgical process. In conventional pyrometallurgical processing, the ore is calcined in a rotary kiln and smelted in an electric furnace to produce ferronickel. The ferronickel produced in pyrometallurgical processing has a lower nickel content, from 8% to 15%, and is mainly used in producing stainless steel. Pyrometallurgical processes are energy-intensive.

In a hydrometallurgical process, mixed ore is heated and pressured in a titanium-clad autoclave by steam and sulfuric acid injection, and nickel and cobalt are extracted into an acidic solution together with iron and aluminum. The final products produced in this process have a much higher nickel content, from 35% to 65%, and are mainly used in making ternary batteries for electric vehicles.

As Indonesia has ferronickel overcapacity, the country is considering a ban on new pyrometallurgical nickel projects next year, Meidy of the miners association told Caixin. The government will steer new investment into hydrometallurgical process to meet the growing demand for EV batteries, she said.

In 2021, China’s leading nickel trader, Lygend Resources & Technology Co. Ltd., built Indonesia’s first hydrometallurgical nickel project. Chinese mining company Zhejiang Huayou Cobalt Co. and metal recycling service provider GEM Co. Ltd. have since launched similar projects.

Among the Chinese companies entering the new race, Huayou Cobalt is the most aggressive. The company in September 2022 clinched a deal with the Indonesian nickel unit of Brazilian mining giant Vale S.A. to build a second plant in the country that uses the high-pressure acid leach process to refine the metal. Huayou is expected to invest $7 billion in Indonesian nickel projects, the company’s chairman Che Xuehua told Caixin.

The expansion is intended to discourage the entry of new competitors. “If they don’t expand now, others will,” a person familiar with Huayou said.

But a new round of overcapacity is already starting to show in the hydrometallurgical segment. Antaike

As of mid-2023, Indonesia had 1.03 million tons of established and planned hydrometallurgical nickel capacity, which is more than twice the demand for battery nickel in 2022, according to Chinese state-backed research house Antaike.