Via Foreign Policy, an article on how years of Chinese investment have transformed Jakarta into a nickel powerhouse, but that support has come at a price:

As Western countries scramble to secure more nickel to power the green energy transition, Indonesia’s dreams of becoming their long-term supplier are being complicated by its ties to another world power: China. 

For a raw material that is so ubiquitous, nickel may seem like an odd thing to care about. But it is more important than one might think. The critical mineral underpins green technologies such as electric vehicle batteries and wind turbines, and Indonesia—which boasts some of the world’s biggest nickel reserves—accounts for more than half of the world’s supply. 

No country has been as pivotal to Jakarta’s transformation into a nickel powerhouse as China, whose years of investments helped overhaul the Indonesian sector into the commanding—and dirty—industry that it is today. But those investments have also given Chinese companies a dominant foothold in the sector—influence that is now proving to be a major headache for Jakartaas it attempts to reach other international markets. 

That’s because in recent years, many Western markets—and especially the United States—have ramped up efforts to slash their dependence on Beijing and cut China out of their electric vehicle supply chains. But since Chinese firms are so deeply entrenched in the Indonesian nickel sector, those moves also threaten to exclude Jakarta’s resources. 

As a result, Indonesia is now trying to reduce China’s influence.

“I do not think that they’ll completely cut China out of further investments, but they do want to diversify their industry,” said Jorge Uzcategui, an expert in global nickel markets at Benchmark Mineral Intelligence. “They do want their material to be able to access the European and North American markets, which are huge growth markets for the battery industry.”

Jakarta has big ambitions for its sector, aspirations that have only been amplified by the global energy transition and the resulting surge in demand for critical minerals. For more than a decade, multiple Indonesian leaders have enacted laws aimed at building out the country’s domestic nickel industry and expanding its higher-value manufacturing capacity. Former President Susilo Bambang Yudhoyono, for example, ordered mining companies to hire domestically; his successor, Joko Widodo, banned raw nickel exports in 2020.

It’s not just Indonesia that’s drawn up such a strategy, either. With demand for critical minerals primed to explode in the coming decades—the World Bank estimates that billions of tons of minerals may be needed to power green technologies by 2050—mineral-rich nations worldwide are positioning themselves to cash in on the coming scramble. One such example is the world’s second-biggest lithium producer, Chile, which has outlined plans to nationalize its giant industry. 

“You’re seeing a push from emerging markets saying, ‘How do I get the best deal out of my resources?’” said Gracelin Baskaran, director of the Project on Critical Minerals Security at the Center for Strategic and International Studies, a Washington, D.C.-based think tank. “This is really Indonesia recognizing that diversity of investment is really important. Having one source of investment and one offtaker is not healthy for the economy.”

The Biden administration’s big climate law, the 2022 Inflation Reduction Act (IRA), has thrown a wrench into Jakarta’s long-standing plans. The IRA conditions generous electric vehicle tax credits on the source and producers of EV batteries’ mineral inputs—and Jakarta’s nickel doesn’t fit the bill. 

The problem is twofold: First, Indonesia doesn’t have a free-trade agreement with Washington, a requirement for its nickel to be IRA-compliant. The IRA’s subsidies also exclude minerals produced by firms with more than 25 percent ownership by China, which is considered to be a “foreign entity of concern”—posing yet another challenge to Indonesia’s ambitions. 

Jakarta is eager to overcome both of these challenges. Indonesia has been ramping up its efforts to limit Chinese investment in its industry and is now working to restructure its agreements for new nickel projects with Chinese firms so that the companies are minority shareholders, the Financial Times reported late last month.

But Kevin O’Rourke, the principal of Reformasi Information Services, an Indonesian political risk analysis consultancy, said that it would likely be difficult to police the level of Chinese ownership of these projects. “There’s rules on paper requiring that clarity to exist, but in practice, it’s almost impossible to ascertain who really owns what,” he said. “So, in that context, there’s going to be a lot of gray areas.”

What Indonesia really wants is a critical minerals deal with Washington that would allow the country’s nickel to qualify for IRA tax credits, even without a free-trade agreement in place. But Indonesia’s push for such an agreement has faced fierce pushback from some U.S. senators, who penned a letter opposing such a deal on the grounds of Chinese investment in Indonesia, the country’s labor rights and environmental protection standards, and its export bans. 

In a May op-ed for Foreign Policy, Luhut Binsar Pandjaitan, Indonesia’s coordinating minister of maritime and investment affairs, argued that the lawmakers’ opposition to the deal undermines the United States’ own energy transition. 

“The IRA was meant to foster U.S. employment, reduce the cost of green energy, and secure supply chains for critical minerals,” Pandjaitan wrote. “Instead, it is effectively barring entry of the critical supplies that U.S. manufacturers need to deliver the goods and infrastructure on which transition depends.”

Indonesia and the United States are now in discussions for a critical mineral trade deal, according to U.S. officials. Washington has also broached the idea of having Jakarta join the Mineral Security Partnership, a multinational initiative that includes 14 countries and the European Union and is aimed at securing a sustainable mineral supply chain. Jose Fernandez, U.S. undersecretary of state for economic growth, energy, and the environment, pitched the partnership as an opportunity for Indonesia to strengthen environmental standards and governance in its nickel industry as well as to attract new investment “that benefits communities.” 

“There’s been a lot of engagement between the White House and Indonesia,” Baskaran said. “To me, part of that is acknowledging that we [in the United States] are highly vulnerable to supply chain disruption right now, and we will not meet the nickel demand that we need for our domestic auto industry without being able to get nickel from Indonesia.”

Still, for Indonesia to effectively attract new, diversified investment, more challenges lie ahead. “It’s going to be hard for responsible investors to be competitive vis-à-vis the established Chinese investors unless the government of Indonesia wants to enforce more prudential standards on the sector and require safety measures and environmental remediation and pollution control,” O’Rourke said. 

The challenge for Indonesia is “to be able to provide the right kind of attractive investment environment” for nickel mining and refining, said former Indonesian Trade Minister Mari Pangestu, who is now at the Peterson Institute for International Economics, a Washington-based think tank. That will involve wrangling the business climate, infrastructure, environmental standards, and renewable energy investments, she said. 

“The intention is there, but there’s some homework to be done to be able to realize it,” she said.