Indonesia’s nickel boom is forcing its own smelters to shut down

The Southeast Asian nation’s metal boom over the past decade has convulsed the industry, catching many off-guard with its speed and scale. Cheap coal-based power and Chinese technology that makes the most of bountiful low-grade reserves have helped Indonesia to control more than half of the world’s nickel production — a win for Jakarta governments eager to boost manufacturing.

The surge prompted a two-year price plunge that has crippled global rivals. With the metal now languishing near its lowest levels since 2020, the effects are now being felt at home, too. Weaker-than-expected demand from key markets like China and ore shortages are adding to the pain in the country’s smelting sector.

“Previously everyone was getting two-year paybacks on their smelting investments,” said Jim Lennon, a veteran metals analyst at Macquarie Group Ltd. “There’s no money in the industry for them now.

PT Gunbuster Nickel Industry — one of Indonesia’s largest smelters with more than 20 production lines for nickel pig iron, a precursor for stainless steel — has delayed payments to suppliers and is close to shutting down completely amid the collapse of its Chinese parent Jiangsu Delong Nickel Industry Co., Bloomberg reported last month. Gunbuster said in a statement last week that its operations continue to run as normal during “changes in operational management.” It did not elaborate.

In Java, Indonesia’s most populous island, several smaller smelters have cut production to minimal levels or stopped altogether, according to a person familiar with the matter. The plants, hundreds of miles from the nickel mining heartland of Sulawesi, face additional costs to ship in ore.

But even facilities near mines are facing difficulties, including those in the massive purpose-built industrial parks run by China’s Tsingshan Holding Group Co., the world’s largest nickel producer. Australian-listed Nickel Industries Ltd, with several smelters in the conglomerate’s parks, posted a full-year loss after taking a $205 million post-tax impairment.

The current state of affairs is a far cry from just a few years ago, when Indonesia banned the export of ore and lavished firms with tax holidays to build up a domestic smelting industry. The breakneck expansion — driven almost entirely by Chinese companies — was touted as a winning push to turn the country’s natural resources into higher value exports, dubbed “downstreaming”.

While the policies did boost Indonesia’s export earnings and created thousands of jobs, the surge in processing capacity has far outpaced demand for nickel. The country is now looking to curb its mine supply in an effort to support the market — a move with grave consequences for producers.

“More than half of the nickel pig iron furnaces are not making money or are losing money,” said Macquarie’s Lennon. “If you have got a smaller furnace and have to buy your ore, you are not making money.”

The rush to invest in the Indonesia nickel sector was spurred on by the rise of electric vehicles, which need nickel for high-performance batteries. But advances made by Chinese firms have seen the metal being displaced by cheaper battery chemistries, in particular those based on lithium iron phosphate.

Meanwhile consumption by the stainless steel sector, the biggest source of nickel demand, is still attempting to turn the corner after suffering through China’s prolonged property slump. Without a sustained increase in appetite — perhaps driven by stimulus from Beijing — Indonesia’s smelters face more pain this year.

“There are some bright spots for demand in the stainless steel market, but nickel batteries are losing market share in the electric vehicle market,” Dan Smith, head of research at Amalgamated Metal Trading Ltd., wrote in a note, predicting bearish pressure ahead for at least the next six months. “There is more pain to come for producers before the market rebalances.”