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As the World’s Largest Nickel Producer Does Indonesia Have Economic Leverage?

There are several strong constraints to Indonesia’s ambition to become a major producer and exporter of battery-operated electric vehicles (BEVs). These constraints, however, are not insurmountable.

By Ranessa Nainggolan

Indonesia has taken a major step toward switching from fossil fuels to a source of energy that is decidedly more environment-friendly. It achieved this by establishing PT Indonesia Battery Corporation (IBC) with shares owned and controlled by four state-owned corporations. These holding corporations are: MIND ID, PT Pertamina, PT PLN, and PT ANTAM. 

IBC is envisioned to develop and produce batteries and a type of electric car called Battery-operated Electric Vehicle (BEV).

This move is in line with the government’s ambitious plan to make Indonesia a globally competitive electric car producer. It is widely deemed feasible because Indonesia controls almost 30 percent of the world’s nickel production. Indonesia produced 780 metric tons of nickel in 2020, down from 853,000 metric tons in 2019. The Philippines was a far second with 223 metric tons in 2020. Moreover, Indonesia produces laterite nickel, which is cheaper to produce than other types of the metal. 

Nickel is an essential raw material in the manufacture of batteries fit to run electric vehicles. In a battery, nickel increases energy density and capacity for storage at lower cost. Hence, foreign investors are particularly keen on participating in the Indonesian nickel and electric car manufacturing venture. So far IBC has managed to raise USD 17 billion in investments from a Chinese battery manufacturer and South Korea’s LG Chem. 

In the light of these developments, and the current preoccupation of the international community with the issue of climate change in which environment-friendly sources of energy are at a premium, the question arises: could Indonesia’s predominance in nickel production be used as an economic leverage in dealing with foreign investors?

The short answer is no. It takes more than a predominance in the production of a valuable raw material to acquire an economic leverage. To get an idea of what it takes for a country to wield a natural source as an economic leverage, you have to take a close look at the example of Saudi Arabia.

The rise of Saudi Arabia

For decades now, Saudi Arabia has been one of the largest oil producing and exporting countries in the world. In the 1930’s, before oil was discovered in Saudi Arabia, it was just another poor Arab country. In 1932 it awarded its first oil exploration concession to Standard Oil of California, and a company was formed to implement this concession: the California Arabian Standard Oil Company (CASOC). A few years later oil was discovered, and Saudi Arabia’s fortunes began to change. More oil extraction sites were discovered in the years that followed. Saudi Arabia became filthy rich with petrodollars. 

In 1944 CASOC changed its name to Arabian-American Oil Company (ARAMCO). Saudi Arabia continued to grow rich on petrodollars. In 1960, Saudi Arabia and more than a dozen other oil exporting countries formed the Organization of Petroleum Exporting Countries (OPEC), which greatly helped maintain stability of oil prices at the global level.

In 1973, the Saudi government bought 25 percent of ARAMCO. Within a year’s time, it had already bought 60 percent of ARAMCO. By 1980 ARAMCO was wholly owned by the Saudi Government.

Today ARAMCO, the Saudi Arabian oil company, is one of the richest in the world. Its wealth is measured not only in terms of dollars and available oil reserves but also in terms of human and technological resources. Through the ARAMCO Research Center, the company dives deep into research and development (R&D), thereby keeping itself abreast with the latest developments in technology. Where in the beginning it produced only crude oil, ARAMCO has expanded its products lineup to include natural gasoline, diesel oil, liquefied petroleum gas (LPG), kerosene, propane, butane, etc. 

The company also has the infrastructure for speedy distribution of its products through its subsidiary, Vela International Marine, which owns and operates 29 oil tankers, including 15 very large crude carriers (VLCCs). ARAMCO also collaborates with various mutinational companies, many of them Chinese and Japanese. Owning a company with such resources and capabilities and having the second largest oil reserves in the world, Saudi Arabia has economic leverage—as long as petroleum remains the world’s default energy source.

In this regard, Indonesia—even if it holds the world’s largest nickel reserves—is not in the same league as present-day Saudi Arabia when it comes to wielding economic leverage. That is because Indonesia has problems of insufficient capital, technology, infrastructure and human resources. Until it has solved these problems, Indonesia cannot wield its nickel production as economic leverage.

The future of car batteries

A relevant and interesting question comes up at this point: Will batteries replace oil as driving energy for vehicles? Huge sums have been invested in this shift, and some progress has been achieved. Some 2.1 million cars were sold in 2019 bringing the total world stock to 7.2 million, but that only represents 2.6 percent of global car sales and one percent of global car stock. BEVs have a long way to go before they become the majority on the road.

In countries like Indonesia, there may be a technological challenge of producing batteries that have both energy density and power density. Energy density refers to how far the car can go with the battery, while power density is all about how quickly can the battery be charged. It is easy to achieve one or the other but not both, while keeping the size of the battery convenient for installation in the vehicle. 

There are other challenges: The development of the BEV itself will certainly meet several hindrances. The price of BEV is more expensive than the people’s purchasing power for cars, which are still at Rp. 300 million. The cheapest BEV price reaches Rp. 600 million with the cost of replacing a damaged car battery of Rp. 50 million. 

There are other challenges: the price of a typical BEV is beyond most people’s purchasing power. The average car today still costs IDR 300 million, while the cheapest BEV commands a price of IDR 600 million, and the cost of replacing a damaged battery is IDR 50 million.

Moreover, Indonesia’s infrastructure does not yet support the electric vehicle ecosystem. Any large number of BEVs on the road will require battery recharging stations. It takes a minimum investment of IDR 600 million to build a commercial recharging station, not including maintenance and operating costs. The station itself will require more space than the average gas station, something that could be a problem in crowded Jakarta.

All these factors will depress the demand for BEVs in Indonesia. 

Thus it may be concluded that while possession of the world’s largest reserves of a valuable raw material may be a great starting point, it is not enough to serve as an economic leverage. Indonesia will have to overcome constraints in terms of capitalization, technology, infrastructures and human resources. 

Given enough time, however, and with the adoption of farsighted and pragmatic policies so that it is able to attract resource-rich and helpful foreign partners, there is no reason the Indonesian government cannot eventually overcome these constraints.

Editor’s note: The views expressed in this article are the author’s and do not necessarily reflect the views of PinterPolitik.

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