February Visit To Indonesia

Trade Ministry
I had a productive meeting with the Trade Ministry’s Director of Agricultural Exports, Farid Amir. I stressed the importance of safety standards to avoid US FDA import alerts, and the growing interest by US consumers in sustainable harvested products that pay fair wages to farmers through programs such as Fair Trade and Rainforest Alliance. We discussed a new inspection regulation on the herbal product, kratom, and Farid confirmed that private inspectors can participate.

Budget Cutback
80% of Indonesians have a favorable view of their new President but more recent polls may tell a different story. President Prabowo instituted a large budget rollback just as I arrived which led to massive demonstrations. This dominated headlines as well as plenty of rumors of a Cabinet reshuffle. His priority program, a free meal and nutrition program for students and mothers, has had a shaky roll-out (food poisonings by contractors and “untasty” offerings). With its currency under stress, Indonesia needs to import largely quantities of costly milk. The Cabinet reshuffle rumor centers around holdovers from the Jokowi administration. The budget “debacle” is due to slowing consumption (car sales are falling) and excessive borrowing during the Jokowi years for infrastructure ($billions in interest payments coming due). Indonesian journalists are also questioning the 15-20 year tax breaks given to Chinese investors in the Morowali Industrial Park, established as one of the cores of the nickel processing industry, as well as the new sovereign wealth fund, Danantara(reviewed on the next page), whose initial $20 billion in capital will be raised, in part, through these budget cuts.

Downstreaming and Investment
Downstreaming remains the predominant policy imperative fed by export bans and local content rules. This policy environment, especially as it relates to minerals, could easily provoke retaliation by the US. While in Indonesia I learned of USTR and Department of Homeland Security directives to assess whether mineral projects abroad manifest an “undue burden” or use forced labor. I discussed this with Rosan Roeslani, Minister of Investment and Downstreaming. Yes, downstreaming has been added to his title as well as the signage. I pointed out that Indonesia could prevent additional US tariffs by reexamining some of the local content rules, releasing the export bans of copper concentrates, and reviewing the new mandate to deposit of 100% of export earnings for 1 year for contracts values at $250,000 and higher. Incentives rather than mandates better attract the downstream investment Indonesia desires. Unfortunately, Indonesia jealously views all the investment its neighbors such as Vietnam receive relative to its own large domestic market and concludes it is entitled to and can force more local production. The prime example is the iPhone. Indonesia argues that Apple (or its subcontractors) should match or come close to the $15 billion it has invested in Vietnam given it has a consumer market many times larger. Apple has agreed to date to build an $1 billion AirTag factory in Batam Indonesia, but that does not satisfy local content requirements. Indonesia also sees the phone factories it has successfully attracted from Samsung and Xiomi, perhaps not realizing that the ASEAN Free Trade Zone was designed to allow production in one member to flow tariff free to another. Apple may have assumed, wrongly, that its facilities in Vietnam would be sufficient. However, in today’s world trade is no longer trade, it is job creation. Rosan, I should say, seemed confident that something would work out so Apple could again sell its new iPhone in the country. Also, news reports indicate export permits will soon be released for copper concentrates.

Danantara
Indonesians were a buzz about a new sovereign wealth fund, apparently the initial one set up under Jokowi INA did not go by far enough. Set to open March 4, Danantara is a super holding company for some of Indonesia’s largest SOE’(state-owned enterprises), including its state banks, Pertamina, PLN, Telkom, MIND ID, as well as an actual fund, had been designed to be like Singapore’s Temasek, or the Chinese Investment Corporation (CIC), and act to make off-budget investments. Delayed by legal issues, a new SOE law now empowers it. The law also corrects a governance issue: SOE managers are protected if reasonable businesses decisions or conditions end in a financial loss. A compromise leaves some oversight authority with the SOE Ministry. Financial markets currently see risk and unanswered questions about to Danantara’s objectives and operations; share prices of many of its constituents such as the profitable state banks have dropped in the 20% range.

Morowali
To know Indonesia today, you have to understand Morowali. I visited this nickel processing enclave after week in Jakarta where I was continually told “why visit Morowali, its all Chinese”. I decided I had to see for myself what Indonesia has placed such a large bet on and fortunately I arranged an invitation to this heavily secured facility. Over 50% of the world’s proven nickel reserves are in Indonesia.

Anyone owning or thinking of owning an electric vehicle is already dependent or will be dependent on what has been and will be developed at the Indonesia Morowali Industrial Park (IMIP) in Central Sulawesi, Indonesia. Furthermore, more and more of the world’s supply of stainless steel and related products are produced here. Created in 2015 after Indonesia banned the export of raw nickel, it currently employs 90,000 workers, encompasses 550 hectares (21 square miles). 54 companies, mostly from Chinese have operations here.

An estimated 30% of the country’s GDP comes from this area along the east coast of Sulawesi. More importantly, low grade versions of nickel ore, which until only a few years ago were considered a waste byproduct can now be turned into an intermediate material used in the production of electric batteries.

Around 2010 Indonesia instituted a ban on the export of raw nickel. Chinese companies, who were the dominant buyers, began moving processing facilities south to Morowali close to not only the nickel reserves, but also Indonesia’s coal fields. Although stainless steel is the main product produced in Morowali, there are also factories for many other finished and semi-finished products. (i.e. nickel pig iron, nickel sulfate, carbon steel, nickel matte, as well as manganese and lithium products used in the EV supply chain. Senior managers I met were all Chinese, none spoke Indonesian. Indonesians are not yet trusted with the key metallurgical engineering and process jobs. There is an MA and PhD college program in metals engineering that may one day change the ratio. But not yet. According to a senior Australian I met, only about 10% of the Chinese workforce can speak Indonesian. Almost every senior Chinese manager or engineer was 40 or under, many had 10 years’ experience at Chinese nickel processing facilities either in China or in other countries such as Papua New Guinea.

The whole enterprise reminds me of Chevron 40 years ago where you would see many Americans, English on signs, the housing layout smacked of an American suburb, and the mess halls served burgers and milkshakes. Gradually a process of Indonesianization took place and the same will take place in Morowali.

Coal is the sole source of fuel for Morowali’s 12 power plants. I saw a lot of solar panels and a solar farm is under construction. But it will only account for a drop in the bucket of the power needs. Morowali’s activity creates a huge dilemma: what do with the leftover dirt, the tailings. The hydrochloric acid can be neutralized, but toxins remain in the dried tailings. Rain becomes an issue. Nickel Industries (An Australian company with several JV’s in Morowali, showed us a plan to manage them sustainably. They admitted occasional differences with their Chinese partners on important environmental and other issues, but the spirit of cooperation was strong. Together Australian and Chinese engineers are planning a new carbon neutral HPAL facility. This promising JV will help flip the narrative that the Morowali is not environmentally sustainable, unworthy of a US critical minerals agreement which Indonesia desired in the Biden years. (It remains to be seen whether it will continue to seek one under the Trump administration.)

The core smelting process that is attracting billions in new investment is HPAL, a complex chain of chemical treatments of nickel ore that ultimately creates a greenish, rock-like substance called MHP. HPAL involves huge temperatures, high pressures, and sulfuric acid. It’s a technology that’s been around for years, but beginning in 2015 the Chinese figured out how to make it much less expensive. Nickel mining is essentially surface mining with several layers, the top ones containing the most valuable nickel and the bottom layers, usually discarded. All of sudden all that wasted dirt became very valuable.

Not only are large metallurgical conglomerates such as Tsinghan building their own HPAL facilities, they are also forming joint ventures with Western nickel companies such as Nickel Industries (Australian) and Vale (Brazilian). Tsingshan has a museum of nickel under construction that honors the three 2019 Nobel prize winners for lithium battery chemistry (An American, a Brit, and a Japanese). There was also a place of honor for a Chinese metallurgy professor whose work furthered HPAL (a process first used in 1960’s). The engineers who had studied with this professor told me their text book paid homage to American advances in HPAL. Morowali is a story of how a country, China, saw a big need early, and put its army of engineers to work. (30-40% of Chinese college graduates major in engineering compared to 6% in the US).

So, Morowali, is not “all Chinese”. It has portals to Western investors and notions of environmental sustainability which will be key to the long-term viability of IMIP but also Indonesia’s dream to be a major player in the world’s EV future. I am glad I did not “shun” it.

I left Indonesia with a sense that America’s presence is slipping a bit. Perhaps, we could reverse this with our own industrial park populated by our best engineering, AI, health and digital technology companies. It would be in America’s interest in such a huge market. A very tall order that would require the leaderships of both governments to make a reality. A topic for a future Trump-Prabowo bilateral? Unlikely, but one can dream.