OPINION:
The chaos at the London Metal Exchange has put a spotlight on an unremarkable commodity. For the first time on record, nickel surged above $100,000 a tonne on March 8th, prompting the LME to suspend nickel trading for a week.
Until recently, Russian nickel accounted for about a tenth of world supply. But Indonesia has the world’s largest nickel reserves and is already the largest producer. Now that Russian nickel faces sanctions, Indonesia could be in for a godsend as buyers compete for a scarcer resource. Unfortunately for the Indonesians, their government has banned nickel exports.
Nickel is an important raw material for stainless steel and for fossil energy alternatives such as lithium-ion batteries. Even before Russian President Vladimir Putin’s invasion threw the market off balance, demand for nickel had risen sharply. According to Nornickel’s latest annual report, global nickel consumption rose from just under 1.3 million tonnes in 2009 to over 2.4 million tonnes in 2020.
So why the export ban? In accordance with a 2009 mining law, Indonesian President Joko Widodo wants companies to process nickel in Indonesia, not just mine ore and ship it abroad to the highest bidder. He sees industrialization as the key to economic growth, stating: “If we reverse it [raw materials] in finished goods, the added value can be tenfold.”
Isabelle Huber’s analysis for the Center for Strategic and International Studies suggests that this could be a winning strategy for Indonesia. In the short term, the ban will cost Indonesia export earnings, jobs and government revenue. But Indonesia is betting it will attract investment in nickel processing, which will pay off well over the long term.
Citing $30 billion in investments in nickel processing and commitments from Chinese companies, Ms Huber says the export ban puts Indonesia “on the right track” to develop an integrated electric vehicle battery supply chain. In fact, Indonesia, encouraged by the supposed success of its nickel policy, is now planning to ban the export of gold, copper and bauxite.
But the current nickel upheaval shows a flaw in this strategy. The Indonesian nickel economy, now linked to a handful of Chinese companies, is closed to potential customers who would bid against each other for Indonesian nickel absent the ban.
Essentially, the government has locked up Indonesian nickel to the highest bidder, limiting the resource’s potential to enrich Indonesians.
Only a small subset of all global nickel buyers were willing to invest in Indonesia. The company most poised to gain a foothold in Indonesia was Tsingshan Holding Group – a company at the heart of China’s “Belt and Road” offerings in the region and incidentally the main beneficiary of the LME trade pause.
The relationship with Tsingshan and other similar companies will bring some benefits to the Indonesian economy. But this also makes Indonesia geopolitically vulnerable. Dependence on exclusive belt-and-road connections instead of access to a multitude of buyers in an open global market will weaken Indonesia’s position as China threatens its territorial sovereignty at sea.
In addition, the export ban makes shipping ore abroad illegal, but does not rule out the activity entirely. Bans breed smuggling, and indeed the Indonesian Coast Guard will step up its anti-smuggling patrols amid the price surge to catch ships seeking the high global rate. The situation is at once a waste of law enforcement resources and a drain on public trust.
The theory that animates Indonesia is based on the theory that its government can achieve trade outcomes superior to those of free trade and competition. Proponents of this theory often cite South Korea and Taiwan as examples.
But as Columbia University economics professor Arvind Panagariya notes in “Free Trade and Prosperity: How Openness Helps the Developing Countries Grow Richer and Combat Poverty,” this theory is shaky at best; The miracles of prosperity that South Korea and Taiwan achieved came despite, not because of, their industrial policies. Indeed, Mr. Panagariya argues, developing countries like Indonesia can best accelerate prosperity by embracing free and open trade.
With a population of more than 270 million and located in the heart of the dynamic Southeast Asian region, Indonesia is poised for an economic miracle of its own – one that could certainly eclipse that of South Korea. Trade strains, however, narrow Indonesia’s path to success. By lifting the export ban on nickel (and proposed export bans on other commodities), Mr Widodo’s government would benefit both Indonesians and the global economy.
• Jordan McGillis is associate director for policy at the Energy Research Institute. Anthony B. Kim is an Economic Freedom Research Associate and Global Engagement Manager at the Heritage Foundation’s Margaret Thatcher Center for Freedom.
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