Updated: 2 days ago
In this latest Wellington Perspective, we lay out the current status of the mining industry in Indonesia and the moves being made by the major operators to diversify their respective business models through value-added downstream processing of complementary mineral products such as nickel, bauxite and tin.
In addition, the rapidly-emerging Electric Vehicle (EV) sector is a major focus - both for the domestic mining companies as an upside business development opportunity and for the Indonesia Government as a new source of foreign direct investment (FDI).
We highlight the following factors as characterizing the ‘direction of travel’ for the sector:
1) The mining category will remain a significant contributor to the Indonesian economy
In 2022, Indonesia produced c. 640 million MT of coal – with an export volume of 494 million MT and earnings of c. USD 3 Bn. per month. Major export destinations include China, India, South Korea and Japan.
Moreover, Indonesia’s coal production grew by an estimated 16% to 353 MT in the first six months of 2023 (YoY), with the full year outturn estimated at 695 MT (+8% YoY).
Domestic coal demand in 2022 soared by c. 36% to 201 MT, surpassing the 200 MT threshold for the first time in history and thus making Indonesia the fifth largest coal consumer after China, India, the United States, and Russia.
The headline statistics amplify the strategic importance of Indonesia across the global marketplace for critical mineral resources:
Indonesia is the world's largest producer of nickel ore, accounting for approximately 30% of global supply.
Indonesia is the world's fifth-largest producer of bauxite, with an estimated output of 11 million tons in 2021.
Indonesia is the world's second-largest tin producing nation.
Indonesia has also taken steps to protect the inherent added-value potential of these mineral resources by imposing strict export restrictions on the unprocessed products. For instance, the export of nickel ores has been banned since 2020.
2) The major mining companies are investing in a sustainable future for the industry
Historically, mining is an industry that has been prone to both sustainability shortcomings and reputational risks.
As such, Indonesia is charting a ‘Black to Green’ pathway in order to instil an industry-wide operating model that avoids past environmental mistakes, when decades of unregulated mining policies and practices created long term damage to many remote localities (e.g. in the Bangka-Belitung islands, off the SE coast of Sumatra).
Using the leading operator in the coal mining sector - PT Adaro Energy Indonesia Tbk. (ADRO) – as an example, there is a clear intention on the part of the incumbent providers to diversify beyond their core product portfolios. Via a separate entity – Adaro Minerals – the company is seeking to leverage the opportunities available in adjacent categories such as nickel, bauxite and aluminium.
This approach combines the embedded mining expertise of Adaro with the ‘smarts’ provided by specialist partners in these related mineral sectors. Adaro Minerals is currently collaborating with third parties in six countries - including India and South Korea – in order to realize the available synergies.
In addition, the company has established another business unit - Adaro Clean Energy Indonesia (ACEI) - to spearhead the various ‘Green Pillar’ initiatives underway within the organization. These include the development of renewable energy sources, the implementation of a network of wind farms and solar grids as well a Hydro-electricity plant. To date the company has committed a total of USD 8 billion to these ‘Green Economy’ programs.
In turn, this reflects the pressing need for the domestic operators to ensure that environmental safeguards are upheld (and augmented) across the value chain in order that there is no risk exposure for the ‘new generation’ of business partners such as the intending EV companies.
3) The co-creation of an integrated EV ecosystem is a major imperative for Indonesia
Electric vehicle production and sales are surging globally, with the sector seen as key in the drive to curb climate change by cutting emissions from petrol and diesel, reduce oil imports and fuel subsidies, and support investment in renewable energy.
Indonesia has attracted a total of USD 42 Bn. in EV sector investment commitments in the period 2020 through 2023, which includes USD 9.8 Bn. from LG Energy Solutions (S. Korea) and USD 5.2 Bn. from battery manufacturer CATL (China).
The Indonesia Government has set a target of having 400,000 electric four-wheelers (cf. end-2022: 7,600 active units) and 1.8 million battery-powered motorbikes in active use by 2025 (cf. end-2022: 26,000 active units). This level of growth mirrors the current rates of market penetration being exhibited by both China and Vietnam.
With a total addressable market (TAM) within Indonesia for the EV category in 2030 being estimated at USD 25 to 30 billion per annum, there are opportunities across the entire value chain for multiple specialty enterprises to engage – together with the associated employment prospects arising for the local communities.
Each of the major coal mining operators in Indonesia will be seeking to leverage their inherent core competencies and entrenched market position to become a significant player in this high potential sector.
The TAM breakdown is currently estimated as follows:
Vehicle R&D/manufacturing: USD 12 to 15 Bn.
Vehicle retail sales: USD 2 Bn.
Battery manufacturing: USD 3 to 5 Bn.
Charging infrastructure: USD 2 to 3 Bn.
Vehicle service and maintenance: USD 1 to 2 Bn.
We cover all of the above issues - and more! - in depth as part of the report pack available here.
If you would like to discuss any aspect of this report, please feel free to contact us.