Indonesia’s electric vehicle battery dream has a dirty nickel problem

Indonesia, the world’s largest nickel producer, is poised to become a key player in the electric vehicle supply chain. Most of Indonesia’s nickel production is currently grade 2 nickel, a low purity type used for stainless steel. The country’s government and mining sector are determined to transform its nickel industry to meet the growing demand for Class 1 nickel, a crucial component for electric vehicle (EV) batteries.[1] Electric vehicles are widely considered a pillar of the transition to renewable energy sources, as they generally have a lower carbon footprint over their lifetime than gasoline-powered vehicles. These efforts have seen some success to date, with the electric vehicle and battery manufacturing sector investing in the country’s downstream industry (in other words, investments in nickel end uses, such as electric vehicle batteries), including an electric vehicle battery cell plant near Jakarta. .

Nickel is a key part of Indonesia’s commodity-driven development strategy, in which the country has banned commodity exports to attract downstream investment and catalyze socio-economic development. The government plans to tax exports of nickel pig iron (NPI) and ferronickel, which would likely boost production of battery-grade nickel. And for EV makers struggling to source nickel in a tight market, Indonesia has emerged as a key supplier over the past year.

But there is a catch: the Indonesian nickel sector is particularly carbon-intensive and environmentally damaging. This creates a tricky challenge for electric vehicle manufacturers, who are under pressure to manage environmental, social and governance (ESG) issues in their supply chains, including carbon emissions. Some electric vehicle manufacturers have expressed a preference for “low carbon” nickel. However, the “low carbon” supply is insufficient to meet the expected demand, and it comes with a higher price. In this article, we unpack environmental risks and recent developments in the Indonesian nickel industry that illustrate many of the difficult trade-offs needed for decarbonization.

Environmental concerns

The Indonesian nickel sector poses many environmental challenges. Its nickel processing industry is particularly carbon-intensive due to its reliance on coal. Civil society groups have also expressed concern about the environmental risks of nickel mining and processing. More recently, environmental groups urged Tesla to halt its plans to invest in the country’s nickel industry, citing concerns about deforestation, polluting water bodies and disrupting people’s livelihoods. natives as a result of nickel mining.

The way nickel is processed, and in particular the way Indonesian nickel resources are turned into material suitable for electric vehicle batteries, is energy-intensive and harmful to the environment. On average, producing Class 1 nickel from Indonesia’s laterite ore resources releases two to six times more carbon dioxide emissions than producing Class 1 nickel from sulphide deposits. The latter tend to have higher grades than laterite deposits and are easier to process, but more laterite projects in Indonesia and elsewhere are being developed to meet growing nickel demand. Moreover, the Indonesian energy network remains heavily dependent on coal, which accounts for around 60% of its total electricity capacity. Its industrial parks, which have become major hubs for nickel and aluminum processing, currently account for 15% of the country’s coal-fired electricity generation.

If these industrial parks’ captive power expansion plans are realized, their share of Indonesia’s total coal-fired power generation is expected to increase to 24%. Although the Indonesian government has technically planned to phase out coal for electricity by 2056, it may not be willing to make economic trade-offs, including reducing industrial park capacity.

Initiatives by Tsingshan, the world’s largest nickel producer, highlight some of these environmental challenges. For example, Tsingshan leads one of five hydrometallurgy projects in Indonesia through PT Huayue, a joint venture that uses high-pressure acid leaching (HPAL) to produce Class 1 nickel from laterite resources, which are typically used for the production of Class 2 nickel. Although in the long term HPAL in Indonesia may be decarbonized, the process produces “difficult to manage toxic waste” and poses environmental risks, like many traditional metal smelters in Indonesia.

Similarly, Tsingshan has also converted Grade 2 nickel pig iron (NPI), which is mainly used to produce stainless steel, into nickel matte, a premium form of the material. This process has raised even greater concerns given that matte production from NPI results in nearly three times the greenhouse gas emissions per unit of nickel than HPAL processing.

Investments and market dynamics

The Indonesian government and investors entering the country’s nickel sector seem willing to ignore these environmental concerns. President Joko Widodo has expressed his aspirations to develop an onshore nickel-based electric vehicle industry, including processing and refining, as well as the production of battery components. In 2020, Indonesia banned raw nickel exports to develop a domestic downstream industry, which halted the large flow of raw nickel to China.

Since the export ban, Indonesia has seen an increase in downstream investment focused on nickel refining and processing, particularly from China. Chinese refineries, including GEM Co, have committed around $30 billion to relocate their operations to Indonesia. In mid-April 2022, Chinese battery giant CATL concluded a joint investment in Indonesia for nickel mining and production of batteries for electric vehicles.

Downstream electric vehicle players including Volkswagen and Tesla have also sought to secure the Southeast Asian nation’s minerals. In April 2022, a Korean consortium led by LG Energy Solution, the world’s second-largest electric vehicle battery maker, signed a $9 billion investment deal with local mining company PT Aneka Tambang (Antam) and Indonesia Battery Corporation. . LG Energy Solution is also building a $1.1 billion battery cell factory in Karawang Regency, 65 km southeast of Jakarta, in a joint venture with Hyundai Motor Group. China has played a key role in funding the coal-fired power plants needed to process nickel. Indeed, China’s large-scale investment in Indonesia’s nickel industry raises serious questions about China’s climate agenda. President Xi has announced sweeping plans to halt overseas coal-fired power plant construction and halt new coal-related projects. Indonesia’s nickel-to-coal processing plants seem to be an exception. A report by the Center for Energy and Clean Air Research explains that China could use a loophole to develop two nickel and steel processing plants powered by coal-fired power plants in Indonesia. Projects fall into a gray area, as they are not “new”. Rather, they are tied to existing steel and nickel complexes approved before the ban. As a result, coal-fired power plants have secured build and purchase agreements from Chinese companies.

Moreover, it would be difficult for EV manufacturers to eliminate Indonesian nickel from their supply chains, even if they wanted to. Russia supplies about 20% of Class 1 nickel, but the repercussions of its invasion of Ukraine and the potential for sanctions could reduce this and limit the willingness or ability of European and American players to source nickel from Russia. Given Indonesia’s investments in refining and processing capacity and the amount of its nickel reserves, Indonesia is likely to become an even more important source of refined nickel for electric vehicle batteries over the next decade.

To advance

Government action will be essential to reduce carbon emissions in the nickel supply chain. There are encouraging movements in Europe. For example, the new EU Battery Regulation will require manufacturers of electric vehicle batteries to disclose the carbon footprint of all batteries sold in Europe. While manufacturers may be motivated to reduce the carbon footprint of their batteries, including switching to low-carbon nickel, they will also likely face practical constraints due to a supply shortage. Moreover, there are few signs of action when it comes to reducing carbon emissions in the nickel supply chain of other major players like China and the United States.

If industry and policymakers ignore the climate threats from coal-fired industrial parks used to produce substances like nickel, Indonesia could cement its position as one of the world’s largest nickel players, but the dirtiest in the electric vehicle supply chain.

Footnotes :

[1] According to the IEA, “There are two types of primary nickel products: high purity Class 1 products (containing 99.8% nickel or more) and lower purity Class 2 products (containing less than 99. 8% nickel). Battery cathodes need nickel sulphate, which is synthesized from class 1 products.”

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