Potential Pact for EV Minerals Between U.S. and Indonesia

Posted by Written by Ayman Falak Medina Reading Time: 3 minutes

Indonesia and the U.S. are exploring a potential partnership for minerals and metals, particularly those used in the production of electric vehicle batteries, such as nickel. The discussions occurred during President Joko Widodo’s visit to the US in mid-November in which both countries committed to elevating the U.S.-Indonesia partnership to a Comprehensive Strategic Partnership.

Indonesia has been pursuing a trade agreement with the U.S. on critical minerals and thus access to the U.S. EV market. Japan signed a similar agreement with the U.S. in March 2023, enabling its automotive industry to benefit from the tax credits afforded under the U.S. Inflation Reduction Act (IRA). The Act offers U.S. consumers US$7,500 credit for the purchase of each new clean energy vehicle. However, the minerals must have been sourced from the U.S. or a country in which the U.S. has an FTA, such as Australia and Canada.

Indonesia’s EV battery manufacturing potential

Indonesia’s nickel reserves are making the country indispensable to the global EV industry with the country aiming to be a global EV hub. Global EV makers, which include US’s Tesla and China’s BYD, are said to be finalizing deals to invest in Indonesia, according to the country’s Coordinating Minister for Maritime Affairs and Investment, Luhut Binsar Pandjaitan. Indonesia aims to be one of the world’s top three producers of EV batteries by 2027.

Indonesia’s economic development strategy is being spearheaded by its commodities exports from nickel to coal to gold and copper. This approach — often referred to as resource nationalism — is guided by Indonesia’s Constitution of 1945, which states that the waters, land, and natural resources of the country are controlled by the state and must be used for the benefit of the people.

This demand from electric batteries is expected to account for one-third of total nickel demand by 2030, particularly as countries worldwide look to lower carbon emissions and meet their net-zero targets.

Indonesia holds the world’s largest nickel reserves with an estimated 21 million tons, accounting for 22 percent of global reserves. The country is also the world’s top producer of metal, with production hitting 1 million tons in 2021.

China’s heavy presence is a concern for Washington

U.S. officials are wary that if they do offer Indonesia a minerals FTA, it would provide China a backdoor for Chinese corporations, who dominate Indonesia’s nickel industry. Chinese companies have erected smelters to secure the nickel supplies for their factories at home that make batteries for electric vehicles. It is estimated that Chinese businesses have invested an estimated US$30 billion in Indonesia’s nickel supply chain.

As such, the U.S. does not want to depend on China for its clean energy supply.

However, several foreign companies, including those from the U.S. have started to cooperate with Chinese companies. Vale Indonesia and China’s Zhejiang Huayou Cobalt signed an agreement with Ford Motor to build a hydroxide precipitate (MHP) plant in Southeast Sulawesi province. The plant will have a capacity to produce 120,000 tons of hydroxide precipitate. Vale Indonesia and Zhejiang Huayou Cobalt have also agreed to build a second MHP plant with a 60,000-ton capacity.

For Indonesia, the country is seeking to reduce its reliance on raw material exports and transition towards higher value-added goods exports. However, Jakarta needs to assure Washington that its policies do not lean too much towards China in addition to ensuring that it can increase environmental safeguards.

Indonesia’s chance to seek a preferential trade agreement with the U.S.

Despite the limited FTA still in the discussion stage, Indonesia should use this opportunity to seek a preferential trade agreement with the US instead of a fully-fledged FTA. For instance, Indonesia can exchange minerals for products, such as soybeans and corn; Indonesia imported 2.67 million tons of soybeans in 2021 – with 2.63 million tons coming in from the United States.  

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