LME reliance, domestic aims drive Jakarta Ni index plan

The Indonesian government's plan to launch a nickel price index may be motivated by intentions to cut dependence on London Metal Exchange (LME) prices, cover wider products in the industrial chain, and accelerate downstream market development, market participants told Argus.

Indonesia — the world's largest nickel producer — will not prioritise a tax or ban on the export of low-grade nickel products such as nickel pig iron (NPI) in the near term, according to senior official in the co-ordinating ministry for maritime and investment affairs Septian Hario Seto.

Indonesia's Energy and Mineral Resources Ministry (ESDM) introduced a nickel ore benchmark price called Harga Patokan Mineral (HPM) in October 2020, after it imposed a ban on ore exports in January 2020. The ESDM uses a formula which is linked to LME nickel prices to set up the benchmark, using parameters such as the ore grade, moisture content, correction factors formulated by the Indonesian government and the Harga Mineral Acuan (HMA) which is the average LME cash official price for the previous two months.

Few nickel smelters in Indonesia used the benchmark when it was just introduced, with their ore purchases done at lower prices than the benchmark, although the Indonesian government wanted to create such a benchmark to calculate taxes more effectively, market participants told Argus. More nickel smelters started to comply with the benchmark when ore demand increased significantly to 1.58mn t of nickel metal equivalent in 2022 from 767,000t in 2020, according to data from International Nickel Study Group (INSG), and stable ore supplies became critical to nickel smelters. Smelters' compliance with the benchmark has increased the government's tax revenues and mines' incomes, and strengthened the government's influence on the resource market.

The new nickel index will most likely include NPI, which is increasingly processed into nickel matte by producers, market participants told Argus.

Indonesia became the global largest nickel producer in 2021. The country produced 1.16mn t of nickel metal equivalent in 2022, including NPI but excluding nickel intermediates mixed hydroxide precipitate (MHP) and nickel matte, up sharply from 878,700t in 2021, according to INSG data. This subsequently resulted in surplus supplies. NPI prices were around 80pc of LME nickel prices in 2018 and only neared LME prices when supplies are tight. The proportion fell to 60pc of LME prices in December 2022 and bounced to 70pc recently. This led the Indonesian government to be of the opinion that NPI is being sold off too cheaply and China's import prices for NPI from Indonesia are not transparent, according to market participants.

Nickel smelters also said feedstock costs are too high if the ore pricing is linked to the LME. The overwhelming majority of NPI production is used in the stainless steel industry, but LME prices can only reflect market conditions for nickel cathode, which is priced higher than NPI and often heavily influenced by the financial market instead of supply and demand factors. This has left nickel smelters facing high feedstock costs and low NPI prices, with hopes that a new price index covering more products in various industrial chains such as stainless steel and electric vehicle (EV) batteries can be launched.

Indonesia exported 2.05mn t of NPI, or 270,000t nickel metal equivalent, to China in the first four months of 2023, up by 46pc from a year earlier, customs data show. Argus forecasts total NPI output in Indonesia will reach 1.36mn t of metal equivalent this year.

Downstream developments

A new price index could also benefit Indonesia's developments in the downstream new energy vehicle (NEV) and battery markets, according to market participants.

The Indonesian government has reiterated its intention to impose restrictions on nickel exports, with a 2pc tax for material containing less than 70pc of nickel from 2022. The aim is to limit Indonesia's primary nickel exports and stimulate investment in products with a higher added value. But the tax has not been implemented until now and the government recently said it would delay the tax and launch a price index.

Two stainless steel producers in Indonesia — with a combined capacity of 7mn t/yr — produced a total of 4.85mn t of crude stainless steel in 2022, ranking second in the world, data compiled by Argus show.

EV sales are forecast to rise to almost a fifth of global total car sales this year, according to data from IEA, with sales in Indonesia more than tripling last year.

Indonesia's Kalimantan region — which houses the North Kalimantan Industrial Estate (KIPI) that is currently under development by a private consortium — is set to receive close to 40pc of the country's new investment tied to the development of supply chains for the battery industry by 2026, according to co-ordinating minister for maritime and investment affairs Luhut Pandjaitan.

Global primary nickel output during 2017-23 '000t