China Has Sewn Up a Critical Metals Market

“Big Auto and Big Oil have been in a partnership for a hundred years,” said Tim Sahay, a senior policy manager at the Green New Deal Network. “Now the automakers need to form new partnerships with metal companies.” The electric vehicle boom is underway, and U.S. automakers’ efforts have been turbocharged by the Inflation Reduction Act (IRA). U.S. firms are scrambling to create new relationships and hit production targets—but are often finding that their Chinese competitors have gotten there first.

Metals is a diverse business, but some countries dominate: lithium from Chile, cobalt from the Democratic Republic of the Congo—and for nickel, most roads lead to Indonesia.

Indonesia has 22 percent of global nickel reserves and in 2021 provided 37 percent of the global supply. The Indonesian government has cannily exploited its position. Tariffs and exports bans have helped push companies not just to dig in Indonesia but to process metals there, too.

Battery and car companies, looking to guarantee a steady supply of nickel, are considering getting involved. However, as with lithium and cobalt, Chinese companies already hold a dominant position.

Making up ground will be hard. Chinese metals companies benefit from long-standing relationships with Indonesia. “When Chinese companies are developing assets in Indonesia, there’s a very steady stream of parts and labor and material going from China to Indonesia to enable them to build new assets quickly, on schedule, and on budget,” said Harry Fisher, a project manager at Benchmark Mineral Intelligence.

This efficiency has helped Chinese nickel producers quickly pivot from focusing on nickel pig iron, used for stainless steel, to mixed hydroxide precipitate, or MHP. The vibrant green powder is quickly becoming a preferred feedstock for batteries.

MHP contains both very high-purity nickel and a small quantity of cobalt. Thanks to MHP, Benchmark predicts that by 2030, Indonesia will produce 80,000 tons of cobalt—roughly 20 percent of global production.

Indonesia now has three plants capable of producing 164,000 metric tons of MHP yearly. Some 26 more have been proposed. All—bar three scheduled to open 2026—involve Chinese companies.

The vast majority of MHP produced also seems to be sold—possibly at knockdown prices—to Chinese companies. Intriguingly, the Chinese nickel ore trader Lygend Resources & Technology Co. seems to be the main client of Indonesia’s Harita Nickel and is carrying out a joint venture with Harita at the Halmahera Persada Lygend plant that processes ore into MHP.

In 2021, Jessica Roberts, the head of forecasting at Benchmark, speculated that the global nickel market might split with a well-supplied China and the rest of the world facing shortages.

Multiple people close to the Indonesian government insist that it would like to diversify in this regard. The country practices careful neutrality in international affairs. Balancing Chinese investment with investment from other sources would fit. Indeed, the Indonesian government has publicly been courting companies such as Volkswagen and Tesla.

However, Western companies looking to enter Indonesia face significant barriers. Mining industry professionals regularly rank Indonesia as one of the worst places to do business, according to annual surveys by the Fraser Institute.

“Many Indonesians believe that foreign investors are here to pillage the country’s natural resources,” said Bill Sullivan, a senior foreign counsel with Christian Teo & Partners, a Jakarta-based law firm, who concentrates on Indonesian mining.

Onerous legal requirements change unpredictably with the political winds. Indonesian courts also almost invariably favor local parties. Many Western miners left Indonesia altogether in the late 2010s.

Meanwhile, Chinese companies, Sullivan said, “are often much less concerned about compliance and are usually much more comfortable operating in opaque and uncertain regulatory environments such as one finds in Indonesia.” Their links to the Chinese state and Indonesia’s cautious attitude toward China might also help.

Western companies looking to enter—or reenter—Indonesia face the daunting task of building relationships from scratch. “Getting to understand the dynamics of the industry, but also the politics of the industry, that takes time,” said Chris Gower, the CEO of Altilium Group, which advocates a less polluting nickel refining process.

Some Western companies are nonetheless looking for ways in, but “they don’t really want to do it with Chinese companies,” Gower said. Americans are apparently particularly nervous.

Yet securing MHP without Chinese technological know-how looks difficult. Converting Indonesia’s low-grade laterite ores into MHP uses a process called high-pressure acid leaching, or HPAL.

Ore is poured with sulfuric acid into autoclaves—huge titanium pressure cookers. It is then subject to temperatures of around 255 degrees Celsius (491 degrees Fahrenheit) and pressures of roughly 4,500 kilopascals, equivalent to being 450 meters (1,476 feet) underwater.

HPAL has been in use since 1961, but companies have long struggled to master the process. Many plants failed to meet production targets.

Now, Chinese companies seem to have cracked the code. Since 2021, they have been involved in building and operating all of Indonesia’s HPAL plants, each of which was built quickly, on budget, and produces reliably. Better designs developed by China ENFI Engineering Corp., a subsidiary of the state-owned China Metallurgical Group Corp., are apparently key.

Finally, environmental issues could deter Western consumers and investors alike. HPAL produces huge amounts of toxic waste. Storing it safely is challenging, especially in tropical climates.

Adding to the headache, well over half of Indonesia’s electricity is generated by burning coal. Given the energy intensity of HPAL, the nickel and cobalt needed for clean cars come with a big carbon footprint.

The Indonesian government is working to assuage concerns. Investment laws are being reformed. Dumping mining waste in the ocean has been banned, and President Joko “Jokowi” Widodo recently promised to improve environmental monitoring of nickel mining. Decarbonization, long delayed, is also picking up steam.

But as these efforts get underway, U.S. efforts to tie decarbonization to domestic reindustrialization and competition with China have added new complications.

IRA subsidies for passenger electric vehicles, or EVs, are subject to strict sourcing requirements. A certain percentage of metals and battery components must be processed in the United States or free trade partner countries for the EVs to qualify.

In an era of growing U.S. worry about competition with Beijing, the IRA makes working with Chinese firms particularly tough. The “foreign entity of concern” rules also bar EVs from receiving subsidies if they are produced using critical minerals or battery components sourced from companies “owned by, controlled by, or subject to the jurisdiction or direction of” the Chinese government. It remains unclear how much—if any—involvement from Chinese companies operating outside China will be acceptable.

Ford may prove a vital bellwether. Last month, the U.S. car giant announced plans to invest in building a behemoth $4.5 billion HPAL plant in Pomalaa on the Indonesian island of Sulawesi. The plant is expected to produce 120,000 metric tons of MHP every year.

Its choice of partners speaks volumes. One is PT Vale Indonesia, the Indonesian subsidiary of the Brazilian mining giant. The other is China’s Huayou Cobalt Co., which already operates one HPAL plant in northern Sulawesi.

PT Vale is a smart and unproblematic choice of partner. The company has a thoroughly Indonesianized management. It also has a good record on environmental, social, and corporate governance, attracting the praise of Jokowi. The Pomalaa plant is also designed to use hydropower.

Partnering with Huayou is much riskier. The firm, founded in 2002, pronounces on its website that it is “[r]ooted in China and making friends all over the world”—but features the politically necessary encomiums to the Chinese Communist Party prominently in its publicity materials. Ford might benefit from an overlooked loophole in the IRA that makes commercial vehicles—e.g. vans, trucks, etc.—eligible for subsidies without being subject to sourcing requirements. But the company is already under fire for partnering with another Chinese company, CATL, to produce batteries in the United States.

That they are taking another political risk shows the indispensability of Chinese suppliers. “There is no, in inverted commas, ‘Western’ MHP being produced in Indonesia at the moment,” Benchmark’s Fisher said.

Fisher does expect this will change, especially given the Indonesian government’s recent environmental commitments. Still, he added, “This isn’t a quick fix—it’s a mid-to-long-term story particularly when you think about switching to renewables.” For some time yet, companies scrambling for nickel may find that Chinese companies in Indonesia are the only game in town.