PAYNE INSTITUTE COMMENTARY SERIES: COMMENTARY

By Matt Lee, Clarkson Kamurai and Brad Handler

April 24, 2025

Indonesia now dominates the global supply of nickel, an essential raw material for lithium-ion batteries and stainless steel. Nickel production in the country has more than doubled in the last 4 years, fueled by the government’s “value chain” strategy that drove domestic development of smelting/refining capacity.

The supply chain of raw nickel ore is characterized by a blend of large and small scale mining. The contribution of Artisanal Small scale Mining (ASM) to Indonesian nickel production is unclear, however, largely because reporting practices are inconsistent and much of ASM activity is subsumed within Large Scale Mining (LSM) operations. Nevertheless, we believe it might be as much as 25% of recent production.

This sizeable impact raises the imperative for Indonesia to understand ASM’s contribution to and the nature of domestic nickel production. That understanding can inform crafting constructive ASM management practices, including formalizing ASM rights and setting operating and reporting standards, which can set the basis for optimizing the economic benefit for local communities and the country as a whole.

CURRENT STATUS OF ASM IN INDONESIA

Indonesia’s (national) mining law is mute with regards to ASM, focusing instead on LSM. Further, while ASM can be licensed as community mining permits, few such permits are issued [1]. However, despite the lack of formal recognition, it is readily acknowledged that ASM activity is widespread, including by nickel LSM companies that have complained of losing profits to these much smaller actors [2].

It has been reported that smelting companies, most of them Chinese majority owned, take advantage of unapproved local miners, primarily by exercising their market power [3] as the only buyer. The smelters’ market power is (a likely unintended) result of the government’s strict policy banning the export of nickel ore. (It should be noted that smelter owners exert this market power not only on ASM but also on LSM operators, by offering ore-buying prices well below government gazetted prices for most of the period1, although as smaller sellers, ASM has even less negotiating leverage.)

INDONESIA ASM NICKEL PRODUCTION ESTIMATION

Because recording of nickel production in Indonesia is not required of all participants, ASM’s contribution to nickel ore production is difficult to ascertain. Yet the nickel ore export prohibition policy allows estimating the ASM production through an Input-Output model (Figure 1). Theoretically, by subtracting the nickel content of (legal) domestic nickel ore inputs and imported inputs from nickel intermediate outputs, the difference comprises the (illegal) ASM contribution. The logic can be expressed as a formula as follows:

ASM Share=Nickel Output-(Domestic “legal” Ore+Imported Ore)

It is worth acknowledging that this approach has limitations, including:

1. The definition of ASM in nickel mining is limited to unsanctioned activities that are therefore not recorded in the government database. Yet as noted above, LSM engages with small scale miners and thus “commandeers” production of what might in other circumstances be considered ASM.
2. Gaps in publicly available data remain, as described below. This includes time lags in production reports from mines and administrative inefficiency.
3. Inventories are ignored, thus annual ore production is assumed equal to annual consumption.

Despite these limitations, we see value in the estimation process as it offers some insight to ASM’s contribution.

NICKEL SMELTING PRODUCTS (THE OUTPUT)
        Most production data from mining and processing in the country’s legitimate system is unavailable, especially for nickel outputs (many smelting entities are not required to publish detailed reports). The Ministry of Energy and Mineral Resources of Indonesia (ESDM) publishes annual industry reports, but they have limitations, including that only pyrometallurgically processed products are tracked, missing 10-20% of total production (hydromet products), and that ore processed in stand-alone smelters, i.e. those without integrated mining rights, are not included.

     Due to these limitations, we believe estimates from private providers more accurately reflect reality. These estimates vary due to the lack of data from small-scale operations; we elect to use Wood Mackenzie’s estimate because of its in-depth coverage of the global nickel industry. Per WoodMac’s estimate, in 2024, Indonesian nickel smelted products totalled 2.2 million tonnes, up 20% from 2023. Pyrometallurgical processes using higher grade nickel ore (saprolite) rose 14% to 1.9 million tonnes, while hydrometallurgical processes, which produce mixed hydro precipitates (MHP) from high pressure acid leaching (HPAL) smelters using lower grade ore (limonite), rose 68% to 330 kilo tonnes (Figure 2).

DOMESTIC NICKEL ORE (INPUT 1)

       Government data on legal domestic nickel ore production also lacks fidelity. ESDM’s reported annual production is 20-30% less than figures from ESDM officials [4][5][6] (Figure 3), mainly due to time lags in mining companies reporting their production. For modelling purposes, we elect to use production figures from public comments made by relevant government officials.

Figure 3. Raw nickel ore production comparison (ESDM Performance Reports, Officials)

To compare the input with the output, nickel ore tonnes are converted to metal-equivalent tonnes. This conversion yields raw ore production on a metal equivalent basis of 1,939 kilo tonnes in 2024 (Table 1).

Table 1. Domestic nickel ore production2

IMPORTED NICKEL ORE (INPUT 2)

Indonesia has been importing nickel ore for the last two years, mainly from Philippines [7] (Figure 4). This is primarily due to internal and external factors, including ESDM delays in approving additional permits, production disruption in Sulawesi region (where most of the nickel is produced) due to high precipitation levels in 2024, and additional smelting capacity outstripping domestic ore production.

Figure 4. Indonesia nickel ore imports (Statistics Indonesia)

PRODUCTION ESTIMATION

Netting the two Inputs against the Output allows derivation of an estimate of ASM production in the Indonesian nickel mining industry (Table 2). The derivations suggest that ASM production has decreased over the last three years in absolute terms. Possible reasons for this include the government’s strict policy on illegal mining (i.e. the government has actively curtailed such activity), larger firms focusing on lower quality deposits due to high nickel demand, and large companies integrating ASM into their operations.

Table 2. Production estimation for ASM in the nickel industry

It is worth noting that our channel checks with regional analysts [11] support the view that ASM’s contribution is likely higher (across all years). That bias appears to also be based on some version of the same “derivation” as is described above. Similarly, there is recognition that the issue is clouded by the use of small miners as contract hires, and thus that the effective contribution of ASM is therefore much greater.

ASM’s contribution to nickel production in Indonesia is significant and it has the potential to be even more so. Effective integration of small mining activities, protection for the rights of ASM workers, and creating more open marketplaces for large and small miners to sell their nickel can set the stage for meaningful growth in mined volumes and economic value creation. In other words, small scale nickel mining, if managed well, can significantly contribute to Indonesia’s economic development, at local and national levels.

References

1 Smelters have offered premiums on occasions due to supply deficits since mid-2023

2 Conversion factor: nickel grade, moisture content from SMM index, saprolite/limonite ratio inferred from the output data, and smelter recovery rate assumed to be 90% [1][2]

3 Conversion factor: nickel grade, moisture content from SMM index

4 Same conversion factor used as domestic nickel ore (input 1)

ABOUT THE AUTHORS

About the Authors

Matt Lee, MS Student, Mineral and Energy Economics, Colorado School of Mines
Matt Lee is a researcher at the Payne Institute for Public Policy and an MS student in Mineral and Energy Economics at the Colorado School of Mines. He holds a BS in Energy Resources Engineering from Seoul National University. Matt has prior experience in corporate development within the critical minerals sector, with a particular focus on the Asia-Pacific region, including Indonesia.

Clarkson Kamurai, Payne Institute Critical Minerals Program Manager and Research Associate
Clarkson Kamurai is a Critical Minerals Program Manager and Research Associate for the Payne Institute at the Colorado School of Mines. Clarkson is a mining engineer with over 18 years of mining engineering experience, in which he holds a Master’s degree. He has experience in precious and energy metal development and extraction. Clarkson’s experience in these areas is drawn from numerous mining operations and projects development across much of Sub-Saharan Africa and South America. He is currently enrolled in the Energy and Mineral Economics Division at the Colorado School of Mines and about to start his PhD studies related to critical minerals supply chain, an area he has a deep passion for.

Brad Handler, Payne Institute Program Director, Energy Finance Lab, and Researcher
Brad Handler is a researcher and heads the Payne Institute’s Energy Finance Lab. He is also the Principal and Founder of Energy Transition Research LLC. He has recently had articles published in the Financial Times, Washington Post, Nasdaq.com, Petroleum Economist, Transition Economist, WorldOil, POWER Magazine, The Conversation and The Hill. Brad is a former Wall Street Equity Research Analyst with 20 years’ experience covering the Oilfield Services & Drilling (OFS) sector at firms including Jefferies and Credit Suisse. He has an M.B.A from the Kellogg School of Management at Northwestern University and a B.A. in Economics from Johns Hopkins University.

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