China's Indonesian Nickel Strategy Faces a Market Reckoning

A dominant supply chain meets falling prices

Chinese companies control approximately 75 percent of Indonesia's nickel refining capacity and own around 60 percent of global refined nickel production. Yet a major Chinese backed smelter on Sulawesi, PT Gunbuster Nickel Industry (GNI), faces collapse after a surge in production helped drive global nickel prices down by more than 40 percent.

As of February 2, 2026, Indonesia's nickel industry presents two competing pictures. Export restrictions brought investment, processing plants and jobs to a country that wanted to earn more from its minerals. The same expansion concentrated control of technology, financing and customers in Chinese hands, while exposing producers to falling prices and changes in battery technology.

GNI, backed by China's Jiangsu Delong Nickel Industry, was designed to produce between 1.8 million and 1.9 million metric tons of nickel pig iron annually. Nickel pig iron is a material used to make stainless steel. Many of the facility's production lines have gone silent, and creditors are discussing emergency financing.

The plant represents about 10 to 12 percent of Indonesia's refined output. Its potential shutdown could disrupt 5 to 6 percent of global supply. Its difficulties show how a strategy that rapidly builds industrial capacity can also leave companies vulnerable when too much production reaches the market.

Indonesia's experience matters beyond nickel. China is extending a similar approach to copper in Peru and cobalt in the Democratic Republic of the Congo (DRC): bring capital, processing technology and infrastructure into mineral producing countries, then build a strong position in the industries that turn those resources into valuable products.

How Chinese companies built the industrial network

Tsingshan Group, a private Chinese steel conglomerate, entered Indonesia through a joint venture with Indonesia's Bintang Delapan Group in 2009. Its operations expanded rapidly after Indonesia banned nickel ore exports in 2014, requiring international companies to process the mineral domestically instead of shipping it abroad in raw form.

Western companies hesitated over the investment and regulatory risks. Chinese companies moved quickly, building a vertically integrated supply chain. That means linking several stages of production, from obtaining ore to processing it and moving the finished material to customers, within a connected industrial network.

The Indonesia Morowali Industrial Park (IMIP) became the flagship project under the Belt and Road Initiative. It developed from a smelter complex into an industrial city with dedicated ports, power plants burning coal and logistics systems. Those facilities gave processors the transport and electricity needed to operate at a large scale.

Chinese financing changed as the projects grew. Between 2000 and 2013, policy banks such as the Export-Import Bank of China financed infrastructure during the early stages. After 2013, commercial banks owned by the Chinese state extended syndicated loans, in which several lenders share the financing and risk of a project.

Sharing that risk helped fund smaller projects within industrial parks. The financing ecosystem, unavailable to Western competitors, supported rapid capital deployment and a greater willingness to accept risky investments.

Chinese companies also commercialized high pressure acid leaching (HPAL), a process that uses acid under high pressure to extract nickel from Indonesia's abundant laterite deposits containing relatively little metal. It produces mixed hydroxide precipitate (MHP), an intermediate material used in making batteries for electric vehicles.

Western attempts at similar processing in Australia and Papua New Guinea had failed because of cost overruns. Chinese engineering made the technology commercially workable in Indonesia, adding processing expertise to the advantages already provided by financing and infrastructure.

Export bans brought investment and a new dependency

Jakarta's downstreaming policy aimed to capture more value from Indonesia's vast nickel reserves, which represent over 42 percent of global supply. Downstreaming means carrying out more of the work that turns a raw resource into a higher value product before it leaves the country.

The 2020 ban on raw nickel ore exports built on earlier restrictions. Foreign direct investment rose from $3.56 billion in 2019 to $10.96 billion in 2022, roughly tripling over that period. Nickel export revenue increased from about $6 billion in 2013 to nearly $30 billion in 2022, roughly five times the earlier amount.

The expansion created jobs and helped make Indonesia the world's largest nickel producer. Yet control of the raw material and control of the industrial business rested with different players. Indonesia held the resource, while Chinese companies dominated processing technology, capital and market access.

Indonesian miners are mostly locally owned because of nationalistic ownership laws. They must sell ore to Chinese processors at government regulated prices substantially below international rates. This gives miners fewer options for where to sell, while processors benefit from access to domestic supplies.

Chinese companies also receive income tax holidays lasting 15 to 20 years and access to subsidized coal through the Domestic Market Obligation (DMO). That policy caps coal prices at $75 per ton, compared with global prices that reached $350 per ton in 2023. Cheap electricity fuel and long tax exemptions help reduce processing costs.

A banker based in Jakarta argued that companies already had enough reason to invest under the earlier permit system. The banker pointed to the partial ore export ban before 2020, when companies making progress on smelter construction could receive export permits:

The partial nickel ore ban before 2020 (where ore export permits were granted to companies making progress on smelter development) and securing permits within industrial parks was actually sufficient for nickel processing companies to invest in Indonesia.

The resulting near monopoly allows Chinese firms to capture most of the benefits from adding value to nickel. Export bans gave Indonesian officials bargaining power in the short term, but Chinese control of financing, technology and customers created a more lasting form of power. The banker's argument was that the costly incentives primarily benefiting Chinese processors went beyond what was needed to attract investment.

Gunbuster exposes the cost of rapid expansion

GNI's troubles became apparent in 2025, when falling commodity prices challenged the assumptions behind Indonesia's industrial expansion. A flood of new nickel production pushed prices down by more than 40 percent, turning expected profits into losses.

Jiangsu Delong has exited three of its four major Indonesian projects while absorbing losses of up to $300 million annually. At Gunbuster, unfinished infrastructure, expensive electricity and penalties for missed delivery deadlines added to the pressure from weak prices.

Creditors are meeting to discuss emergency financing, but the company's fate remains unsettled. The scale of its output makes the decision important for both Indonesia and the global market: a facility responsible for 10 to 12 percent of national refined production can create a substantial supply disruption if it stops operating.

GNI also shows that industrial parks, access to financing and a dominant market position do not remove ordinary business pressures. A processor still needs reliable infrastructure, affordable power and enough revenue from sales to meet its costs. When prices fall sharply, delays and penalties become harder to absorb.

China's battery choices weaken the nickel bet

Chinese electric vehicle manufacturers are rapidly adopting lithium iron phosphate (LFP) batteries, which contain no nickel. Indonesia invested heavily in supplying nickel for batteries, but a growing part of its main customer's battery industry is choosing a chemistry that uses other materials.

BYD's $1 billion investment in an Indonesian electric vehicle assembly plant uses LFP technology. The project brings vehicle manufacturing to Indonesia while running against Jakarta's strategy of connecting its nickel resources to demand for electric vehicle batteries.

Nickel containing battery chemistries are losing market share in China. Indonesian producers therefore face two pressures at once: abundant new supply is weighing on prices, and demand from their primary customer is shifting toward batteries that do not need nickel.

GNI's nickel pig iron business and the HPAL plants supplying battery materials operate in different parts of the nickel industry. Together, however, they illustrate the breadth of Indonesia's exposure. Stainless steel materials face the consequences of excess production, while investment in battery materials also depends on which battery technologies manufacturers choose.

Forests, farms and communities bear the costs

Sulawesi and Maluku have experienced severe environmental and social costs from the nickel boom. At PT Vale Indonesia's Sorowako Block, the country's longest operating nickel concession, mining has caused extensive deforestation.

An analysis by Mighty Earth ranked Sorowako first among Indonesian nickel mines for tree cover loss, with 14,559 hectares cleared between 2014 and 2022. Vale has identified 14,137 hectares of key biodiversity areas within mineable zones, including critical habitat near Lake Towuti. Those areas contain ecosystems important to the survival of plants and animals.

In Loeha Raya, farmers grow white peppercorn on ancestral land. They have encountered drilling operations without prior consultation, while sediment entering spring water has contaminated supplies and left some farmland unusable. Sedimentation occurs when soil and other particles wash into water and accumulate there.

A local community member described the fear associated with exploration and possible expansion:

We are very worried about the company expanding mining here. When there is drilling exploration, people are afraid to farm.

A 2013 Constitutional Court ruling recognized Indigenous peoples' customary forests. Yet land tenure claims remain stalled in verification processes, leaving communities vulnerable as mining expands. Recognition of customary forests has therefore been followed by delays in confirming the claims that would help communities defend their land.

Farmers face an immediate problem within the larger industrial strategy: land used to support their livelihoods can become an exploration or mining area before their claims are resolved. Pollution adds another pressure by affecting the water and farmland on which those livelihoods depend.

Coal power adds a growing health burden

Nickel processing requires substantial electricity, and dedicated coal plants have been built to supply smelters. These captive plants, which serve industrial facilities rather than the wider electricity market, now account for 23 percent of Indonesia's total coal power capacity.

More captive coal capacity is under construction than is currently operating. The industrial expansion therefore carries a continuing commitment to electricity generated from coal, alongside the benefits that processors receive from subsidized fuel.

Health studies project that annual deaths associated with air pollution from processing activities could rise from 215 in 2020 to nearly 5,000 by 2030. Associated healthcare costs could reach $3.4 billion annually.

The projection puts a public cost beside the growth in investment and exports. Indonesia earns more by processing nickel domestically, but communities also face polluted air, damaged water supplies and forest loss. The industrial gains and the health and environmental burdens fall on different groups.

Washington faces limited routes into Indonesian nickel

American mining companies have largely exited Indonesia amid resource nationalism policies. Newmont Mining left entirely in 2016 after disputes over export restrictions. Freeport McMoRan was forced to divest majority control of the Grasberg copper mine in 2018.

Mandatory divestment laws and unpredictable regulations deter Western companies. Chinese enterprises supported by the state can absorb volatility and accept lower margins, giving them greater room to operate under those conditions.

Ford Motor Company announced a $4.5 billion partnership in 2023 with Vale Indonesia and China's Huayou Cobalt to build an HPAL facility. The partnership reflects the difficulty Western automakers face in securing Indonesian nickel without working with Chinese firms already established in processing.

The United States and Indonesia lack a free trade agreement, preventing Indonesian nickel from qualifying for clean vehicle tax credits under the Inflation Reduction Act. Restrictions on foreign influenced entities further complicate access. These rules connect eligibility for the incentives to both the origin of minerals and the influence behind businesses supplying them.

Some policymakers favor building alternative supply chains outside Indonesia, an approach requiring enormous investment and industrial policy sustained over many years. Others propose direct engagement through offtake agreements and minority equity stakes. An offtake agreement commits a buyer to purchasing production, while a minority equity stake gives an investor ownership without majority control.

Either approach requires government coordination to provide financing and regulatory clarity for American companies. Washington currently lacks a coherent strategy for securing access to the world's dominant nickel supplier, leaving businesses to navigate a market in which Chinese partners are often central.

The model spreads beyond Indonesia

Beijing's 2023 outbound investment report identifies overseas economic cooperation zones as important platforms for international expansion. The approach uses infrastructure and industrial development to support access to markets, with elements already appearing in copper mining investments in Peru and cobalt processing in the DRC.

The DRC has introduced cobalt export quotas of 96,600 metric tons annually for 2026 and 2027, roughly half of 2024 levels. Chinese companies have adapted to those limits. The use of government policy to shape mineral supply parallels Indonesia's use of export restrictions to encourage domestic processing, while Chinese firms control the resulting value chains.

China has also doubled its reserves of high purity Class 1 nickel since late 2024. Those reserves provide a strategic buffer against price volatility for domestic industry while helping China maintain its grip on global supply.

Several dates show how Indonesia's strategy and China's industrial position developed:

• 2000 to 2013: Chinese policy banks provided financing for infrastructure during the early stages of investment.
• 2009: Tsingshan entered a joint venture with Bintang Delapan Group.
• 2013: Indonesia's Constitutional Court recognized Indigenous peoples' customary forests.
• 2014: Indonesia banned nickel ore exports, accelerating domestic processing investment.
• 2016 and 2018: Newmont exited Indonesia, and Freeport McMoRan divested majority control of Grasberg.
• 2020: Indonesia imposed the raw nickel ore export ban that built on earlier restrictions.
• 2023: Ford announced its $4.5 billion HPAL partnership, and Beijing's outbound investment report highlighted overseas economic cooperation zones.
• 2025: Gunbuster's financial crisis exposed the pressure from falling prices and operating problems.
• 2026 and 2027: The DRC's cobalt export quota is set at 96,600 metric tons annually.

More mineral producing countries are considering Indonesia's export ban approach as a way to promote local economic growth. Chinese companies bring capital, technology and a willingness to work under conditions that deter Western investors, allowing them to adapt and move into higher value activities.

Indonesia's experience shows why the terms of that investment matter. Strong governance, environmental safeguards and a wider range of partners are needed if countries are to gain lasting control over industrial development. Otherwise, dependence on exporting raw materials can be replaced by dependence on the companies that finance, process and sell them.

Key Points

• Chinese companies control approximately 75 percent of Indonesia's nickel refining capacity and own around 60 percent of global refined nickel production.
• Indonesia's export bans helped lift foreign direct investment from $3.56 billion in 2019 to $10.96 billion in 2022, while nickel export revenue rose from about $6 billion in 2013 to nearly $30 billion in 2022.
• Gunbuster faces collapse after nickel prices fell more than 40 percent. Its potential shutdown could disrupt 5 to 6 percent of global supply.
• China's growing use of LFP batteries, including at BYD's planned Indonesian assembly operation, weakens demand for nickel containing battery materials.
• Sorowako lost 14,559 hectares of tree cover between 2014 and 2022. Pollution from processing is projected to cause nearly 5,000 annual deaths by 2030.
• American companies face ownership restrictions, regulatory uncertainty and barriers to clean vehicle tax credits when seeking Indonesian nickel.
• China's industrial investment model is extending to copper in Peru and cobalt in the DRC, where annual cobalt export quotas are set at 96,600 metric tons for 2026 and 2027.