Nickel Expansion Collides with Forest Conflicts, Governance Risks, and Geopolitical Tensions in Indonesia

Indonesia’s strategic push to become Southeast Asia’s green energy hub and a global critical minerals powerhouse is entering a pivotal phase. While the nation’s aggressive policies and investments aim to leverage its vast mineral resources—particularly nickel—to fuel the EV and renewable energy sectors, recent developments reveal a complex web of environmental conflicts, governance challenges, regional security concerns, and geopolitical rivalries. These factors threaten to both accelerate and constrain Indonesia’s ambitions, underscoring the need for a balanced approach to sustainable growth.

Accelerated Downstream Nickel and Critical Mineral Processing

Indonesia continues to prioritize downstream processing of its mineral wealth, especially following the 2026 ban on raw nickel ore exports. This policy shift has acted as a catalyst for record investments:

• Pertamina, Indonesia’s state-owned oil and gas giant, announced investments exceeding $7 billion to develop large-scale nickel refining facilities capable of producing battery-grade nickel, aligning with the nation’s vision of establishing a comprehensive mineral-to-battery supply chain.
• International companies like Vale Indonesia (INCO) are expanding their downstream projects, emphasizing adherence to ESG standards to meet global market expectations and attract responsible investment.
• Domestic sector leaders such as Krakatau Steel (KRAS) are scaling up production of EV-specific steel and battery components, creating an integrated resource processing ecosystem.

In tandem, Indonesia is contemplating a tin export ban to further bolster its high-tech manufacturing sector, aiming to secure domestic supply chains and nurture local industries. These initiatives are supported by bureaucratic reforms designed to streamline investment processes and boost transparency, signaling a strategic effort to attract foreign capital.

The market responded swiftly: Nickel prices surged approximately 20% on the London Metal Exchange (LME) amid supply disruptions, including production cuts at the Weda Bay mine. This rally underscores Indonesia’s critical role in the global EV battery supply chain but also highlights the urgency of expanding refining capacity to meet soaring international demand.

Market Dynamics and Operational Challenges

The rapid investment and policy shifts have led to notable market and operational developments:

• The nickel price rally reflects Indonesia’s significance but also a vulnerability—any disruptions could ripple globally.
• Operational disruptions have emerged, notably:
  • A landslide at Morowali, a major nickel processing hub, resulted in one fatality and temporarily halted operations, illustrating environmental vulnerabilities driven by deforestation and extreme weather.
  • Production cuts at Weda Bay, a key mine, have constrained supply, further fueling price increases.

These incidents underline the environmental and infrastructural risks Indonesia faces amid rapid resource development, especially as climate change exacerbates extreme weather events.

Governance Shifts Toward Resource Nationalism

A defining trend in Indonesia’s resource strategy is a renewed emphasis on resource sovereignty and state-led control. This shift is exemplified by Defense Minister Prabowo Subianto, a prominent advocate for resource nationalism:

• At the 2026 Davos World Economic Forum, Prabowo emphasized Indonesia’s commitment to resource sovereignty, advocating for protectionist policies and greater state intervention. His rhetoric signals a move away from market liberalization towards local control and strategic autonomy.
• A widely circulated video features Prabowo asserting:
  "We will ensure that our bureaucrats serve the nation, not foreign interests. Our sovereignty is non-negotiable."

Legal and legislative reforms reinforce this stance:

• The Asset Forfeiture Law now grants authorities broad powers to seize property without judicial approval, raising fears of property rights erosion and due process violations.
• Reforms to the Criminal Code (KUHP), effective since January 2026, broaden penalties for environmental crimes, corruption, and permit violations. Vague legal provisions risk being weaponized against activists and civil society, threatening transparency, accountability, and ESG compliance.
• The reinstatement of the ‘Persero’ status for state-owned enterprises (SOEs), including PT TIMAH Tbk, signifies a move to strengthen state control over key sectors, emphasizing resource sovereignty.

Civil Society and Media Concerns

These legal and policy shifts have sparked resistance from civil society:

• Organizations like the Indonesian Democratic Party of Struggle (PDI-P) have cautioned against the Asset Forfeiture Law, emphasizing justice and fairness.
• Drafts of Broadcasting Bills suggest increased government oversight over digital and media sectors, raising fears of censorship and restrictions on free speech.

Collectively, these developments raise concerns that resource nationalism and state-centric governance may undermine democratic accountability, deter responsible foreign investment, and damage Indonesia’s international reputation.

Environmental, Land Rights, and Security Risks Escalate

Despite its resource ambitions, Indonesia faces persistent environmental conflicts, land disputes, and security threats that threaten project timelines and regional stability.

Environmental and Land Rights Conflicts

• The implementation of Forest Regulation No. 39/2025, aimed at ecological restoration, involves seizing up to 5 million hectares of illegal plantations. While intended to conserve biodiversity, these seizures have displaced indigenous communities, sparking social unrest and protests.
• Illegal mining continues within approximately 190,000 hectares of forest areas, despite efforts to promote sustainable small-scale mining and community engagement. Delays in permit issuance, loss of ancestral lands, and public protests remain significant obstacles.

Security Incidents and Regional Unrest

In eastern provinces such as Papua and Sulawesi, security disturbances persist:

• The rescue of 18 Freeport miners from insurgent sieges highlights ongoing insurgent threats.
• A terrorist attack on a commercial aircraft in Papua, resulting in two fatalities, underscores the ongoing insurgent activity disrupting resource development.
• Land rights disputes and insurgent operations continue to delay projects and threaten regional stability.

In response, Indonesia has expanded military procurement, acquiring fighter jets, drones, and advanced defense systems. The government’s plan to transform strategic islands into "aircraft carriers"—deploying military assets—aims to protect vital assets but risks alienating local communities and fueling unrest.

Environmental Incidents and Climate Vulnerability

Recent environmental events have exposed vulnerabilities:

• A landslide at Morowali, a critical nickel processing hub, caused one death and temporarily halted operations, illustrating hazards from deforestation and climate change-driven extreme weather.
• Increasing flooding and landslides threaten ongoing projects and raise operational costs, emphasizing the urgent need for sustainable land use and climate-resilient infrastructure.

Floods and Government Crackdowns

Severe flooding in Sumatra further underscored Indonesia’s environmental fragility. The government has responded with crackdowns on firms accused of illegal land clearing, aiming to control deforestation. While these measures aim at environmental preservation, they have heightened tensions with companies and local communities over land rights and ecological accountability.

Security and Geopolitical Dimensions

Security challenges continue to influence resource development:

• Insurgent activity in Papua and Sulawesi has delayed projects and increased operational costs.
• The attack on infrastructure and military operations have prompted significant military deployments across strategic regions, including efforts to secure maritime borders and resource-rich waters.

The Jakarta Treaty 2026 and Regional Security

On February 6, 2026, Indonesia and Australia signed the Australia-Indonesia Treaty on Common Security, also known as the Jakarta Treaty 2026. This agreement marks a new chapter in regional cooperation, aiming to:

• Enhance maritime security,
• Counter regional threats,
• Facilitate joint patrols,
• And strengthen bilateral defense ties.

While praised as a step toward regional stability, some analysts question whether it will lead to increased militarization or exacerbate tensions with China, especially as Indonesia balances its strategic partnerships.

Regional Tensions and New Security Partnerships

Indonesia’s expanded military procurement and strategic island development—such as transforming key islands into "aircraft carriers"—are part of broader efforts to protect vital assets amid rising regional tensions. Notably, Indonesia is actively seeking diversified security partnerships, including recent discussions with the U.S. and Gabon’s New Energy Metals Holdings Ltd, to reduce dependence on Chinese financing and expand critical mineral cooperation.

Financial Pressures and Diversification Strategies

Indonesia’s heavy dependence on Chinese financing for infrastructure projects, such as the Jakarta–Bandung high-speed rail (HSR), has raised concerns over debt sustainability:

• A recent Nippon.com report highlights cost overruns, delays, and uncertain repayment terms associated with Chinese loans.
• Heavy reliance on Chinese capital influences industrial policy and resource management, potentially limiting Indonesia’s autonomy.

Diversification Efforts

In response, Indonesia is pursuing strategic partnerships to diversify:

• Defense Minister Prabowo’s visit to the U.S. included discussions on security cooperation and critical mineral investments. A short video shows him engaging with U.S. industry leaders, emphasizing:

  "We are committed to attracting responsible investment in our critical minerals sector."

• The MoU with Gabon’s New Energy Metals Holdings Ltd aims to diversify Indonesia’s critical mineral portfolio via rare earth element (REE) projects, reducing dependence on Chinese sources.
• Bilateral agreements with the U.S. have resulted in $38.4 billion in trade and investment commitments across sectors like textile, energy, and technology, signaling a strategic pivot to regional diversification.

Fiscal and Debt Management

Recent fiscal data show a surge in government spending:

• January spending increased 26%, with a 54.6 trillion rupiah (~$3.25 billion) budget deficit, according to Gayatri Suroyo (Reuters).
• Rising debt levels, especially from Chinese infrastructure loans, pose sustainability concerns amid ongoing fiscal pressures.

Current Status and Future Outlook

Indonesia’s vast mineral reserves and strategic policy initiatives present immense growth opportunities. The nickel price rally underscores its importance in the global EV supply chain but also highlights the urgent need to expand downstream capacity and diversify mineral partnerships—including regional collaborations like the Gabon MoU.

However, balancing ESG principles, community rights, and resource governance remains critical. Addressing land rights disputes, strengthening environmental safeguards, and clarifying legal frameworks are essential to prevent social unrest, biodiversity loss, and reputational damage.

Simultaneously, prudent debt management, especially concerning Chinese loans, alongside SOE governance reforms—notably the reinstatement of ‘Persero’ status—are vital to ensuring economic stability.

In conclusion, Indonesia’s resource-driven growth hinges on its ability to navigate internal governance reforms, environmental sustainability, and regional security challenges while maintaining a transparent and responsible investment climate. Its success will determine whether it can convert vast resource wealth into sustainable development and regional influence amid a complex geopolitical landscape.

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The Jakarta Treaty 2026 – A New Chapter or a Path Full of Questions?

On February 6, 2026, Indonesia and Australia signed the Australia-Indonesia Treaty on Common Security, also known as the Jakarta Treaty 2026. This landmark accord aims to strengthen bilateral security cooperation, focusing on maritime security, counterterrorism, and regional stability. While heralded as a step toward enhanced regional stability, some analysts caution that increased military collaboration and strategic positioning could intensify regional tensions, particularly with China, and complicate Indonesia’s delicate balancing act between major powers. The treaty’s long-term implications for regional geopolitics and Indonesia’s internal sovereignty remain an open question, prompting ongoing debate about its role as a catalyst for peace or a pathway toward heightened militarization.