The word hilirisasi does not translate elegantly into English. Downstreaming captures the economic concept, the deliberate policy of adding value to raw materials before they leave the country rather than exporting the unprocessed input for someone else to refine. But it does not capture the political weight that the word carries in Indonesian policy discourse, where it has become something close to a national ideology: the conviction that Indonesia's extraordinary endowment of critical minerals should produce Indonesian industrialisation rather than simply subsidising the industrialisation of whoever buys the ore. That conviction, now entering its most consequential phase under President Prabowo, has placed Indonesia at the centre of a geopolitical triangle it did not fully anticipate when it began drawing the lines.
As of March 2026, Indonesia accounts for somewhere between 60 and 65 percent of global nickel output. The figure is extraordinary by any measure, and its implications for the global energy transition are difficult to overstate. Every electric vehicle battery that uses nickel-based chemistry, every energy storage system deployed in a renewable power installation, every consumer electronics device that draws on nickel intermediates, depends on a supply chain that runs, in substantial part, through the Indonesian archipelago. Jakarta knows this. It has known it for a decade. The question it has been navigating, with increasing sophistication and increasing risk, is how to convert that geological endowment into permanent industrial capacity rather than a temporary foreign exchange windfall.
The Built-In Chinese Monopoly
To understand the trap, it is necessary to follow the sequence of decisions that created it. When Jakarta first imposed nickel ore export restrictions in the mid-2010s and escalated to a full ban in 2020, the Western response was a combination of WTO challenge, diplomatic pressure, and studied indifference to the investment requirements that Indonesian processing ambitions demanded. Western mining companies and battery manufacturers were not willing to commit the capital required to build industrial-scale nickel processing facilities in Indonesia on the terms and the timeline that Jakarta was offering. The regulatory environment was unfamiliar. The environmental compliance requirements of Western institutional investors were demanding. The returns were uncertain. The decision was made, repeatedly and across multiple companies and governments, to look elsewhere or to lobby for policy reversal rather than to engage with the investment case on its merits.
Chinese companies made a different calculation. Tsingshan Holding Group, CATL, and a constellation of associated enterprises looked at the same investment case and saw a strategic opportunity rather than an operational burden. They had the capital, the technical expertise in high-pressure acid leach and rotary kiln electric furnace processing, and the strategic incentive to secure upstream control of a mineral critical to their domestic battery manufacturing ambitions. Within a decade, they had transformed Sulawesi's Morowali Industrial Park into one of the most significant nickel processing complexes on earth, and they had done it at a speed and cost that no Western consortium came close to matching.
Jakarta's gamble was rational. Use Chinese capital to build the infrastructure the West refused to fund, capture the export earnings, and then use the resulting leverage to attract the diversified investment base that would reduce dependency on any single partner. The first part of that sequence worked precisely as planned. The second part is where the trap closed.
The trap is the US Inflation Reduction Act. Under IRA provisions, electric vehicles and battery systems containing significant content from entities with Chinese ownership or influence are progressively excluded from American tax credits. The definition of what constitutes disqualifying Chinese content is still being worked out in regulation and litigation, but the direction is clear: Washington has decided that the clean energy supply chain it is subsidising should not run through Chinese-controlled processing. Indonesia now sits in the position of having the mineral the West needs, processed by the partner the West has decided it cannot accept, in facilities built with capital the West declined to provide when it was needed.
The RKAB Price Lever
Jakarta's response to the pincer it finds itself in has been to reach for the one instrument it unambiguously controls: the mining quota system known as the RKAB. For 2026, the government has cut production targets to 260 million tonnes, a reduction of approximately 30 percent from 2025 levels. The stated rationale combines environmental management with supply discipline. The operational effect is a price lever.
LME nickel prices spiked to $18,950 per tonne in late January following the quota announcement and are currently hovering near $17,300 despite a global surplus that would, in the absence of the quota, be expected to push prices considerably lower. Jakarta is using artificial supply restriction to maintain price levels that the market fundamentals do not currently support. The logic is that higher prices offset the cost pressures that are squeezing the margins of Indonesian smelters, many of which remain coal-powered and are absorbing the full impact of Brent crude at $125 per barrel in their energy input costs.
The energy cost problem is the dimension of the hilirisasi strategy that receives least attention in Western analysis and most attention in Indonesian boardrooms. Nickel smelting is one of the most energy-intensive industrial processes in the critical minerals supply chain. Building the smelters was the challenge Jakarta set itself a decade ago. Powering them affordably in a world of $125 oil and a domestic energy transition that is moving more slowly than the industrial build-out it is supposed to support is the challenge it faces now. The coal-powered smelters of Sulawesi are caught between the war-driven energy price spike and the green premium demands of the Western customers they are trying to attract.
The irony is pointed. Indonesia built its nickel processing capacity to participate in the global energy transition. It now finds that the energy costs of running that processing capacity are being driven up by the very geopolitical instability that the energy transition is supposed to eventually resolve. The clean future is being built on dirty economics in the present.
The Washington Pivot and Its Limits
On February 20, 2026, the United States and Indonesia announced a bilateral nickel deal framed as a strategic partnership for critical mineral supply chain security. Washington described it as securing unrestricted access to Indonesian industrial commodities. Jakarta described it as an investment partnership. The gap between those two descriptions captures the fundamental tension in the relationship.
What Washington wants is straightforward: nickel output that qualifies under IRA provisions as non-Chinese-influenced, available at sufficient volume to anchor an American battery supply chain that does not depend on Chinese processing. What Jakarta wants is also straightforward: capital investment in new processing capacity, technology transfer, and market access guarantees that allow Indonesia to diversify away from Chinese offtake without losing the revenue that Chinese buyers currently provide. The deal announced in February gestures toward both sets of objectives without delivering either in the specificity that would make the partnership operationally significant.
The structural obstacles are considerable. Western industrial investment moves on a timescale and with a regulatory burden that is fundamentally incompatible with the speed at which Chinese companies built Morowali. Environmental due diligence, community consultation requirements, institutional investor ESG criteria, and the political complexity of the IRA's own domestic content requirements all extend the investment decision cycle well beyond the window in which the market signal is clearest. By the time a Western-funded processing facility in Indonesia could be operational, the supply chain landscape may have shifted materially. Jakarta cannot afford to wait, and it knows it.
| Stakeholder | Core Demand | The Dilemma | Position |
|---|---|---|---|
| Indonesia | $30bn+ export surplus and domestic industrial capacity | Chinese smelting dominance creates IRA ineligibility; Western alternative too slow and too costly to deploy at scale | Trapped Centre |
| China | Raw material security and battery supply chain control | Targeted by US and EU green protectionism; IRA exclusions threaten the commercial logic of the Sulawesi investment | Under Pressure |
| United States | IRA-compliant battery inputs free of Chinese influence | Needs Indonesian nickel but cannot accept Chinese processing; Western investment capacity insufficient to replace it quickly | Structurally Dependent |
| European Union | Energy transition inputs at manageable cost | $125 oil raises energy cost of processing; stagnant industrial growth limits ability to fund alternative supply chains | Passive Buyer |
Master of the Market or Piece on the Board
The question that defines Indonesia's strategic position in 2026 is whether Jakarta is the master of the nickel market or the most valuable piece on someone else's board. The distinction matters because it determines whether hilirisasi has achieved its fundamental objective, which was not merely to increase export earnings but to give Indonesia genuine agency over its own industrial trajectory.
The honest answer is that it is currently both, and the balance between those two positions is less favourable than the export earnings figures suggest. Indonesia has genuine leverage: no credible alternative to Indonesian nickel supply exists at the volumes required by the global EV transition, and that leverage is real regardless of who processes the ore. But the processing infrastructure through which that leverage is exercised is 75 percent controlled by entities whose primary loyalty is to Chinese industrial policy rather than Indonesian industrial development. The value addition is happening on Indonesian soil. The margin capture, the technology control, and the offtake pricing are heavily influenced by the Chinese partners who built the facilities.
Diversifying that ownership structure is the work of the next decade, and it requires Western partners who are willing to engage with Indonesia's investment requirements on Indonesia's timeline rather than on the timeline that suits Western regulatory and institutional preferences. The February 2026 deal is a step in that direction. It is not yet a solution. Until the investment follows the rhetoric, Jakarta will remain in the trap: sovereign in its mineral endowment, dependent in its industrial infrastructure, and essential to a supply chain over whose direction it exercises less control than its geological position would suggest it deserves.
Indonesia is betting that the world's hunger for electric vehicles will eventually force the West to swallow its geopolitical reservations about Chinese-influenced supply chains. That bet may prove correct. The West has shown, repeatedly and across multiple critical mineral categories, that energy security ultimately outweighs supply chain purity when the cost of insisting on purity becomes high enough. But if Jakarta cannot diversify its investor base away from Beijing before that reckoning arrives, it risks completing the transition from raw material supplier to something more troubling: a high-technology tributary state in the very clean-energy economy it helped build. The smelters are Indonesian. The leverage, for now, is not entirely so.