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Home»Finance»Should the Philippines Replicate Indonesia’s Nickel-based Industrialization?
Finance

Should the Philippines Replicate Indonesia’s Nickel-based Industrialization?

February 4, 2025No Comments7 Mins Read
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Does Indonesia’s industrial upgrading serve as a compelling model for the Philippines? Both nations rank among the wealthiest in Southeast Asia in terms of natural resource endowments. Indonesia boasts a status as a global minerals heavyweight: it is a major producer of copper, the world’s largest thermal coal exporter, the second-largest tin exporter, and has the sixth-largest bauxite reserves. It also boasts the largest number of nickel reserves globally. While the Philippines possesses more limited deposits of tin, coal, copper, and bauxite, it holds significantly greater chromite and gold reserves than Indonesia. Leveraging these comparative advantages through strategic industrial policies has immense economic potential for the Philippines.

Over the past decade, Indonesia has aggressively expanded its exports of intermediate mineral goods, such as processed ferronickel and pig nickel. Its total exports of these products have skyrocketed from $3 billion in 2012 to $30 billion in 2023. During this period, the contribution of the island of Sulawesi, the location of most of the country’s nickel deposits, to Indonesia’s GDP has doubled, rising from 4 percent in 2012 to 7 percent in 2023. Sulawesi’s annual growth rate has surged to 7-9 percent between 2020 and 2023, far exceeding the 3-5 percent national average. Crucially, this thriving smelting sector relies not just on investment, but also on robust training and skill development.

This success was achieved through a ban on the export of raw nickel ore, which encouraged foreign investment in the intermediate production process. By banning exports, nickel mining firms had no choice but to sell to domestic smelting companies, around 80 percent of them from China. A small number of large Chinese smelting companies have come to dominate the market, creating an oligopsony where they dictated prices that were significantly lower than international rates.

However, this economic triumph has come at a significant socio-environmental cost. Indonesia’s nickel export restrictions and the accompanying extractive activities have had severe consequences. Extensive land clearing, spanning over 5,000 hectares, has occurred on Sulawesi and Halmahera, another island with considerable nickel deposits in the Maluku Islands. The smelters, which collectively rely on 12 GW of coal power, have generated massive pollution, emitting 60 million tons of CO2 annually, reinforcing Indonesia’s status as the world’s third-largest CO2 emitter. This has led to degraded air quality, adverse public health impacts, contaminated coastal ecosystems, decimated fishing stocks, and damaged coral reefs. Residents of Sulawesi now face the highest levels of cancer and other health issues in the country. A 2022 survey found that 40 percent of children under five on the island have suffered from asthma, and adult cases of pulmonary disease have risen by 25 percent in the smelter-heavy areas.

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Given these severe socio-environmental consequences, Indonesia’s model is arguably not a suitable blueprint for the Philippines or any other resource-rich country to emulate. Following Indonesia’s nickel-based industrialization is likely to encounter significant implementation challenges, generate unintended negative consequences, exacerbate political and social tensions, and potentially lead to national security concerns.

First, the Philippines faces significant challenges in assembling land for industrial development. Many land parcels lack proper documentation or registration, enabling local elites and landowners with political connections to block such initiatives in order to retain land for speculative purposes. These groups can effectively obstruct the government’s efforts by challenging them through legal channels and other avenues. Furthermore, the country’s legal framework is characterized by overlapping and conflicting regulations.

For instance, the Indigenous Rights Law of 1997 recognizes the ancestral domain of indigenous communities, but this recognition is often disregarded by other government agencies. Similarly, the Department of Agrarian Reform’s Comprehensive Agrarian Reform Program distributes land, while the Department of Environment and Natural Resources grants permits for activities like logging and mining. Local governments further complicate matters by implementing their own planning and zoning laws. Additionally, the Philippines’ population density of 382 people per square kilometer is more than double that of Indonesia’s 151, exacerbating land scarcity issues. In contrast, Indonesia’s post-2001 agrarian reforms prioritize the state’s control over resources, making indigenous groups and other actors weaker and thereby limiting formal disputes.

Second, implementing a similar project in the Philippines would likely have an even more severe environmental impact due to the country’s decentralized mining governance. Deforestation would likely increase as a result of the need to expand mining concessions. The Philippines is home to global biodiversity hotspots, with over 6,000 plant species, as well as areas of intact forests such as the Sierra Madre. Expanding mining operations in regions like Palawan, Caraga, and Zamboanga could endanger the Philippine eagle, tamaraw, and other endangered species. Furthermore, increased deforestation would exacerbate the impacts of natural disasters like flashfloods.

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In 2022, only 3 percent of mining firms in the Philippines complied with Philippine environmental standards. Building a smelter in the Philippines would necessitate the construction of more coal-fired power plants to provide electricity, further entrenching the country’s reliance on coal, which accounts for 57 percent of its electricity generation. The Philippines also has lower-grade nickel ore, known as laterite, which requires more energy to smelt and generates 30 percent more waste. With a higher population density, pollution from coal-fired power plants would be more severe than in Indonesia, where nickel smelting has taken place on the relatively remote island of Sulawesi.

Water pollution, marine damage, and soil degradation would also increase, and the Philippine government has shown that it lacks the enforcement capacity to ensure mining companies comply with water waste standards. The archipelagic geography of the Philippines would mean that environmental damage to coral reefs and coastal communities, already struggling with the impacts of climate change, would be significant. Additionally, poor waste management practices, similar to those seen in Sulawesi’s Morowali industrial park, could result in the leakage of heavy metal-laden slag waste into farmland.

Third, implementing a similar nickel smelting project in the Philippines would likely intensify political or social conflicts with various local actors. One major issue would be the displacement of the country’s sizable artisanal and small-scale mining community, which comprises roughly 300,000 miners working on both formal and informal concessions. Many of these small-scale miners rely on mercury and cyanide in their nickel laterite processing, a practice that could be disrupted. While limiting these environmentally damaging activities could itself be beneficial, evidence from Indonesia suggests that these smaller miners could simply relocate their operations elsewhere within the country to offset the expansion of large-scale mining.

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Furthermore, since the 1990s, decentralized governance has empowered local elites like governors and mayors to designate “small-scale” mining areas within mineral concessions. Artificially depressing nickel ore prices, as seen in Indonesia, would exacerbate the desperation of these already vulnerable small-scale miners, who wield more power in the Philippines compared to their Indonesian counterparts, potentially leading to severe conflicts.

And finally, inviting Chinese smelting firms to the Philippines in exchange for lower ore prices, as per the Indonesian model, would pose a significant national security threat. Given Indonesia’s relative distance from China’s most assertive actions in the South China Sea, despite ongoing frictions around the Natuna Islands, allows the elites to tolerate potential security risks in pursuit of economic development. However, the Philippines’ active territorial disputes with China in the South China Sea make such an arrangement far more precarious. The inability of the Philippines to effectively monitor and regulate Chinese investments, as evidenced by the proliferation of Chinese scam compounds and online gambling firms, further compounds the risk of these smelters being leveraged by the Chinese state to exert pressure on the Philippines. With China already wielding significant influence over the Philippines’ critical energy grid transmission sector, allowing further Chinese dominance in the strategically vital nickel industry could have severe geopolitical consequences for the country.

Ultimately, the feasibility hurdles, probable environmental degradation, rising political and social strife, and security concerns suggest that the Philippines should chart a divergent course from Indonesia. Given the Philippines’ robust service industry, alternative development trajectories are viable – ones that do not depend on Chinese-backed mineral-driven advancement.

The Philippines should actively pursue alternative foreign investors, such as Japanese or American companies, who are willing to invest in smelters and refiners without the constraints of artificially depressed prices and other problematic factors. Securing support from both the Philippine and foreign governments could significantly encourage these firms to invest and bolster economic development in this crucial Indo-Pacific ally.

Indonesias Industrialization Nickelbased Philippines Replicate
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