Defining Precisely What is 'Downstream' Activity for Indonesia?
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28 March 2024 22:04 WIB
By: Dr. Will Hickey | Distinguished ASEAN Scholar, Guangdong University of Foreign Studies, Canton, China
It has been all over the news recently that Indonesian president-elect Prabowo Subianto will continue the current President Joko Widodo’s policy of downstream or value-added activity on the processing of Indonesia’s vast natural resources. Nonetheless, Indonesian politicians' ideas of down-streaming are half-baked, with too much focus on slogans and rupiah returns and not the overall societal benefits that are derived from real activities. Is it really ‘more profitable for the people’, or is it more profitable for the business insiders and investors?
If a narrow definition is used, downstream then becomes one of adding some (or any meager) value to the raw natural resource, such as sweetening crude oil (by pulling out the sulfur gas), creating a lithium slurry from lithium ores, smelting nickel in laterite form to perfect it for export only (more on nickel smelting below) or shipping refined crude palm oil abroad, then many things are lost in the mission of what seems to be a true ‘downstream’ activity.
There are upstream, midstream, and downstream processes in all natural resources. It would seem that Indonesia is currently stuck in both the middle-income trap and in the midstream (not really downstream) processing of its natural resources. It is doubtful that President-elect Prabowo can tackle one issue without addressing the other.
The electric vehicles, or the EV, industry is still largely influx in terms of type of battery components. Currently, all the rage is nickel batteries or NCM type, but many EV manufacturers, including Tesla, are starting to shift their focus to lithium batteries, or LFP, which are cheaper and lighter, though they still do not have the same power as the NCM type. In other words, the nickel demand could all shift quickly, further, 90% of the nickel processing business in Indonesia is controlled by China. China with its BRI (Belt and Road Initiative) as an example, is not particularly concerned with ‘downstream’ in other countries. They are more concerned with upstreaming to feed their own domestic mills, with foreign down-streaming activity only as robust as the demand from China’s industry dictates, (i.e. finished nickel, steel, or oil products). Right now, China is declining economically and has several domestic growth challenges and unfavorable aging demographics.
Both coal and gas in their ultimate downstream form can become substrates for plastic PVC beads and specialized liquid fuels. Yes, coal and gas can even make gasoline, kerosene, and other synthetic liquids, via the Fischer–Tropsch process, but this reaction requires a large electricity input. South Africa, similar to Indonesia with large coal reserves, uses this process to produce heavily polluting diesel fuel.
What about then the ultimate downstream goal of oil and gas for Indonesia: namely, producing enough gasoline for its domestic market? As of 2023, Indonesia still imports nearly 400,000 barrels of gasoline a day. What currently softens this imported price blow is not any increased domestic refining capacity, but rather fuel subsidies, still in the range of around $32 billion a year, this is roughly the same amount of money needed to finish the new Indonesian capital, in Nusantara. We can see that a successful move to ‘downstream’ could then provide real tangible economic results for Indonesia via economic improvements.
