China's Strategic Control Over Indonesia's Mineral Supply Chains

In 2024, Jiangsu Delong, the world’s second-largest stainless-steel producer, filed for bankruptcy, prompting several Chinese firms and state-owned enterprises to acquire its Indonesian assets. Among these was China First Heavy Industries, a state-owned enterprise established in 1954, which supplies military-grade metals to China’s military, including reactor vessels for nuclear submarines. Securing nickel feedstock for specialty steels is crucial for this manufacturer, which is deeply embedded in China’s naval industrial base.

This situation illustrates China’s strategy for critical minerals: incentivizing access to upstream assets for Chinese firms reduces supply disruption risks and shapes the cost structure of downstream products in military equipment, semiconductors, and other strategic industries. China achieves this through active party-business coordination, which mitigates commercial risks through two main mechanisms: company officials within the party wing of the firm and party officials within the firm’s leadership. Additionally, state-owned enterprises work alongside or behind private firms, facilitating a two-way exchange of information and state support.

Indonesia serves as a key example of how this strategy operates. Major firms like China Hongqiao, the largest primary aluminum producer, and Tsingshan Holding Group, a leading stainless-steel producer, exemplify this model. Chinese-style party-business coordination has given China an advantage over the United States in securing upstream minerals. However, closing this gap does not necessitate copying the Chinese model; instead, it requires reactivating an American precedent through a special-purpose vehicle modeled on historical entities like the Metals Reserve Company.

China Hongqiao’s connections helped integrate its Indonesian alumina operations into a state-backed system under Belt and Road financing. The Indonesian operation, PT Well Harvest Winning Alumina Refinery, is now the largest smelter-grade alumina plant in Southeast Asia, supplying feedstock to factories in Shandong, China. The overlap between civilian and military aerospace sectors in China further emphasizes the strategic importance of upstream aluminum control.

Tsingshan operates through politically connected partners, securing upstream nickel assets and integrating Indonesian production into China’s supply chains. Its operations in Indonesia, particularly at Morowali and Weda Bay, are among the largest nickel processing complexes globally. Tsingshan’s partnerships provide political access and industrial intelligence, crucial for navigating the Chinese market.

The case of Jiangsu Delong illustrates how Beijing secures strategic assets through both state-owned and state-aligned private firms. As Delong faced financial distress, Chinese partners absorbed its Indonesian operations, including a majority stake in PT Virtue Dragon, Delong’s largest nickel processing facility.

China First Heavy Industries, which had a minority stake in Delong’s operations, expanded its position following Delong’s bankruptcy. The firm’s leadership is closely tied to the Chinese Communist Party, emphasizing the interconnectedness of state and business in China’s mineral strategy.

Indonesia’s export bans on nickel ore and other minerals have prompted Chinese firms to move upstream into processing, gaining cost advantages through tax holidays and domestic pricing policies. These incentives have significantly reduced production costs, allowing Chinese firms to thrive in Indonesia’s mineral sector.

The U.S. has recognized the need to secure mineral access but has responded with fragmented initiatives. While some measures have been taken, such as the Inflation Reduction Act and the CHIPS and Science Act, they lack the integrated approach necessary to address the complexities of mineral supply chains effectively. A special-purpose vehicle could serve as a coordinating entity, absorbing risks and facilitating information sharing to enhance the U.S. position in securing critical minerals for strategic sectors.