Indonesia’s Resource Engine Stalls as Costs and Policy Choke Mining Turnaround

JAKARTA, Investortrust.id — Indonesia’s cornerstone mining sector is projected to labor under intense economic strain for the majority of 2026, navigating a painful operational slump following a sharp contraction at the start of the year. A toxic combination of escalating production costs, aggressive domestic fiscal shifts, and fragile global demand has pushed the resource industry into a complex transition phase that far exceeds a typical, cyclical commodity downturn.

The resource sector contracted by 2,14% year-on-year in the first quarter of 2026. This performance made mining the sole primary economic sector to shrink during a period when Indonesia’s broader gross domestic product expanded by a resilient 5,61%.

The downturn highlights deep structural vulnerabilities within the industry that cannot be remedied by short-term market fluctuations alone, according to Edi Permadi, a natural resources professional expert at Lemhanas, the National Resilience Institute.

"The contraction was triggered by a combination of domestic policies and global dynamics," Permadi said when interviewed on Friday, June 5, 2026. "On the policy side, the government has raised royalties through a progressive scheme since 2025, particularly for nickel, which sits in the 14% to 19% range. Then came the implementation of the newest Mineral Benchmark Price (HPM)—the state’s mandatory mineral floor price—in April 2026, which increased the transaction base price for ore, especially limonite."

Beyond domestic borders, global commodity markets remain uncomfortably unbalanced, characterized by a persistent supply glut in nickel that continues to cap international price recoveries.

"Projections for the mining sector throughout 2026 must be evaluated in stages, factoring in various extreme risks or black swan events that are appearing with greater frequency in the global economy," Permadi added.

A Squeeze on Electric Vehicle Supply Chains

As the industry grinds through the second quarter of 2026, mining output is projected to remain firmly in negative territory, with growth hovering between minus 2% and minus 1% year-on-year.

The full, bruising impact of these compounded operating costs is now materializing across production floors. The primary casualty is the High Pressure Acid Leach (HPAL) sector—the capital-intensive chemical processing technology used to refine low-grade Indonesian ore into the high-grade mixed hydroxide precipitate (MHP) vital for the global electric vehicle battery supply chain.

"During this period, the full impact of rising production costs is becoming visibly apparent," Permadi stated. "The HPAL industry, as a critical leg of nickel downstreaming, has experienced a highly significant cost surge. The price of sulfur has increased from around $275 per metric ton ($250 per short ton) to between $960 and over $1.300 per metric ton ($1.180 per short ton), while sulfuric acid has reached $800 to $910 per metric ton ($725 to $825 per short ton). The impact on the cost structure is immense."

He explained that sulfuric acid, which historically accounted for a manageable 35% to 40% of an HPAL plant's total operating expenses, has ballooned to swallow up 65% to 70% of production budgets. When combined with energy costs—including fuel oil and electricity—which command an additional 10% to 20% share, the total cost to manufacture battery-grade MHP has practically converged with primary nickel prices on the London Metal Exchange. Corporate profit margins have effectively been compressed to zero, with many operations running at a net loss.

Regulatory caps on raw volume are adding to the operational gridlock. Moving away from a long-held strategy of volume expansion toward price stabilization and value-add preservation, the government has actively reined in production quotas, slashing national coal targets compared to last year and tightening nickel output limits.

Yet the most severe threat to the sector remains an unpredictable geopolitical flashpoint in the Middle East. "Under a black swan approach, disruptions to global supply caused by escalating conflicts in the Middle East—specifically along critical energy and sulfur distribution channels like the Strait of Hormuz—could drastically worsen the cost environment," Permadi warned. "In this scenario, the mining sector's contraction could potentially widen to below minus 3%."

To cushion the blow, Permadi suggested that recent aggressive fiscal signals from regulators need an immediate pause. "The delay, or even complete cancellation if possible, of the planned royalty hikes announced by the Minister of Energy and Mineral Resources and the Minister of Finance is an entirely appropriate step," he noted. "Furthermore, there is an urgent need to review the HPM for limonite ore to bring it closer to economically viable market prices, ensuring that the foundation of Indonesia's NMC battery and electric vehicle development ecosystem can keep moving forward."

The Long Walk to Stabilization

Barring further global shocks, the resource sector is expected to enter a temporary stabilization phase in the third quarter of 2026, with growth flattening out to between minus 0,5% and positive 0,5%. By this point, industrial players are anticipated to have adjusted to the elevated cost environment through aggressive internal efficiencies and supply chain integrations.

Widespread contract renegotiations between independent miners and state-licensed smelters will serve as the primary defensive strategy to keep operations afloat despite paper-thin margins. A moderated domestic regulatory stance regarding limonite benchmark pricing would further support this fragile equilibrium.

But, any third-quarter plateau remains highly sensitive to the economic health of Indonesia’s major trading partners, specifically the ongoing trade tensions between Washington and Beijing.

"As the primary consumer of industrial metals, any economic deceleration or trade tension in China will immediately impact demand for Indonesian nickel and copper," Permadi pointed out.

"Should a black swan event emerge in the form of an escalating trade war or a broader global slowdown, the mining sector could easily return to stagnation or negative growth in the third quarter. Conversely, if international relations improve, the stabilization phase will take firmer root."

True relief is not anticipated until the final quarter of 2026, with mining GDP projected to tip back into positive growth between 0,5% and 2%. This modest rebound would mark the official end of a year-long downturn.

"Better price stability, anchored by an HPM reform that establishes a reliable floor price, will begin to offer predictability for corporate operators," Permadi said. "Furthermore, if geopolitical tensions ease, energy and sulfur costs have the potential to stabilize, which will directly restore industrial margins. However, this recovery will not be linear."

He explained that under an optimistic blueprint, global supply shocks could inadvertently trigger a commodity price rally, pushing mining sector growth above 3%. Conversely, should the global economy slide into a deeper recession, growth will likely flatten back toward zero.

"The dynamics of the mining sector throughout 2026 show a distinct pattern: contraction in the second quarter, stabilization in the third, and a restricted recovery by the fourth," Permadi concluded. "Cumulatively, annual growth for the sector is expected to print between minus 1,5% and positive 1%. This makes 2026 a textbook transitional year."

Preserving Capital in a High-Risk Landscape

Beyond pure growth percentages, the defining battle for Jakarta will be maintaining the country's long-term investment appeal. HPAL ventures are phenomenally capital-intensive, requiring upfront commitments ranging from $2,5 billion to $4 billion per project. In such a high-stakes environment, sudden regulatory pivots and unchecked domestic inflation directly threaten multi-year investment theses.

"While progressive royalty adjustments and elevated benchmark pricing successfully boost immediate state revenues, they simultaneously drive up policy risk perceptions," Permadi warned. "Market data indicates that even the mere discussion of fresh fiscal tightening has been enough to trigger sell-offs in listed mining equities, underscoring how sensitive investors remain to regulatory uncertainty."

To counter this, the state must learn to balance its fiscal ambitions with the realities of the global commodity cycle, building flexible tax frameworks that adjust to market downcycles. Synchronizing state royalties with actual, realized production costs and offering targeted corporate incentives to critical green-technology projects will be essential. Ultimately, strict corporate adherence to Environmental, Social, and Governance (ESG) standards, absolute legal consistency, an increase in exploration activities, and regular policy harmony will do more to secure long-term global capital than raw volume ever could.

"A national approach of policy tranquility is absolutely vital to reverse the current contraction and, over the long term, foster the industrialization of products that carry much higher economic value," Permadi concluded.