Australia and Indonesia 2026: nickel, IA-CEPA, and the Prabowo downstream bet

The bilateral baseline in 2026 #

Two way merchandise trade between Australia and Indonesia reached approximately 23.6 billion Australian dollars in calendar 2024 according to DFAT's composition of trade publication, with Australia running a structural surplus driven by thermal coal, beef, wheat, live cattle, and a growing share of refined copper and aluminium. Indonesia's exports into Australia, dominated by petroleum products, vehicles, machinery, and palm oil derivatives, sat near 6.2 billion Australian dollars on the same DFAT series. Services trade, which sits outside merchandise customs data, added another 4 billion Australian dollars in education, tourism, and digital services according to ABS international trade in services, with Indonesian student commencements at Australian universities recovering past pre pandemic levels in 2024.

The architecture around those flows is now unusually thick. The Indonesia Australia Comprehensive Economic Partnership Agreement entered into force on 5 July 2020 and is now in its sixth year of phased liberalisation. The August 2024 Defense Cooperation Agreement, signed at Akademi Militer in Magelang, lifted the relationship to treaty status for defence, and the Comprehensive Strategic Partnership upgrade announced in 2024 added structured dialogues on critical minerals, energy transition, digital economy, and food security. The ASEAN Australia Plan of Action 2025 to 2029, agreed at the March 2024 Melbourne Summit, anchors the regional layer.

IA-CEPA five years in: what the tariff and rules of origin actually say #

IA-CEPA eliminated tariffs on 99 percent of Australian goods exports to Indonesia by value at entry into force, with the residual lines phased to zero between 2020 and 2030. The headline wins for Australia were live cattle (a duty free quota that grew 4 percent annually to 700,000 head by year five and is uncapped from year six), feed grains (zero tariff for feed wheat and barley above defined volumes), frozen beef carcases, dairy, and steel. Indonesia obtained zero or substantially reduced Australian tariffs across textiles, apparel, footwear, automotive parts, electrical machinery, and tropical fruit, and Australia bound its services and investment commitments well beyond its WTO General Agreement on Trade in Services schedule.

The agreement's hidden value sits in two places. First, the chapter on rules of origin permits cumulation between the parties and with regional partners under specified conditions, which becomes useful when Indonesian downstream nickel processors feed Australian or Korean cathode plants under the Regional Comprehensive Economic Partnership umbrella. Second, the Skills Annex created the framework for Indonesian workforce training partnerships and the Monash University Indonesia campus in BSD City, which opened its first cohort in October 2021 and reached approximately 600 enrolled students by 2024, the first foreign owned campus in Indonesia. Endeavour and Australia Awards Indonesia scholarship lines, plus the Australia Indonesia Centre's research program, sit on top of that base.

The nickel question: Indonesia's position and Australia's exit #

Indonesia produced approximately 1.8 million tonnes of mined nickel content in 2024 according to USGS Mineral Commodity Summaries 2025, equal to roughly 50 percent of global mined supply. Indonesian reserves were estimated at 55 million tonnes of contained nickel, again the largest national share. The nickel ore export ban in force since January 2020, the parallel buildout of rotary kiln electric furnace capacity for nickel pig iron and ferronickel, and the rapid expansion of high pressure acid leach plants for mixed hydroxide precipitate and nickel sulphate together moved Indonesia from a raw ore exporter to the dominant global processor. By 2024 Indonesia hosted at least nine operating HPAL plants and another seven under construction, with a near term Class I capacity ceiling above 700,000 tonnes per year of contained nickel.

The Australian side of that story is the inverse. BHP placed Nickel West, Kambalda, Mount Keith, Leinster, and the Kwinana refinery on temporary suspension in October 2024 citing oversupply driven losses. First Quantum's Ravensthorpe, Wyloo's Kambalda concentrator, and Panoramic's Savannah were placed on care and maintenance across 2023 and 2024. Western Australia's nickel sulphide industry shrank from approximately 160,000 tonnes of contained Class I production in 2022 to under 90,000 tonnes by 2025. The Australian government's response, a Critical Minerals Production Tax Incentive of 10 percent on processed value from 2027 to 2040, expanded Critical Minerals Facility lending, and the Future Made in Australia Act, was sized for the medium term but does not change the 2026 cost curve in which Indonesian HPAL nickel sulphate clears at 12,000 to 14,000 US dollars per tonne while Australian sulphide producers need closer to 20,000 to break even.

Lithium, rare earths, and the missing midstream #

The complementary picture in lithium and rare earths is sharper than headlines suggest. Australia produced roughly 86,000 tonnes of mined lithium content in 2024 according to USGS, more than half of global supply, with Greenbushes, Pilgangoora, Mt Marion, Wodgina, and Kathleen Valley as the producing set. Indonesia mined no significant lithium in 2024 but is constructing cathode precursor and cell capacity at the Konawe and Morowali industrial parks under the LG Energy Solution and Hyundai Motor backed grand package, plus a CATL aligned cluster at Halmahera. The structural opportunity for Australian spodumene producers is to feed Indonesian precursor cathode active material plants that need Class I nickel sulphate from local HPAL output and lithium hydroxide that Indonesia cannot produce domestically at scale before 2028.

The friction is that most Australian spodumene moves to Chinese lithium hydroxide refineries, and most Indonesian HPAL nickel sulphate moves into Chinese precursor plants that supply CATL and BYD. The IA-CEPA framework, the RCEP rules of origin, and the bilateral Critical Minerals Investment Partnership announced under the 2024 elevation can in principle reroute a meaningful share of those tonnes through bilateral midstream. In practice that requires lithium hydroxide refining inside Australia, which Tianqi Kwinana and Albemarle Kemerton have struggled to ramp, plus battery grade nickel sulphate and precursor capacity inside Indonesia that meets Foreign Entity of Concern tracing for IRA Section 30D eligibility. Neither condition was satisfied at scale in 2025, and the bilateral conversation in 2026 is whether to subsidise both ends of that midstream simultaneously.

Prabowo's program and the policy ceiling for 2026 #

Prabowo Subianto was inaugurated on 20 October 2024 with the largest cabinet in Indonesian post Suharto history, including a new Ministry of Investment and Downstream Industry that consolidated nickel, copper, and bauxite downstreaming under a single line. The program's anchor target, 8 percent annual GDP growth by the second half of the term, requires an investment to GDP ratio above 35 percent against a 2024 outturn near 30 percent according to Bank Indonesia, plus continued downstream value capture. The free school lunch program, the food estate expansion in Merauke and Central Kalimantan, and the new sovereign wealth fund Danantara Indonesia, launched in February 2025 to consolidate state owned enterprise assets above 900 billion US dollars in stated holding value, are the visible vehicles.

For Australia the practical reading is threefold. The food estate program creates demand for Australian feed grains, beef genetics, and agricultural technology, all of which sit inside IA-CEPA preferences. Danantara, alongside the older Indonesia Investment Authority sovereign fund, becomes a counterparty for joint critical minerals processing ventures, with Future Made in Australia and Export Finance Australia on the Australian side. The downstream nickel push, however, deepens the structural displacement of Western Australian sulphide producers, which the Albanese government cannot offset with the production tax credit alone. Bilateral coordination on environmental, social, and governance standards for HPAL tailings, on labour rights enforcement at Sulawesi parks, and on Indigenous and traditional landholder consultation is the politically necessary condition for the IRA aligned offtake structures Korean and US OEMs want to sign.

Three scenarios for 2026 to 2028 #

Our base case, assigned roughly 55 percent probability, has bilateral merchandise trade growing at 6 to 8 percent annually through 2028, two new bilateral midstream joint ventures reaching final investment decision (one Australian lithium hydroxide refinery with Indonesian sovereign capital, one Indonesian battery grade nickel sulphate plant with Australian offtake), and the food estate program absorbing 1.2 to 1.6 million tonnes of Australian feed wheat per year by 2028. In this path Prabowo's growth target is missed (actual growth lands at 5.5 to 6 percent), but the bilateral architecture deepens through the Critical Minerals Investment Partnership, the Defense Cooperation Agreement implementing arrangements, and a renewed five year Plan of Action.

The bear case, at 25 percent probability, has continued Indonesian HPAL oversupply pushing nickel below 14,000 US dollars per tonne, further West Australian sulphide closures through 2026 and 2027, friction over ESG standards at Sulawesi parks blocking IRA aligned offtake, and Prabowo accelerating non aligned trade arrangements with China and BRICS plus that dilute IA-CEPA preferences. The bull case, at 20 percent probability, has a coordinated 2027 FEOC tightening that pushes Korean and US OEMs into bilateral midstream structures at scale, Lynas heavy rare earth output expanding into Indonesian cathode plants, lithium prices recovering above 1,800 US dollars per tonne spodumene equivalent by 2028, and bilateral merchandise trade clearing 35 billion Australian dollars by 2028.

What miners, OEMs, and governments should be doing now #

For Australian miners, the priority is to stop modelling Indonesia as a competitor and start modelling it as the inevitable midstream for any battery program that wants to clear margin in Asia. That means term offtake structures that pair Australian spodumene and lithium hydroxide with Indonesian nickel sulphate and precursor cathode active material under explicit FEOC traceability, with Treasury memos refreshed quarterly. Pilbara Minerals, IGO, and Mineral Resources have the balance sheet to do this. Smaller juniors should focus on partnership routes through the Critical Minerals Facility and Export Finance Australia rather than chasing Chinese converter offtake.

For battery and automotive OEMs, the bilateral corridor is the cleanest IRA Section 30D compliant path that exists in Asia outside Korea and Japan, but it requires investing in audit and traceability infrastructure that does not yet exist at scale. LG Energy Solution, Hyundai, Samsung SDI, and Tesla are already inside the Indonesian park structures. Western OEMs without that footprint should evaluate brownfield equity stakes alongside Danantara and the Indonesia Investment Authority rather than pure offtake. For governments, the binding constraints are Indonesian environmental and labour governance at Sulawesi parks and the speed at which the Australian production tax credit translates into actual processing capacity. A bilateral working group on tailings disposal standards, modelled on the IRMA framework, would do more for IRA eligibility than a further round of communiques.

Sources #

• DFAT Indonesia country brief and composition of trade 2024
• IA-CEPA agreement text and DFAT outcomes guide
• Indonesia Australia Comprehensive Strategic Partnership 2024 announcement
• Defense Cooperation Agreement signed Magelang August 2024
• USGS Mineral Commodity Summaries 2025, nickel and lithium
• Australian Critical Minerals Strategy 2023 to 2030
• Future Made in Australia Act 2024
• Indonesia BPS macroeconomic indicators
• ASEAN Australia Plan of Action 2025 to 2029
• Reuters reporting on Indonesian HPAL buildout and Prabowo downstream policy 2024 to 2025
• Australian Financial Review reporting on Nickel West suspension October 2024
• World Bank Indonesia Economic Prospects 2024 to 2025