An expensive new risk for Western manufacturers and their investors.

This past June, German chemicals giant BASF backed out of a planned $2.6 billion nickel refinery in Weda Bay, Indonesia. While the company cited changing dynamics in the global nickel market, BASF also faced calls to abandon the project from environmental and human rights groups.

BASF's decision to walk away should focus the clean energy and automotive sector's attention on a new risk profile: Indonesia's booming nickel industry, fueled by a wall of funding from Beijing, is bulldozing a trail of destruction at home and abroad that belies the lofty goals of the clean energy transition.

Nickel is a key ingredient for clean energy technologies like electric vehicle (EV) batteries. Nickel is also one of the building blocks for graphics processing units in data centers and for the high-temperature alloys used in ships, aircraft and other military hardware.

A damning investigative report recently published by Bloomberg News reveals how Indonesia's alliance with China to quickly build a world-leading nickel industry comes with a massive human and environmental cost.

Rivers run red in the Indonesian archipelago with mine waste as they flow onto foul oceans that thousands of people rely on for fishing and aquaculture. Reports of worker deaths and clashes between Chinese and local workers come monthly – especially from the Sino-Indonesian Morowali Industrial Park on Sulawesi Island.

The massive amounts of energy required to convert low-grade laterite ore into battery-grade material come from coal-fired power plants, ensuring that the CO2 footprint of Sino-Indonesian nickel is 50 times more than what could be sourced from Australia.

Bloomberg's report reads like a modern-day Dicken's story set in the tropics.

Indonesia's ability to mine and process its low-grade nickel laterite ores is made possible by enormous investment, operational persistence, and technological and manufacturing innovation by Chinese companies with close ties to the Chinese Communist Party. It is also facilitated by the Chinese lack of interest in labor rights, environmental protection or the interests of local indigenous people.

China has funded the Indonesian nickel mining and processing boom with over $30 billion from the Belt and Road Initiative (BRI). Over the last decade China's share of total foreign direct investment to Indonesia rose from around 2% in 2012 to a peak of 25% by the end of 2018 on a four-quarter rolling basis-most of which went to the mining sector.

Chinese capital flowing into the Indonesian nickel complex was enabled by very different risk and return parameters than those generally accepted by the West, as BHP pointed out earlier this year. Now, the International Energy Agency projects Indonesia to mine and refine 62% and 44% of the world's nickel by 2030, respectively.

The Morwali Industrial Park was in part financed by the China Development Bank. Huayou Cobalt's new mining and processing investment in Indonesia, with Ford Motor Company as a minority partner and offtake customer, is funded by state-owned Shanghai-Pudong Bank and touted as a key component of China's marquee state infrastructure and geopolitical influence strategy known as the "Belt & Road Initiative."

Indonesian nickel is cheap for a reason. While the cost to produce a ton of nickel ore is far lower than nickel produced in Australia, Canada and the United States, the true costs to people and the environment are not priced in.

In some markets, the cost of high standards of production is recognized through higher prices. Those high standards of production become part of a product's value proposition (think "fair trade" coffee) – especially for investors and companies with robust ESG commitments.

There are some promising initiatives within the mining sector to establish independent standards that can be tracked and traced.

The Nickel Mark, an assurance framework for responsible mining practices, was expanded to include nickel in late 2022. Since then, five production and refining operations in Australia, Canada, the United Kingdom and Norway have received the Nickel Mark.

At the start of the year, the International Council on Mining and Minerals convened a third of the global mining industry to commit to higher environmental standards. Both would establish verifiable, qualitative differentiation of mineral production that allows high-standard materials to be valued correctly.

Earlier this year, Australian Treasurer Jim Chalmers quipped, "We don't have the right market structures to reward global producers that improve their environmental and social footprint."

Proper pricing cannot be established if the market can't differentiate the products. Standards and tracing systems are the keys that will unlock premium pricing for responsibly produced battery minerals like nickel.

But the explosive growth and reckless production practices in countries like Indonesia prove that these efforts, thus far, have had limited impact on purchasing decisions. With the sad news that BHP will suspend operations at Nickel West in Western Australia due to oversupply of Chinese-produced Indonesian nickel, it's clear that nobody from the Ford supply chain team was spending much time on Qantas flights to Perth.

However, the auto sector and the battery supply chain that supports their EV ambitions should consider the risks of sourcing Sino-Indonesian blood nickel for a few pennies of incremental margin improvement.

Markets, supply chain managers, and corporate executives all need to consider the human and environmental externalities involved in sourcing blood nickel from Indonesia as a risk. Like icebergs and ships, the most damaging risks are often well below the waterline.

First, reputational brand damage is a potential risk that should cause auto executives to think twice.

A recent video report from Unilad features footage of previously uncontacted forest tribespeople facing down a mining bulldozer about to plow into their forest lands and where the tribe finds its sustenance. Younger car buyers who grew up watching Avatar don't want to be complicit in a real-world version of the animated film.

Supply chain risk is another widely acknowledged but easily overlooked risk here. China has demonstrated its willingness to use its dominance in mineral production as leverage on numerous occasions in the last 20 years, as we've seen with gallium, germanium, and graphite.

The supply chain risk of a sudden geopolitical move by China to cut off Western customers from supplies of Sino-Indonesian nickel would be massive and make the chip crisis of a few years ago look like a small delay.

Sourcing from Sino-Indonesia suppliers while ignoring the human rights, worker safety, and environmental protection commitments in their own sustainability reports is a new and potentially material risk.

Public officials in the U.S. are acting on this blatant type of "greenwashing." Earlier this year, the New York District Attorney sued Brazilian pork producer JBS for false claims about its green credentials.

At stake are millions of dollars in penalties and further reputational impacts. Or even take the recent example of California suing Exxon over lying about the recyclability of plastics.

Without deeper risk assessment, Western manufacturing companies that source cheap inputs today could pay a much higher price tomorrow. Car buyers who are motivated to contribute to the energy transition by purchasing an EV do not want to learn that the car they purchased caused new environmental damage, increased the need for coal-fired power or involved human suffering.

The U.S. Department of Defense doesn't want to find out its access to HY-80 non-corrosive steel for the hull of a Virginia class nuclear submarine depends on nickel from a potential military rival.

The very small margin improvement gained from sourcing Sino-Indonesian blood nickel could, in fact, be far more expensive in the long run.

Gabriel Collins is a graduate student in the Mineral and Energy Economics program at the Colorado School of Mines and an analyst at Talon Metals. Morgan Bazilian is the director of the Payne Institute for Public Policy at the Colorado School of Mines and a former lead energy specialist at the World Bank. Simon Lomax is a policy and outreach advisor to the Payne Institute and a former climate change reporter for Bloomberg News.