Electric vehicle makers are eyeing ditching China and turning to noncompetitor countries like Indonesia for battery supplies to meet increasing demand without violating provisions of the Democratic climate legislation meant to move supply chains closer to home.
The Inflation Reduction Act, the new green energy and healthcare law Democrats passed in August, increased the federal electric vehicle tax credit’s total value to $7,500 to incentivize more purchases but added stringent new content requirements for vehicle batteries inputs that will phase in over the next seven years. The requirements are designed to claw back a share of the market from China and other competitors.
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But Chinese dominance of the battery supply chain will be hard to work around, according to industry leaders and analysts, as China commands some 70% of it and has a hand in multiple segments, from mineral refining to battery manufacturing. U.S. industry will also be unable to meet demand on its own.
“The bottom line is, everybody wants to be eligible,” Joe Britton, executive director of the Zero Emission Transportation Association, said Tuesday during a National Mining Association-hosted event about critical mineral supply chains. Britton’s group represents U.S. electric vehicle makers and others, including utilities and mining companies, with a stake in the EV race.
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The new law divides the EV credit into separate critical mineral and battery component portions, each worth $3,750.
Critical minerals relevant to the EV sector, as defined by the U.S. Geological Survey, include lithium, cobalt, nickel, and graphite, among a few others. Battery components would refer to pieces of the battery like the cells, anodes, and cathodes.
Beginning in 2024, eligibility for the EV credit is withheld for any vehicle that has a battery with components manufactured or assembled by an “entity of concern” — China, Russia, Iran, and North Korea. The same prohibition extends to a battery’s critical minerals beginning in 2025.
The law also requires that by Jan. 1 of next year, an eligible electric vehicle battery contain at least 40% critical minerals extracted or processed in the United States or a U.S. free-trade agreement partner or recycled in North America.
That percentage increases in subsequent years but never reaches 100% under current law, allowing manufacturers to continue utilizing some inputs from countries that don’t have trade agreements with the U.S.
Britton emphasized that the U.S. sector wants to use domestically sourced components as much as possible and said he expects mineral processing and battery manufacturing to increase thanks to tax incentives in the inflation bill.
He also said to expect EV manufacturers to also look to other regions, especially Indonesia, the globe’s top producer of nickel, a mineral used in battery cathodes.
“While Indonesia is not eligible to be your FTA agreement country for compliance, it’s not China,” Britton said. “So, I think there’s going to be a huge driver to non-Chinese, even to non-FTA countries, for production because that is a backdoor way to avoid the entity of concern language.”
Lawmakers in both parties are increasingly worried about the national security implications of being reliant on a geopolitical foe in China, an underlying motivation of the inflation bill’s domestic content and free trade agreement provisions.
Sen. Joe Manchin (D-WV), who was the make-or-break vote for the Inflation Reduction Act and negotiated it down to the very end, had opposed earlier versions of the bill on the grounds that the electric vehicle credit would enable further dominance in the sector on the part of China and other competitors.
The EV credit’s content requirements also serve the “Buy American” agenda of President Joe Biden to bring more manufacturing jobs to the U.S., from which the mining sector stands to benefit.
“I’d never really thought I’d see such a catalyst as this. This is going to be a forcing function,” Mitch Krebs, president and CEO of Coeur Mining, told the Washington Examiner of the new law.
On the other hand, the content requirements, as well as a separate requirement that eligible electric vehicles be assembled in North America, have fractured the U.S. trade relationship with Europe, Japan, and South Korea, all of which have EV manufacturers that stand to lose out from the protectionist measures.
The inflation bill’s battery mineral reshoring effort has its own limit, said John Anton, director of pricing and purchasing at S&P Market Intelligence.
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“Everything you can bring back home at a competitive price, you do, but you can’t bring everything back home. Nickel, cobalt, some of them — you just don’t have that much in the U.S.,” Anton said.
“The Andes are where you have to go. You can’t do it without Peru and Chile,” he added.
Chile is the globe’s leading copper producer, and Peru is No. 2. Chile is also the second largest lithium producer after Australia.
Notably, EV manufacturers vying for the critical minerals portion of the tax credit do not have to “do it without” either country, as both have free trade agreements with the U.S.
