Picking winners in US EV battery supply chain revolution

The US hopes a generous tax credit incentive will spur electric vehicle battery manufacturers to start locating sourcing and production facilities in North America.

The US is attempting to wrestle control of the electric vehicle battery supply chain away from China, and its weapon of choice is the Inflation Reduction Act. But imposing regulations on a sprawling and complex part of the global economy is a major challenge. Despite US regulators’ clear intentions, there is still uncertainty over which countries and companies stand to gain. 

Demand for the mining, refining and production of key EV battery materials is soaring. McKinsey thinks the battery value chain could increase 10-fold between 2020 and 2030, taking annual revenue to $410bn.

For reasons of geopolitical security and economic gain, the US wants to see as much of this value created in North America and by foreign allies as possible. In its unprecedented attempt to remake a global supply chain, the US is relying on a relatively modest tool — the humble tax incentive. 

Since April, a generous $7,500 consumer tax credit for EV buyers is only fully available if geographic sourcing and production requirements for critical minerals and battery components are met. The US Treasury has said that for critical minerals — for example, lithium and nickel — 40 per cent of the value must be extracted or processed in the US or a free trade agreement partner.

For the component parts of an EV’s battery — for example, the cathode and anode — 50 per cent of the value needs to be manufactured or assembled in North America. Both figures will increase steadily over time.

Very few vehicles are currently eligible, but the US hopes that the incentive will push companies to locate production and sourcing accordingly. The tax credit will be available until 2032, so the sooner companies move the greater the tax benefit.

There are signs it is already working. “We are starting to see quite a bit of activity around feasibility analysis on onshoring facilities across batteries, storage, EVs and related components given the guidance from [the] Treasury,” says LEK Consulting managing director Amar Gujral.

Cutting out China

Crucially, from 2024 the tax credit will not be available if any of the components are processed, manufactured or assembled in countries deemed a “foreign entity of concern”. This includes Russia and, most importantly, China, which boasts around 75 per cent of global battery manufacturing capacity. From 2025, the FEOC criteria will also apply to critical minerals, where China is likewise a major player. 

Given China’s dominance of the global battery supply chain, this will be difficult to enforce, says Chris Berry, president of House Mountain Partners, an advisory company specialising in battery metals. “There are also examples where corporate America and the political class differ [in their attitude to China],” he adds.

Ford Motors, for example, plans to build an EV vehicle battery factory in Michigan, with China’s Contemporary Amperex Technology as a technology partner, and has joined Zhejiang Huayou Cobalt as partner on an Indonesian nickel processing plant.

The most obvious beneficiaries of the IRA tax incentives are US allies that are already valuable sources of critical minerals. In terms of value, the key minerals are lithium, nickel and graphite.

The US has taken a broad approach in defining FTAs. A critical minerals agreement with Japan signed in late March, for example, was deemed to qualify as an FTA for IRA tax incentive purposes. Of the countries with which the US has FTAs in place, Berry says the five that stand to benefit most are Canada, Mexico, Australia, Chile and South Korea.

Australia and Chile will be huge winners as major sources of raw lithium. The US and Australia signed a new collaborative agreement on critical minerals and clean energy transformation in May. Refining and processing lithium into battery-grade material is another matter.

Although the Australian government wants to see more high-value refining production in the country, South Korean companies have a strong foothold in lithium refining and are better placed to gain. Metals giant Posco recently cited lower production costs in its decision to base a new lithium processing facility in South Korea, rather than near the Australian mine where the lithium is sourced. 

When it comes to graphite, there are far fewer ally-sourced options. “The majority of the graphite used in anodes comes from China,” says Gujral, “The US is looking at different synthetic graphite opportunities and several facilities have been announced, which will position the US to be more of a winner there.”

Chicago-based Anovion Technologies announced last month that it will build the country’s largest synthetic graphite production facility in Georgia. Toronto-listed Northern Graphite has plans for a huge battery anode material plant in Quebec that will produce synthetic and natural graphite.

Made in America?

Although the US should be a key beneficiary of the IRA, there are concerns in the US battery industry about just how much of the supply chain the country will be able to onshore. The distinction between components and minerals has already weakened the push for more domestic manufacturing.

“[The] Treasury made it clear that making anything that’s below a component can be done in an ‘FTA country’,” says Sam Jaffe, senior director of business development at the US subsidiary of Israeli battery technology company Addionics. “That weakens the made-in-America part of the IRA considerably.”

The most expensive part of an EV battery is the cathode. Several South Korean companies have announced plans for cathode plants in North America.

LG Chem plans to invest $3.2bn in a cathode material plant in Tennessee. General Motors and Posco Future M have announced additional investment in their Canadian battery material facility, which is due to start operating in 2025. German-headquartered BASF has also acquired land for a plant in Canada, which has the added attraction of large hard rock and brine-based lithium resources. 

But making the precursor cathode materials (pCAM) requires significantly more energy and investment and generates more employment than making the cathode active material. “If we end up manufacturing battery cells in the US, but we're importing the pCAM material from Korea or Japan, then that doesn’t represent as big a shift in supply chain terms,” says Jaffe. 

There is also significant uncertainty over just how the US will approach the definition of FEOC, most importantly with regard to China. If an entity under partial Chinese ownership meets the definition, then lithium sourced from an Australian-Chinese joint venture — of which there are several — could end up excluding an EV from IRA tax credits.

The US administration has yet to release guidance on how it will treat these entities for tax credit purposes.

“These are still decisions that regulators in the US need to make and they are really, really hard,” says Chad Bown, Reginald Jones senior fellow at the Peterson Institute. “Until we have any sense for how these [will be] made, nobody should be thinking they understand how this is going to play out.” 

Nor is the FEOC question the only source of uncertainty. In late December, the US Treasury decided to allow any EV that was leased to qualify for a consumer separate tax credit, which does not require any of the sourcing requirements for critical minerals or components. That decision is likely to have helped placate allies in Europe, whose domestic EV manufactures are major exporters to the US market.

There are also suggestions that the leasing decision provides a temporary fix to incentivise EV purchases while companies build their new manufacturing plants in North America. 

But it also weakens the pressure to shift supply chains. “By opening up the leasing track, it takes pressure away from companies to have to work harder, faster to meet those [sourcing and location] criteria,” says Bown. 

This uncertainty around what form further guidance will take and the interplay between different policy decisions makes it hard for companies to commit to breaking ground on new projects. Although the direction of travel is clear, the road ahead is not.

“The next step for companies is progressing to a final investment decision, and I think that’s where the level of uncertainty and murkiness is still keeping many in a wait-and-see mode,” says Gujral.