US Inflation Reduction Act Could Help Cut Chinese Battery Metal Ties: Details

US Inflation Reduction Act Could Help Cut Chinese Battery Metals Ties: Details

The US Inflation Reduction Act (IRA) includes “the largest investment ever to fight the existential crisis of climate change,” according to President Joe Biden, who will sign the bill into law on Tuesday. About $369 billion (roughly Rs. 29,26,200 crore) in federal funds will flow to climate change and energy security, which will boost domestic capacity to manufacture wind turbines, solar panels and electric vehicles.

However, green investment comes with a metallic sting in the tail.

The IRA increases and extends the existing electric vehicle (EV) subsidy to $7,500 (approx. Rs. 5,94,800) but conditions the tax credit on the sourcing of the battery’s mineral materials.

At least 40 percent of the critical metals in the battery – lithium, nickel, cobalt and manganese – must come from the US or a free trade agreement (FTA) partner. In 2026, this percentage will reach 80 percent.

Auto-makers have lobbied hard against the linkage, arguing that China is still too dominant and the US is too far behind in the battery metal supply chain.

That, however, is the point. The link between subsidies and mineral inputs is to accelerate the drive to build domestic, or at least favorable, critical mineral capacity and break China’s stranglehold.

Made in America

Auto-makers should “be aggressive and make sure we’re mining in North America, we’re processing in North America and we’re holding a line on China,” said Senator Joe Manchin, the architect of EV’s minerals sourcing component. Grant Scheme.

This is a tough challenge.

Benchmark Mineral Intelligence estimates that China currently has 81 percent of the world’s battery cathode production capacity, 75 percent of cobalt refining capacity, and 59 percent of lithium processing capacity.

The US and Canada together refine only 3.0 percent and 3.5 percent of the world’s lithium and cobalt, respectively, and battery cathode capacity is even lower.

Canada is an FTA partner. There are also other major mineral producing countries such as Australia, Chile, Mexico and Peru.

However, the list does not include Argentina, which is currently experiencing a boom in lithium investment, or Indonesia, which is emerging as a major battery metal production center centered on its large nickel deposits.

Not even on the list is the European Union, which has already said the new EV subsidy scheme could violate World Trade Organization rules.

South Korea agrees. Battery manufacturers such as LG Energy Solutions and Samsung SDI should benefit from the country’s FTA status, which may themselves depend on Chinese metal inputs.

Both the European Union and South Korea are members of the US-backed Mineral Security Partnership, a metals alliance of “friendly countries”, likely to have some scope to compromise on the devilish detail of sourcing criteria.

Given the multi-year process of building new mines, especially in the U.S., the challenge for auto-makers to qualify for subsidies is still huge.

Drive investment

There is no shortage of government money for that.

The bipartisan Infrastructure Act passed last year gave the Department of Energy $6 billion (roughly Rs. 47,600 crore) to invest in the domestic battery supply chain.

Applications for the first round of battery metal processing funding closed in early July, and money is expected to start flowing in over the next few months.

The Department of Defense is separately investing in a $120 million (approx. Rs. 950 crore) rare earths separation plant in collaboration with Lynas Rare Earths of Australia. Rare earths are important for electric motors, which means they are captured by regulations on sources of EV minerals.

The IRA offered a little more reward by increasing the tax credit to 30 percent for investments in any “advanced energy project” involving a broad spectrum of green transition technologies.

US government investment in mining and metals processing hasn’t been seen this big since World War II, and the Biden administration has pushed a relic of the Korean War — the Defense Production Act — even further.

Green Gauntlet

This should be a boom time for the mining and processing industry in North America.

But it isn’t. According to E&E News, the number of applications for mining on federal lands has been declining for a decade. Also the number of licenses granted.

Mining companies and their stakeholders have been hit hard by the battle with environmentalists. They have often lost money with large projects such as Antofagasta’s Twin Metals copper and nickel mine in Minnesota.

However, the stick of EV subsidy sourcing rules comes with the carrot of mining promises to allow reform.

“We have reached an agreement with President Biden and Speaker Pelosi to pass comprehensive authorization reform legislation before the end of this fiscal year,” Joe Manchin and Senate Majority Leader Chuck Schumer said in a joint statement.

Whether this is a tweak or a fundamental rewrite of the long-standing General Mining Act of 1872 remains to be seen.

But it’s clear that allowing the entire battery metal supply chain to be built on home soil is a big log-jam.

Senator Manchin’s EV plan also directly challenges the contradictions at the heart of the green movement, which wants to move quickly to a low-carbon world but does not support the means to ease the transition.

The messaging seems to be that if you want government-subsidized electric vehicles, you need to stop opposing the new domestic metal capacity needed to make them.

Whether it works or not remains to be seen.

But make no mistake. This EV subsidy scheme represents another major movement in the restructuring of critical mineral supply chains.

The views expressed here are those of the author, Andy Homme, a Reuters columnist.

© Thomson Reuters 2022


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