The Inflation Reduction Act (IRA) took over headlines last year with the implication that it would have a dramatic impact on the battery metal supply chain. Where are we now with this? Is the impact as big as expected?
When President Biden signed the IRA last July, I was meeting with battery companies in South Korea. They were very confused and didn’t know what to do. This is because most South Korean battery companies had announced they were setting up battery factories in the US, however, their supply chain relies on the Chinese.
Now, one year on, a lot has happened. First and foremost, those assets that are domiciled in North America and US free trade agreement (FTA) countries, their values have escalated and been prioritized.
Chinese companies are also making changes. They’re setting up battery materials factories in US FTA countries. They wanted to set up factories in the US but they couldn’t. The CATL and Ford JV is a perfect example.
Chinese companies are also prepared to make divestments. Because the IRA not only measures the origination of production, but also the ownership of the producers, although the threshold is not clear. But, those Chinese companies have been pressed by their customers, especially in the West, to come up with a divestment strategy.
The IRA has definitely been driving investment flows, not only in the upstream, but across the whole supply chain. However, there has also been a lot of pushback — establishing a separate supply chain independent from the existing one is very tough from cost as well as technical perspective. It’s like starting from scratch. It’s not going to be easy because you are working against immense competition and a free economy.
China has been steps ahead of the rest of the world in terms of battery metals production and refining for several years. Do you expect it to continue to dominate and innovate ahead of the West?
In the short to medium term, China remains in a dominating position, because it has been well ahead of everyone in the whole supply chain. In the long term, however, it might change given the world is asking for a more diversified supply chain.
I can give you an example. Towards the end of 2022, lithium hydroxide production was around 180,000t. If we look at the breakdown, 98% was produced in China, and the remaining 2% was from Australia, but from a Chinese company. That tells you the story. Then, if we break that down into companies, 80% of lithium hydroxide was processed by Chinese companies and 20% by Albemarle, which is an American company, however, most of its processing factories are based in China.
Then, if we look at nickel, more than half comes from Indonesia now and this will continue to grow. So, I think nickel is going to be more difficult, because it’s not only about the resources, but also the technology. If you look at what’s required for battery materials, it’s basically mixed hydroxide precipitate (MHP), which needs to go through a hydro-metallurgical process called High Pressure Acid Leach (HPAL) to be produced. The Chinese are the ones who have that technology and have mastered it at the lowest cost and in the shortest timeframe. If we look at the reason behind this, it really is the domestic demand which has supported that commercialization.
In the short to medium term, I see China remaining in a dominant position. However, long term, it will become more diversified, but it takes time.
Major Chinese companies like CATL are moving into Indonesia and making strategic partnerships across the region. How important are these partnerships for the growth of the industry overall?
It’s very important, because if you have an industry leader like CATL who’s going to invest in your country, this will help you escalate the establishment of the supply chain and cultivate the competition to create a positive environment. Of course, in the short term, it’s going to be a pain because it’s going to bring competition to local players, but in the long term its only beneficial.
There’s a perfect example, which is when China brought Tesla into Shanghai. China not only changed the rules, because previously you could only have OEMs in joint ventures with local companies, but the rules were changed to allow Tesla to have 100% sole ownership. As a result, there have been lots of complaints and severe competition for local Chinese EV companies calling ‘the wolf is coming!’. However, because of Tesla the local supply chain (in terms of the battery materials companies), has created an ecosystem in which both entities can grow together. This accelerated the growth of the whole supply chain in China.
I think for CATL, if they go to Europe or the Americas to set up factories, it’s a positive thing. However, for different reasons, especially geopolitics, it seems it’s not going anywhere in the US. Hopefully, it will happen in Hungary.
Also, I think governments should really create a pro-competition culture and positively cultivate the supply chain and establishment of an ecosystem. In the long term, it would only be beneficial.
With these new regulations, we’re seeing parallel or new supply chains being established. We have those that already exist in China and the new ones that are being pushed by the US and the EU. How do you see this further developing?
New regulations are driving investment flows, especially into North America. We’ve seen battery materials companies that are very keen to establish factories in the US, to be IRA compliant, so that they can benefit from the US government allowances.
It will also be positive because it results in a more diversified supply chain that isn’t dependent on China. It helps North America and the EU to accelerate their electrification process.
However, globally it’s slowed down. If we look at Europe, more specifically the UK, it has pushed back the target to ban new sales of petrol and diesel cars to 2035 from previously set 2030.
Overall, there has been lots happening, but it will take time for Europe and the Americas to set up their own supply chains.
Do you see any other interesting emerging players in the industry? We’ve seen Korea and Japan getting quite involved in the upstream. What else do you see happening here?
Korea and Japan are very active, especially Korea is catching up very fast. We have advised LG Chem to invest in one of the lithium miners in Canada. They’re catching up to not only secure their supply chains, but also to make sure they have more control in the pricing.
Besides Korea and Japan, we’ve also seen lots of other parties. The Western OEMs, (GM, Ford, and Stellantis), are active in investing in the upstream. GM, as we all know, has made the largest investment in the upstream for auto companies in history. Stellantis has also made quite a few investments, not only in lithium, but also nickel and even copper.
The sovereign wealth funds have become very active. Indonesia wants to gain more exposure into the upstream, given its leading position in nickel and battery materials. The Middle East is very active and wants to establish its own supply chain by bringing more expertise into its countries.
Interestingly, the oil and gas companies, like ExxonMobil, Chevron, and Aquinor also want to gain more exposure in the lithium upstream. They want to leverage off their technologies because they have more know-how in the subsurface. They see they have a technological advantage in getting into direct lithium extraction technology (DLE).
So, the space is becoming more crowded and even more exciting.
Any thoughts for the industry moving forward? What do you see happening as regulations continue to take hold and regionalization continues?
It’s becoming interesting but at the same time, disappointing, because the market forces and flows won’t follow simple economics. We’ve seen that regulations have been so powerful in driving the investment directions, but also over-regulation and protectionism is hindering the natural forces of the markets.
I think mining companies need to become more prepared for regulatory changes. They need to become more diversified in terms of their investor base, but also their customer base, depending on which market they are most interested in gaining exposure in.
Long term, as critical minerals are becoming strategically important, there are much more capital flows entering the space. It’s also interesting for the investors. They need to be crystal clear in what they want, what kind of commodity they want, and what kind of downstream space they want to enter.