What does the US Inflation Reduction Act mean for the EV battery supply chain?

The proposed US Inflation Reduction Act promises $369 billion for climate and clean energy policies, but also sets an ambitious target to extract and process key battery minerals locally.

The Senator Joe Manchin led change to the Build Back Better Act zeroes in on the lithium ion battery to EV supply chain with tax incentives and efforts to drive localisation.

Here we outline the main policy changes to the act that could impact the lithium ion battery supply chain. 

$7,500 EV Tax Credit Extension Beyond 200k

The bill includes an extension of the $7,500 tax credit relief for new electric vehicles beyond the current 200,000 vehicle cap. But it stipulates they have to be built with North America or trade agreement critical minerals, including lithium, cobalt, graphite, nickel and manganese. 

The bill says not less than two-fifths of the critical minerals used in electric vehicle batteries should be extracted and processed locally in the US or with a free trade agreement (FTA) partner, or recycled in North America. It includes provisions to ramp up this requirement to 80% in 2026. 

“To be eligible, batteries have to contain a level of critical minerals extracted or processed in any country the US has a free trade agreement with or recycled in North America,” it says. 

10% tax break across the supply chain 

The bill also includes a 10% Advanced Manufacturing production tax credit across the breadth of the lithium ion supply chain, which would help ease the cost burdens facing battery manufacturers and automakers. 

This 10% tax credit begins with the production of critical minerals and extends midstream for cathode and anode materials.

An investment tax credit is also included for the energy storage and production tax credit for battery cell manufacturing with a cost of $35 a kilowatt-hour. 

President Joe Biden had earlier this year invoked the Defense Production Act (DPA) to step up US production of minerals for electric vehicle and storage batteries and lower the nation’s reliance on foreign supply. 

Separately, the US Department of Energy (DOE) dedicated $3.16 billion of funding as part of the Bipartisan Infrastructure Law to develop the country’s battery supply chain. The funding will be allocated across the supply chain, with the bulk of it being made available to mid-stream processing to cathode, anode and battery cell production.

“The proposed bill does seem to be a step in the right direction,” said Manish Dua, analyst at Benchmark.

“At the heart of it, the intent is to localise the critical minerals supply chain and components that go into making lithium-ion batteries and electric vehicles generating local value addition, to create jobs and eventually to gain pace in the goal of working towards climate change mitigation efforts.” 

Building a US battery supply chain will take best part of decade

While the proposal is a major step forward for the US as it zeroes on specific battery supply chain issues, it does face issues around its practical application. 

“Considering it takes seven years to build a mine and refining plant but only 24 months to build a battery plant, the best part of this decade is needed to establish an entirely new industry in the United States,” said Simon Moores, chief executive of Benchmark. 

Moores shed doubt on the EV tax credit. 

“The presently proposed $7,500 credit for those EVs that do not contain any critical minerals from China or Russia will effectively be made redundant, considering the proposal ends in 2024 just when a domestic supply chain is beginning to gain momentum.

“It is almost impossible that any Fair Trade Alliance countries – of which Australia and Chile are the stand out – could fill China’s raw material gap for the USA’s EV demand between now and 2024. 

“This is considering the basic lack of raw material supply in many markets and the fact that most future raw material has already been contracted and accounted for.”

“If the US wants the incentive to really work, it needs to extend this by 4 years to 2028 so the battery supply chain builds into the incentive,” he added. 

China is currently the largest refiner of battery minerals such as lithium, cobalt and graphite – a dominance that is not likely to end this decade, Benchmark forecasts.

Benchmark data shows that China currently has 81% of the world’s cathode manufacturing capacity, 91% of the world’s anode capacity and 79% of the world’s lithium ion battery capacity. 

In contrast, the U.S. currently has 0.16% of the global cathode manufacturing capacity, 0.27% of the world’s anode capacity and 5.5% of the world’s lithium ion battery capacity. 

China also dominates global lithium refining and processing. The US and Canada currently refine only 3% and 3.5% of the world’s lithium and cobalt and compared to 59% and 75% for China, according to Benchmark’s Lithium Forecast. By 2030 the US and Canada will contribute about 7% and China 46%.

New lithium mines are set to be developed in the US, but their supply will be limited. According to the Benchmark Lithium Forecast, lithium chemical supply from North America is set to increase to nearly 60,000 tonnes LCE in 2025, underlining almost a four-fold increase on 2022 supply. But that is enough for only around 1 million electric vehicles. 

The bill could be a near-to-medium term boost for automakers that already have or plan to tie up the upstream and midstream portion of their supply chains in countries which have a free trade agreement with the USA, such as Australia, Canada, Chile, Mexico. It would however be a negative for the Indonesian nickel supply planning to enter the North American market.

Indonesia, which is set to be the largest producer of nickel for batteries, is also not on the list of eligible suppliers. Benchmark forecasts that Indonesia’s share of global refined nickel production will increase from a forecast 41% in 2022 to 59% in 2030.

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