[Battery Decoupling from China]① Reshaping the Supply Chain... "Where to Go Instead of China?"

(1) Inflation Reduction Act Enacted... Challenges in Diversifying Battery Mineral Supply Chains
Must Meet Conditions of 'Resource-Rich Countries and FTA with the United States'

Editor's NoteThe battery industry is facing strong aftershocks from the United States' Inflation Reduction Act (IRA). With only about four months left before its implementation, urgent measures are needed, but finding an immediate solution is not easy. This is because it is difficult to find alternatives to China, which has secured a dominant influence in the battery materials market.

Battery companies have secured multiple supply chains outside China to diversify their supply chains, but they are concerned that risks may increase due to various variables such as supply volume and price fluctuations. In a situation where it is unclear whether the global trend toward decoupling from China will intensify or whether the U.S. will take a step back considering practical limitations, this article examines the crisis and solutions faced by the domestic battery industry confronted with the new supply chain reshuffling between the U.S. and China.

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] The Peterson Institute for International Economics (PIIE), regarded as a U.S. think tank, recently pointed out in a report that China's dominance over critical minerals and global supply chains for the transition to clean energy is expanding more than expected. According to PIIE, while lithium is dominated by Chile and Australia, nickel by Indonesia and the Philippines, and cobalt by the Democratic Republic of Congo at the mining stage, China occupies most of the major facilities at the processing stage. In contrast, the U.S. influence is relatively minimal, highlighting a clear difference from the fossil fuel supply chains led by the U.S.

The Inflation Reduction Act (IRA), which the U.S. will implement from next year, is showing signs of rapidly changing the global battery materials supply chain. Battery companies targeting the U.S. market are now under pressure to find alternative sites that can replace China, which has led the mining, processing, and production of key minerals.

Domestic battery companies are also putting their lives on securing new supply chains. They are in a position where they must attempt 'de-Chinaization' of their supply chains toward the U.S. while maintaining cooperative relations with China. Experts point out the urgent need for a national-level strategy to achieve decoupling from China.

According to the industry on the 24th, Australia and Chile are being eyed as candidate countries that can replace China in the battery industry. This is because they are resource-rich countries and have free trade agreements (FTA) with the U.S., meeting both conditions.

The U.S. government, under the IRA, will only provide subsidies if at least 40% of the battery raw materials in electric vehicles sold from next year are produced domestically or in countries with which the U.S. has an FTA.

This ratio will increase by 10% annually, reaching 80% of raw materials from 2027. The minimum ratio of battery parts produced and assembled in North America will also rise from 50% in 2023 to 100% by 2029.

Since the U.S. intends to exclude China from the electric vehicle value chain domestically, our battery companies have no choice but to attempt decoupling from China. The best scenario is to enter mines within the U.S.

In the case of lithium, a key battery material, the U.S. ranks fourth in global reserves. Procuring lithium locally would reduce dependence on China while benefiting from the IRA, achieving two goals at once. The Biden administration has expressed support for increasing domestic mineral production, so it is not impossible. They could also use U.S. automakers with whom they have joint ventures as a foothold.

However, recent mining development projects in the U.S. have faced strong opposition from local communities and environmental groups, making the situation difficult. For example, Chilean mining company Antofagasta attempted to develop a copper-nickel mine in Minnesota but was thwarted due to environmental concerns.

Australia has a bright outlook as it is a country with which domestic battery and material companies have actively pursued cooperation. LG Energy Solution signed a long-term nickel product purchase agreement last year with Australian Mines (AM), an Australian battery raw material producer, and POSCO Group also signed a strategic cooperation agreement with Australia's Hancock to expand cooperation in future core raw material businesses such as secondary batteries.

At the recently held 'Korea-Australia Energy and Mineral Resources Cooperation Committee,' both countries agreed to strengthen cooperation in the energy and mineral resources sectors. Australia's key minerals rank first in lithium production worldwide, third in cobalt and manganese, fourth in rare earths, and fifth in nickel.

Chile forms a representative mineral belt in South America along with Bolivia and Argentina. This region accounts for 65% of the world's lithium reserves and 30% of production. LG Energy Solution has signed a contract with Chile's SQM, one of the world's largest lithium producers, for about 55,000 tons of lithium until 2029.

In Southeast Asia, resource-rich Indonesia is also attracting attention. Hyundai Motor, Kia, Hyundai Mobis, and LG Energy Solution have secured $710 million (about 950 billion KRW) in investment funds for a joint battery cell factory in Indonesia, accelerating their entry into the country. However, Indonesia is not an FTA partner with the U.S., so it cannot benefit from the IRA, which is a limitation.

Experts point out that the IRA should accelerate diversification of the battery supply chain. Park Jae-beom, senior researcher at POSCO Research Institute, said, "Although it is difficult to immediately replace China due to high dependence, in the long term, it could serve as an opportunity to diversify raw material procurement away from China alone."

Since battery companies have limitations in responding, there is also a need for government support. Professor Park Cheol-wan of Seojeong University proposed, "Considering the importance of the battery industry, a special committee to strengthen battery competitiveness should be formed, and the National Assembly and central government ministries should establish comprehensive countermeasures."