[Click eStock] "LG Chem and Korea Zinc, Bound as Brothers... To Pursue Vertical Integration of Precursors"

[Asia Economy Reporter Myunghwan Lee] As LG Chem and Korea Zinc have begun cooperating to respond to the Inflation Reduction Act (IRA), securities analysts have predicted that this collaboration will lead the two companies to vertically integrate precursors.

Hana Securities analyzed on the 25th, "LG Chem is expected to continuously pursue vertical integration of precursors through future cooperation with Korea Zinc."

On the 23rd, LG Chem and Korea Zinc signed a comprehensive business memorandum of understanding (MOU) to discover raw materials that meet the Inflation Reduction Act requirements. The two companies plan to cooperate to ensure the stability of cathode material raw material supply in the North American region by jointly discovering metals that comply with the Inflation Reduction Act.

Hana Securities' analysis suggests that this agreement aims to secure stable profitability through vertical integration of precursors. Precursors account for about 90% of the cost of cathode materials.

Under the agreement, the two companies positively agreed to consider expanding the production capacity of the precursor plant, which their joint venture is constructing in Ulsan, from the initially planned 20,000 tons to 50,000 tons. LG Chem and Kemco, a Korea Zinc affiliate, established the joint venture Korea Precursor Co., Ltd. in June and are building a precursor plant in the Onsan Industrial Complex in Ulsan, targeting mass production in the second quarter of 2024.

It is also analyzed that LG Chem will procure precursors, which are compounds of nickel, cobalt, and manganese, from Korea, a country with a free trade agreement (FTA) with the United States, to facilitate North American operations. This is because the Inflation Reduction Act stipulates the origin of key minerals as a criterion for electric vehicle subsidy payments in the U.S.

Kim Hyunsoo, a researcher at Hana Securities, predicted, "LG Chem's vertical integration of precursors is expected to lead to enhanced profitability and operational strength in the cathode material sector, and further strengthen the sales competitiveness of LG Energy Solution's batteries."

Meanwhile, Hana Securities also pointed out that precursors are affecting the performance and valuation of other cathode material companies due to cost structure and the Inflation Reduction Act. EcoPro BM receives some precursors through its affiliate EcoPro Materials, and L&F procures some precursors through its subsidiary JH Chemical.

Researcher Kim stated, "Both EcoPro BM and L&F have not yet significantly highlighted the value of precursor internalization through affiliates and equity investments," but added, "As the currently proposed plans are gradually implemented, the current price attractiveness could become more prominent."