Countries around the world have introduced policies to promote vehicle electrification in response to the tightened carbon emission regulations and rising New Energy Vehicle (NEV) subsidies. For example, the European Union's 27 member states have agreed to ban the sales of gas-powered cars and vans from 2035. Despite the fact that the U.S. automobile market now trails behind China and Europe in terms of electrification, the country's NEV sector will witness fast growth with the implementation of the Inflation Reduction Act (IRA).
Figure 1-1: NEV Penetration rate in major countries in the world in 2022
Sources: Marklines and Mysteel
In the previous weekly report China's EV battery Makers Set Sail for the U.S. Market, Mysteel Nonferrous Metal & New Energy Research Center has already introduced the U.S. NEV market, which resembles a typical low-penetration market with significant growth potential. This weekly report will further analyze the opportunities brought by the implementation of the IRA for Chinese lithium-ion battery makers.
First, China plays an indispensable role in the global industrial chain of lithium-ion batteries, as it has maintained a complete industrial chain and technological edge, as well as a sizable R&D workforce. Chinese enterprises dominate more than half of all key processes in power battery production, with the coverage for most processes exceeding 70% and a few close to 90%, such as graphitization. Therefore, it will take some time for the United States to develop its own lithium-ion battery industry chain. In the short run, the IRA will have less of an immediate impact on supply than it would on demand in the U.S. NEV market which still heavily relies on imports.
Second, although the IRA's local sourcing requirements on critical metals in EV batteries have a negative impact on China's battery industry chain, the restrictions on relevant battery components including cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid-state electrolyte, battery cell and battery module will begin in 2024. From 2024, the IRA stipulates that vehicles equipped with battery components sourced from a "foreign entity of concern" (including China) will not receive any subsidies. But in 2023, the percentage of battery components required to be manufactured or assembled in North America is only 50%. So, Chinese enterprises will still have a substantial footprint in the U.S. market in the short term.
In the past five years, Chinese battery enterprises have generally planned their production capacity on battery demand generated by the global "carbon neutral" goal, without considering the market segmentation caused by international competitions. With the rapid development of China's new energy enterprises in recent years, the country's NEV industry chain itself has been faced with the challenge of overcapacity, and they are expected to focus more on global markets instead of the domestic one. Besides, the IRA's credit subsidies for NEV purchases in the U.S. will not only boost its domestic market, but will also contribute to the overseas expansion of Chinese new energy enterprises, considering the possible slowdown in China's NEV market growth.
With the IRA limitations on critical minerals, lithium resources from the United States' Free Trade Agreement (FTA) partner countries will become more competitive, and foreign lithium miners will be pushed to build integrated capacities, though this may take some time. In the near term, Chinese enterprises will still have more cost advantages as the IRA restrictions on China's critical metals do not take effect until 2025. In the medium and long term, China, as a manufacturing powerhouse, will also find ways to participate in overseas expansion as long as enterprises see market potential and profit.
Regarding nickel and cobalt, the former is mostly supplied by Indonesia, while the latter by Congo, but neither of the two is an FTA country, which will benefit Chinese enterprises to produce high-nickel ternary batteries in the future. Besides, nickel and cobalt are mainly produced in Australia, and the production in the U.S. and its FTA partners is relatively low, which cannot satisfy the demand of the U.S. market continuously. In addition, the IRA will encourage U.S. enterprises to develop nickel-manganese batteries or lithium iron phosphate (LFP) batteries, but it also takes time to develop related technologies. However, China is way ahead of the U.S. in battery technologies. Therefore, US automakers need to gain technical support from their Chinese peers if they want to receive subsidies as soon as possible. And Chinese enterprises can also accelerate their overseas capacity layouts via technology investments.
To sum up, Chinese lithium-ion battery makers need to seize the opportunities that arise from the promulgation of the IRA and expand their global footprints in the pivotal year of 2023.
Written by Mysteel Nonferrous Metal & New Energy Research Center
Edited by Ruby Zhang, zhangjiajing@mysteel.com; Alyssa Ren, rentingting@mysteel.com
