EV bill sets ‘tight’ phase-in timeline for battery metal rules

Proposed critical mineral sourcing rules that would govern an electric vehicle tax credit are ambitious and might require significant changes to battery metal supply chains, and fast, according to metal sector experts.

Automakers have raised concerns over the phase-in of the tax-credit rules in the Inflation Reduction Act, which proposes firm requirements on metal content in EV batteries in order for a vehicle to qualify for a $7,500 consumer tax credit. The proposed bill is not yet law, but if it goes ahead in something close to its current form, the industry would have to quickly expand the refining of key battery metals — including lithium, nickel, cobalt and copper — for EVs to meet the tax credit standard.

“It’s going to be very, very tight to hit some of the bill’s sourcing goals and percentages,” said Chris Berry, president of House Mountain Partners, an advisory firm that focuses on battery metals.

The bill breaks down the tax credit into two $3,750 tranches, each separately defining EV battery content in terms of critical minerals and battery components. Starting in 2023, 40% of an EV’s battery metals by value would have to come from the U.S. or a country with which it has a free trade agreement. The requirement grows each year to 80% in 2027.

In the other tranche of the tax credit, 50% of the value of battery components would have to come from the U.S. or the other free trade countries in 2023. The figure climbs to 100% in 2029.

Automakers have reportedly said the bill’s targets are too tough, and they are looking for a longer phase-in amid a global push to expand EV manufacturing.

Refining challenge

The major challenge for automakers is that China dominates the refining of key battery metals such as lithium, and building new mines and processing capacity takes years. Mining sector experts point to lithium, nickel and copper as metals that will be especially tough to source under the proposed rules.

While the U.S. and its free trade partners mine metals including copper and lithium, final processing often happens in China or elsewhere. One example is copper concentrates, which are produced by many mines in North and South America but go to smelters that are often located in China, which consumes roughly half the world’s copper.

Much the same is true for lithium. The white-hot commodity is chiefly mined in Australia and Chile, which have free trade agreements with the U.S., while China accounts for about 60% of the sector’s refining capacity.

As such, the U.S. and its free trade partners will need to rapidly focus on expanding metal refining to meet the growing demand for metals if automakers are to fully capture tax credits in the proposed bill, mining sector experts told S&P Global Commodity Insights. It may be easier said than done, however.

“You can do that if you have a command economy like China, but it’s hard to do that in democratic countries,” said Joe Mazumdar, head of Exploration Insights.

While the bill may put automakers in a bind, it is set to benefit metal producers and miners in the U.S. and countries with which it has free trade agreements, Mazumdar and Berry said. Still, it remains to be seen whether they can pivot quickly enough to match the bill’s targets for metal content in EV batteries.

“The next three years are super crucial with respect to the build-out of that middle piece of the supply chain,” Berry said.

Source: https://www.spglobal.com/marketintelligence/en/news-insights/blog/insight-weekly-august-2-2022