How is the post-IRA cathode landscape evolving?

As theInflation Reduction Act (IRA) accelerates the buildout of US gigafactory cell capacity, efforts to onshore the midstream of the US EV battery supply chain are lagging the pace of downstream investment – representing a potential bottleneck for US supply chain security.

The IRA provides substantial financial incentives to boost domestic clean energy supply chains, slashing the capital expenditure (capex) of a US cathode production facility by up to 30% according to Benchmark analysis. This has attracted foreign investment into the US EV market, notably fromSouth Korean companies aiming to play a vital role in the growing US EV battery market.

Projections for US cathode supply through to 2030 have been boosted sixfold since the passage of the flagship climate policy in August 2022.

Nevertheless, with US cell production set to scale to over 800 gigawatt hours (GWh) by the end of the decade, Benchmark data indicates that domestic US cathode supply will account for just one third of US cell supply – leaving the US reliant on imports to fill this supply gap.

Can FTA partners bridge this supply shortfall?

To de-risk the US battery supply chain from China, the IRA facilitates tax credit eligibility if an applicable percentage of the value of the critical minerals contained in the battery are extracted or processed in a region where the US has a free trade agreement (FTA).

This has opened the door to a tide of battery supply chain related investments in FTA economies since August 2022. Midstream capacity has been a key target of this investment, owing to the relatively low capital outlay and the limited exposure to price risk (when compared to upstream mining operations) for projects at this step of the value chain.

South Korea has led the way in this regard, notching up over $5 billion of investment in battery precursor and cathode investments from domestic players in 2023– with an eye on exporting the material to the US EV market. South Korean battery producers have signed a host of partnerships and supply agreements with US automakers, requiring IRA-compliant supply chains to fulfil these contracts.

Morocco too has been on the receiving end of a flurry of recent cathode-related investments, owing to its FTA agreement with the US and close proximity to the EU. The North African country is also host to the world’s largest reserves of phosphate, making it a particularly attractive proposition for lithium iron phosphate (LFP) investments targeting Western EV markets.

“In theory cathode supply from FTA jurisdictions could be sufficient to meet demand from US-based cell suppliers by the end of the decade,” said Harry Tinker, cathode and anode analyst at Benchmark. “However, it is unlikely all FTA cathode supply will be re-routed to the US market, as producers will have commitments from other regions to meet.”

“Furthermore,” he added, “suppliers must ensure compliance with US ‘Foreign Entity of Concern (FEOC)’ requirements to sell into the US market.”

China remains integral to the supply chain for South Korean battery manufacturers, as South Korean companies continue to engage in investments throughout the value chain in partnership with Chinese companies. These commitments may now necessitate adjustments in ownership structures to ensure compliance with IRA tax credit requirements.

Benchmark estimates up to 15% of US and FTA cathode supply to originate from operations financed with Chinese capital by 2030, with this figure rising to 35% at the battery precursor stage of the supply chain.

LFP investments on the rise

Commitments to LFP cathode capacity are forming an increasingly significant part of the post-IRA investment landscape. The forecast for LFP cathode supply from US and Free Trade Agreement (FTA) jurisdictions by 2030 has grown from little over 1,000 tonnes in Q3 2022 to 350,000 tonnes as of Q1 2024, according to theBenchmark Cathode Forecast.

This trend is echoed at the cell level, with the US’s share of global LFP cell production forecast to increase from 0.1% in 2023 to 4% by 2030.

LFP cells are seen as key to reducing the cost of electric vehicles in the US, and the chemistry is already extensively used by Tesla. The US is also becoming increasingly reliant on the iron-based chemistry for energy storage systems due to LFP’s superior-life cycle.

Join us at Giga USA 2024

Discussions on cathode production and the Inflation Reduction Act will continue at Benchmark’sGiga USA 2024conference being held June 11-13 at the JW Marriott Washington DC, USA.