Korea battery materials maker onshores China supply chain to win US subsidies

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Korean conglomerate Posco is leading a push to move production of battery materials from mainland China to South Korea, as companies around the world adapt to qualify for US tax incentives reshaping the global EV supply chain.

The Inflation Reduction Act (Ira), US president Joe Biden’s flagship climate legislation, offers billions of dollars in subsidies to EV manufacturers and battery makers to source components from the US and its free trade partners rather than from China.

But Korean producers of the anodes and cathodes in EV batteries produced by LG Energy Solution, Samsung SDI and others still rely on Chinese partners to source and refine certain critical minerals. China controls the supply chain for dozens of minerals for clean technologies, producing about 90 per cent of the world’s rare earth elements.

South Korean companies have established a series of joint ventures with Chinese companies in recent months to establish domestic facilities and produce materials that will qualify as Ira-compliant.

Lee Kyung Sub, head of the battery materials business at Posco, a steel producer that is aggressively expanding into the battery industry, said the company was targeting the booming US EV market.

Posco is building a supply chain for Ira-compliant materials in which “nothing will be produced or sourced in China,” said Lee, during an interview at Posco’s headquarters in Seoul.

“The nickel that is required for the North American market we will source from Australia, and it will go through the smelting process in a Korean facility.”

But he acknowledged Chinese companies would continue to play an important role in the supply chain because of their “upper hand” in areas including the processing of nickel and graphite.

In May, Posco’s battery materials subsidiary signed a wide-ranging MOU with China’s Zhejiang Huayou Cobalt to co-produce materials in Korea for the cathodes and anodes used in lithium ion batteries.

In June, Posco announced joint ventures worth $1.2bn with China’s CNGR Advanced Material to produce materials for high-nickel cathodes on the Korean peninsula’s southeastern coast. The two companies also operate a battery recycling plant in Korea along with Korean conglomerate GS Group.

“It is very difficult and cost exorbitant to be completely China-free,” said Lee.

Posco’s strategy is shared by several other leading players in the Korean battery industry. Korean battery maker SK On and materials producer EcoPro have formed a partnership with China’s GME Resources to produce battery companies at a plant in Saemangeum in South Korea’s south-west, while LG Chem, one of the world’s second largest battery producers LG Energy Solution, has also formed a partnership with Zhejiang Huayou Cobalt.

“Korean battery companies have always partnered with the Chinese,” said Tim Bush, a Seoul-based battery analyst at UBS. “The difference now is that the JVs are being moved from China to Korea.”

Bush noted that Washington is yet to spell out what level of Chinese ownership will be permitted in joint ventures producing components destined for the US market.

While US officials were likely to tolerate some Chinese participation in the joint ventures, he said, “it is highly unlikely a Chinese majority-owned entity anywhere in the world will be deemed compliant with the Inflation Reduction Act.”

One of the world’s top ten steelmakers, Posco’s market cap has risen more than threefold over the past three years as investors pile into Korean battery-related stocks.

The conglomerate has embraced the battery industry as the principal driver of its future growth. It will devote 43.6 per cent of its capital expenditure to its battery materials business in 2023-2025 — more than it will invest in steel — compared with 13.6 per cent between 2016 and 2018.