IRA spurs Japanese, South Korean battery investment

The US' Inflation Reduction Act (IRA) has stirred up the insecurities that economies have about their critical minerals industries, spurring greater electric vehicle (EV) battery investments in northeast Asia this year.

The battery race began in 2022 but intensified this year, with the IRA producing a greater response from governments and the global lithium, battery and EV industries. They now risk being left in the lurch as the US tries everything in its power to create a more independent and secure supply chain.

The past two months has seen UK's lithium industry respond, Europe's battery industry expressing concern, South Korea acting swiftly to support its EV and battery industry and Japanese politically-influential auto manufacturer Toyota taking the lead to advance the country's EV and battery industry.

Expanded tax credits under the IRA, designed to grow domestic production of clean energy vehicles and the lithium-ion battery supply chain, have, to a certain extent, resulted in expanded South Korean and Japanese investments.

There is now seeing increased developments across the entire critical minerals supply chain, partly because of the impact of the IRA and its ripple effects.

South Korean battery manufacturer LG Energy Solutions is aligning its supply chains to try making batteries that qualify for the IRA's subsidies. It has partnered up with Chinese lithium producer Yahua to produce lithium hydroxide in Morocco, which is a signatory to free trade agreements with the US and EU. It is also raising its investment in its Arizona's manufacturing complex to $5.5bn, planning a $4.1bn joint venture lithium-ion battery factory in Canada's Ontario with European auto producer Stellantis. It is also working with US auto manufacturer General Motors (GM) to operate three joint-venture manufacturing plants in Ohio, Tennessee and Michigan for GM's Ultium battery.

South Korean battery material firms SK On and Ecopro Materials' joint venture with Chinese battery firm Green Eco-Manufacture is also building a 50,000 t/yr battery precursor plant in South Korea to meet the IRA's market entrance requirements.

South Korea's government in general reacted positively to the revised IRA rules published on 31 March, according to a Congressional Research Service report published in April.

But Japan is standing firm on building out domestic capacity and seeking to regain market power. This is despite the critical minerals agreement signed between Japan and the US in March, essentially addressing Japan's concerns on the critical mineral content requirements of the IRA.

The unveiling of Toyota's new EV plan on 7 April denotes that the government will have no choice but to gear up domestic battery production to facilitate the private sector.

"Toyota means politics in this country," a battery material trader told Argus.

Uncertainty, tensions linger

But sluggish GDP growth in South Korea and Japan, coupled with high borrowing costs with expectations of persistently high interest rates, may limit firms' appetite to further invest.

GDP growth in Asia is to be dominated by China and India in 2023, according to the IMF's regional economic outlook for Asia and Pacific, which expects the two countries to contribute around half of global growth this year.

The relatively unstable global investment climate because of rising trade fragmentation risks may also be an obstacle to Japanese and South Korean firms' long-term domestic and foreign investment commitments. The two countries, which share production links with the US and China, may suffer negative spillover in their exports to the US and China if US-China trade barriers in the form of tariffs intensify, according to an economic update by the World Bank in April.

The intensifying side effects of friendshoring, or manufacturing and sourcing from countries that are geopolitical allies, and a greater divergence from globalisation of supply chains have become much more noticeable. This is creating tensions between economies given the looming insecurities.

Outside of Asia the policy has created political-economic challenges between the US and EU. It may even "create a wedge between EU member states that can subsidise and those that lack fiscal resources and cannot", according to a working paper by Washington-based think tank the Peterson Institute for International Economics.

By Joseph Ho