This week, South Korean officials will meet with their American counterparts to discuss their “concerns” with the Inflation Reduction Act, which places limitations on who can receive subsidies from the United States for the manufacture of electric vehicles and where businesses can source battery materials.
A $430 billion bill, regarded as the largest climate package in American history, was signed into law by President Joe Biden this month.
The law ends subsidies for some EV models, mandates that EVs be built in North America, and mandates that a portion of the essential minerals in use in batteries originate in the United States or a country that is an American free trade partner.
According to industry sources, Korean battery producers must alter their mineral sourcing paths, which could have a negative impact on cost, putting them at a competitive disadvantage with EV makers who receive tax incentives in the United States. This puts car manufacturers like Hyundai Motor at a temporary competitive disadvantage.
The industry ministry said that South Korean authorities would inform their American colleagues from the U.S. Trade Representative’s department as well as the U.S. Treasury that the new legislation may go against international trade agreements like the WTO agreement and the U.S.-South Korea free-trade agreement.
The ministry revealed that Korean automakers may decide to change their production schedules to prioritise, for instance, building U.S. operations, while battery manufacturers may look to diversify their mineral sourcing.
If we look at the new regulations that take effect in 2019, at least 40% of the financial worth of the essential minerals used in batteries must originate in the United States or perhaps an American free-trade ally, and that percentage will rise to 80% by 2027.
As per ministry figures, about 58% of lithium, 64% of cobalt, and 70% of graphite are processed in China globally.
A few sources in the battery business relay that LG Energy Solution (LGES) (373220.KS), SK On, and Samsung SDI (006400.KS) are significantly affected by the new regulations.
It’s grown to be a major headache. According to a source in the South Korean battery business, the clients of automakers claimed they didn’t anticipate the new regulation would go into force so quickly.
It was going to take a lot of time to verify where each of the components & minerals originated from, let alone make any adjustments to sourcing, according to a second source from the South Korean battery business, who advised the government to urge the United States to postpone the battery sourcing law.
A second source commented that their only other choice is to petition the US to relax the mineral and battery component requirements and postpone the implementation.
Because they were not permitted to speak to the media, the sources declined to give their names.
When asked if they anticipate meeting the standards by next year, LGES, SK On, and Samsung SDI did not respond.
For automakers, analysts predicted that the adjustments to EV subsidies will have a minimal financial impact because sales of EVs in the United States for Hyundai (005380.KS) & Kia (000270.KS) account for a small portion of their overall sales of cars in the country.
Still, they claimed that it was a setback.
As the electrification of the U.S. automotive market accelerates, Hyundai is at a handicap in the short run compared to manufacturers whose EVs earn credits, according to Meritz Securities expert Kim Jun-sung.
A spokeswoman for Hyundai Motor was not instantly available for comment.