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US EV policy likely to give free trade agreement nations a lift

Highlights

US policy aims for 67% new light-duty auto sales to be EVs by 2032

US dependent on foreign battery metal producers

Federal law discourages using Chinese materials

  • Author
  • Camellia Moors
  • Editor
  • Ankit Rathore
  • Commodity
  • Metals
  • Tags
  • Battery Materials Cobalt Lithium Nickel United States

Battery metal-producing nations that hold free trade agreements with the US are poised for a trade boost from the country's efforts to shift to electric vehicles, analysts and industry observers told S&P Global Commodity Insights.

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Under US policy, EVs could account for 67% of new light-duty auto sales by model year 2032, up from 6.6% in 2022. While tax credit-eligible EVs are encouraged to include US-sourced battery metals such as lithium, cobalt and nickel, low domestic production is expected to keep the country dependent on foreign producers for years. At the same time, federal law has created disincentives for automakers to use materials produced by Chinese companies or from a key producer, China.

The Inflation Reduction Act gives EV buyers access to credits when their cars are made with materials from countries with US free trade agreements (FTAs). It is an option that, combined with other US laws and policies, makes FTA countries a particularly appealing source of supply for automakers.

The US has comprehensive FTAs with 20 countries and a limited critical minerals FTA with Japan. The Biden administration is also seeking to make FTA-like agreements in other parts of the world, notably with nickel giant Indonesia or with Argentina, the fourth-largest global producer of lithium.

"The way that I think this is going to go from a more political economy kind of perspective is that while there is a notional commitment to helping develop and widen supply chains for these minerals at the mine site [and] in terms of refining capacity ... not [in] the US or China, I think that there is going to be a heavy emphasis on the subset of US FTA partners that are also kind of advanced industrial or post-industrial democracies," said Cullen Hendrix, senior fellow at the Peterson Institute for International Economics, a think tank.

Tax credit advantage

Automakers have already zeroed in on producers in FTA countries for mineral offtake agreements in response to the IRA, experts noted.

Benigna Leiss, a nonresident fellow at Rice University's Baker Institute of Public Policy and former general director of Chevron Energía de Mexico, pointed to US-based Albemarle's Chilean lithium operations as a draw for automakers under the IRA. Albemarle has a lithium offtake agreement with Ford.

"They are importing already under [Inflation Reduction Act] rules," Leiss said. "I think that they have moved quickly, and I know that Ford is making that agreement with Albemarle because of the FTA that Chile has."

Chile is the No. 2 global producer of lithium and already the US' top source for imports, giving it a strong foundation for expanding its market share.

However, shifting import sources toward FTA countries is easier for some materials than others.

"For lithium, for instance, the [sourcing] picture actually isn't all that bad ... [but] with cobalt, it is not on any kind of firm footing," Hendrix said.

The Democratic Republic of Congo, which does not have an FTA, produced 69.9% of the world's mined cobalt supply in 2022, although it was not a major supplier for US cobalt imports. However, a history of concerns about labor and environmental problems makes automakers and US diplomats alike reluctant to strike agreements there. Instead, Norway, Canada and Japan have topped the list of US suppliers over the last several years.

Free trade nations edge into lead

US imports have already shifted slightly, perhaps in response to the law. In the first three quarters of 2023, the US sourced 55.8% of its overall lithium imports from nations it either has an FTA with or is in prospective critical mineral trade talks with, like the UK, increasing from 54.9% year on year, according to S&P Global Market Intelligence data.

US lithium imports from the EU, with which the US has been engaged in lengthy trade discussions, have declined significantly since 2020. They dropped 78.2% to 174 mt in the first three quarters of 2023, compared with 798 mt in the same period of 2020.

The US depends more heavily on non-FTA countries for its cobalt supply than for lithium, with just 38.4% of cobalt imports in the first three quarters of 2023 coming from FTA countries, although that was up 1.2 percentage points from the same period in 2022.

US cobalt imports from the EU, where there is as yet no agreement, were down 18.6% year over year during the first three quarters of 2023 compared with a year prior.

Canada and Australia, both of which have FTAs with the US, are also promising sources of battery metals for US automakers. Canada is also considered a domestic source under the US Defense Production Act, which includes funding for critical minerals projects, and US President Joe Biden has requested the same designation for Australia.

"What we have now is a preemption that's built around this notion that we can make up for the challenges with sourcing these materials [with] large-scale increases in mining capacity in places like Australia and Canada," Hendrix said. "That may work five, 10 years from now ... [but] the US legislation was written in a way that it sort of put the time horizon for removing Chinese content from these supply chains in 2025."

"My best guess for when Canada and Australia would actually be in a position to pick up the slack on some of these materials will probably be closer to 2027, 2028, optimistically speaking," Hendrix said.