Korean Electric Vehicles in Crisis... Reducing Dependence on Chinese Rare Earths Is the Key

To Secure US Subsidies, Rare Earth Dependency Must Be Reduced
Lithium and Graphite Imports from China Near 80-90% Dependency

According to the 'Inflation Reduction Act' passed by the U.S. House of Representatives, only electric vehicles and batteries using American-made parts are eligible for government subsidies. / Photo by Song Hyundo, Asia Economy intern reporter

[Asia Economy Reporter Lim Juhyung, Intern Reporter Song Hyundo] On August 12 (local time), the U.S. House of Representatives passed the Inflation Reduction Act (IRA), which includes subsidies for American-made electric vehicles and measures to address climate change, deepening concerns for domestic electric vehicle companies. Foreign-made batteries that do not use American-made parts are excluded from the U.S. government's subsidy support. In particular, domestic battery products are heavily dependent on Chinese raw materials.

The IRA is expected to have a significant impact on the prices of electric vehicles and lithium-ion batteries sold in the U.S. The bill provides subsidies of up to $7,500 only for electric vehicles and batteries produced in the U.S. or countries that have free trade agreements (FTA) with the U.S.

Korean companies have already invested in local factories in the U.S., so this provision is not problematic. Hyundai Motor Group announced in May that it would establish a new electric vehicle-only plant and a battery cell assembly plant in Georgia, USA. Battery manufacturers such as SK Innovation are also planning to establish battery plants worth about 13 trillion won through joint ventures with American automaker Ford. These electric vehicle and battery plants are operated through local supply chains, so they are likely to meet the subsidy support requirements specified in the IRA.

U.S. President Joe Biden signed the 'Inflation Reduction Act,' focusing on climate change response and expanding healthcare coverage, at the White House in Washington, D.C., on the 16th (local time). / Photo by Yonhap News

The problem lies in raw materials. The IRA requires that 40% of the minerals used in battery manufacturing be sourced from the U.S. or its allied countries. This ratio will increase by 10% annually, eventually reaching 80%. If the proportion of minerals extracted, manufactured, or recycled in a "Foreign Entity of Concern" is high, subsidies will be excluded. The term "Foreign Entity of Concern" is generally interpreted as targeting countries like China, which have conflicts with the U.S. in various areas such as diplomacy and trade.

◆ Dependence on Chinese lithium and graphite, key battery materials, approaches 80-90%

Producing lithium-ion batteries requires various minerals, but lithium hydroxide and graphite are key materials. Lithium is lightweight and highly efficient, making it suitable as a battery material, while graphite is the main raw material needed to make battery anodes. Domestic battery production heavily depends on China for both lithium and graphite.

According to data released by the Korea International Trade Association on the 22nd, the import ratio of Chinese lithium for domestic battery production from January to July this year was 84.4%. Graphite was even higher at 89.6%. The dependence of the domestic battery supply chain on Chinese minerals has been deepening every year. Lithium dependence rose from 64.9% in 2018 to 83.8% last year, an increase of 18.9 percentage points, while graphite increased from 83.7% to 87.5%, up 3.8 percentage points during the same period. This year, it is approaching 90%.

For lithium, Chile is a promising alternative import country. Chile is the only South American country that is a member of the North American Free Trade Agreement (NAFTA), led by the U.S., and thus meets the IRA criteria. The government signed a memorandum of understanding (MOU) last year to strengthen cooperation with Chile's Ministry of Energy and Mining in the mineral supply chain sector.

Processed graphite is the main raw material used in the production of anode materials for lithium-ion batteries. / Photo by Yonhap News

However, replacing the graphite supply chain is somewhat difficult. According to the Korea Institute of Geoscience and Mineral Resources, 77.5% (55 million tons) of the world's total graphite reserves of 71 million tons are in China. China supplies 71% of global graphite demand, leveraging its abundant reserves. Moreover, not only simple production but also secondary industries that process graphite into industrial raw materials have developed. For example, many processed graphite plants needed to make battery anodes are located in China, and domestic companies such as POSCO Chemical have invested significant shares in these plants. Forcibly attempting to decouple graphite imports from China risks destabilizing the entire battery supply chain.

Industry insiders analyze that the passage of the IRA could be an "opportunity" to move away from a China-centered mineral supply chain. An official from the battery industry said, "The Inflation Reduction Act could pose risks to domestic industries importing Chinese raw materials," but added, "There was always a need to reduce dependence on China, so this bill's passage should be used as a stepping stone for diversifying supply chains." He continued, "It is true that it is difficult to replace places like China, where graphite reserves are abundant and mining costs are low," and added, "We need to explore various routes such as Europe and other continents."

This content was produced with the assistance of AI translation services.