US proposes changes to the IRA in move to exclude China (and Russia) from benefits

The US proposed new regulations as part of the IRA to limit Chinese/Russian content for EVs.

With China’s leading role in raw materials and batteries, this could have a BIG impact.

Here are some of the implications for anyone investing in lithium or EVs:

Some stocks will benefit, and others will be shunned (will get to it in a sec).

First, what has changed exactly?

There are 3 main proposed changes:

• EVs would no longer qualify for $7.5K subsidy if batteries are made in China or with Chinese components/materials
• Entities considered Chinese w/25% ownership
• Exclude “Foreign Entity Of Concern” or FEOC

The crux here is: what is a FEOC?

Until last week, FEOC didn’t have a definition.

That has changed.

FEOC are now:

• Covered nations: China, Russia, North Korea, Iran
• 25%+ government-owned/controlled by covered nations
• Companies operating under licensing from covered nations.

There are HUGE implications.

This applies to the IRA and the Bipartisan Infrastructure Law, which already allocated $6bn of credits for batteries and critical minerals.

Both exclude FEOC.

Rules would go into effect in:

1. Batteries: 2024
2. Critical minerals: 2025
3. Non-traceable battery materials: 2027

The goal is that any EV subsidy is contingent on where materials are sourced from.

Those either domestically or from a Free Trade Agreement (FTA) partner at target:

• 2023: 30%
• 2027: 80%

Let’s look at the potential impact on various lithium and other related stocks:

A quick note before we do.

It’s important to note that the analysis needs to dive deep into ownerships/deals at:

• asset level
• licensing deals
• offtake agreements
• where processing takes place

(also ownership threshold is cumulative among parties, direct/ind)

Here we go:

To benefit 🟢

• $LAC owns 100% of US-based Thacker Pass
• $SQM Tianqi owns less than 25%, Mt Holland is a JV w/Australian-based Wesfarmers
• $LTR no offtakes w/China
• $PLS Ganfeng only 6%, CATL sold
• $CTL Chile FTA
• $SYA Canadian production
• $PLL US-assets

Some risk 🟡

• $ALB may need to separate production from Greenbushes (JV w/Tianqi, 26%) & Wodgina to comply, Chinese plants ineligible
• $LTHM risks on Chinese-based plants, Argentina not FTA
• $IGO nickel portfolio could offset lithium exclusion
• $SGML offtake w/China’s Yahua

Ineligible (for asset mentioned) 🔴

• $LAAC Ganfeng owns 51% of Argentina asset (but Argentina not FTA anyway)
• $MIN Mt Marion is a 50/50 JV w/Ganfeng
• $IGO Kwinana refinery ineligible
• $F licensing w/CATL for Michigan factory
• $TSLA cheaper models use CATLS LFP batteries

Notes:

• Absolutely not an exhaustive list
• Full picture is tricky as ownership can be hidden
• Sources: Bloomberg, Deutsche Bank analysis, Reuters, AFR, (you’ll find links to articles here)

That’s it for today!

Geopolitics will continue to cast shade on China’s role in the battery supply chain. While some players have stayed away, many used offtakes to get started back when their capital was fully welcomed.

Anyhow, the story is not finished…