Raw Materials are Costly
Exports of cathode materials, one of the core materials for electric vehicle batteries, are surging. But experts have pointed out that much of the money that Korean companies make by exporting them ends up going to China as they import core raw material compounds such as lithium and precursors to make cathode materials.
Korea’s exports of cathode materials for secondary batteries totaled US$7.49 billion in the first half of this year, up 66 percent from the same period of 2022, the Korea International Trade Association (KITA) said in a report on the impacts of the U.S. Inflation Reduction Act (IRA)’s implementation guidelines on Korea’s battery supply chain on Sept. 5. Korea’s cathode material exports showed a steep increase of 77.7 percent on average from 2019 to 2022.
This is attributed to exports from major Korean battery makers such as LG Energy Solution, which sent cathode materials to their factories in Europe and the United States.
Korea has a trade structure where an increase in cathode exports pushes up imports of lithium and precursors. Accordingly, Korea’s trade balance with China is also deteriorating as Korea relies heavily on China for lithium and precursors. In the first half of this year, Korea’s trade deficit in lithium and precursor trade reached US$5.09 billion and US$2.17 billion, respectively, of which its trade deficits with China alone came in at US$3 billion and US$2.11 billion, respectively.
Korea marked 59 percent of its total lithium trade deficit and 97 percent of its total precursor trade deficit with China. This means that about 88 percent, or US$5.11 billion of Korea’s US$5.81 billion trade surplus in cathode material exports in the first half of the year, went to China for Korea’s purchases of lithium and precursors.
Since 2022, China’s imports of compounds for making secondary batteries have exploded, significantly contributing to the deterioration of Korea’s overall balance of payments with China. In the case of lithium hydroxide, a lithium compound used to make ternary cathode materials by being added to precursors containing nickel, cobalt, and manganese, Korea’s trade deficit with China jumped from US$550 million in 2021 to US$3.21 billion in 2022.
The deficit also reached US$3.02 billion during the first half of this year. At this rate, Korea is expected to have a deficit of US$6 billion in trade of lithium hydroxide alone with China this year.
In the report, KITA emphasized that it is important for Korea to secure production capacity for raw compounds for cathode materials not only to respond to the U.S. IRA, but to reduce costs through a vertical integration of battery materials. “Relying on imports for precursors would not only make it difficult to meet the qualifying core mineral ratio requirements to receive U.S. tax credits, but imports from China would likely be ineligible for the credit under the foreign concern (FEOC) conditions,” the report said.
To qualify for EV tax credits under the IRA in the United States starting from 2025, batteries must not contain any key minerals sourced from foreign entities of concern (FEOCs) regardless of percentages. The report also raised concerns about the possibility of future blockages to Korea’s exports to the United States with reference to Chinese companies’ recent rush to set up joint ventures to manufacture battery compounds, including precursors with Korean companies in Korea, as the interests of Chinese companies seeking a bypass in their exports to the United States and South Korean companies needing stable sources of raw materials overlap.
“If the United States tightens the criteria and excludes Korean companies’ joint ventures with Chinese companies from tax credits, a worst-case scenario is that Korean companies will be forced to withdraw from such joint venture projects or find other partners,” the report warns, adding, “Detailed guidelines to be finalized in the near future are likely to affect such joint ventures so they should be closely monitored.”
While the U.S. government has yet to put out detailed guidelines, secondary battery companies around the world are currently making efforts to exit China in anticipation of the possibility of Chinese companies being included in the FEOC list as they play an integral role in the global supply chain.
Overall, KITA believes that the reorganization of the battery supply chain caused by the implementation of the U.S.’s IRA will be positive for the Korean battery industry as Korea has a free trade agreement (FTA) with the United States for the time being. But it suggests that Korean companies keep a close eye on China’s strengthening of a global expansion strategy and the United States’ move to foster its own battery industry in the long term.