Lithium producers are particularly exposed as the US looks to limit the ability of “Foreign Entities of Concern” to benefit from the IRA.

The United States has introduced a new amendment to the Inflation Reduction Act (IRA) which has added clarity to the term “Foreign Entity of Concern” (FEOC). A FEOC is any foreign entity “owned by, controlled by or subject to the jurisdiction or direction of a government of a covered nation”. The countries for which this applies are China, North Korea, Russia, and Iran. A company can be considered a FEOC if 25% or more of its board seats, voting rights, or equity are held by a company based in China, North Korea, Russia, and Iran.

The amendment states that from 2024, no manufacturer will be able to offer a tax subsidy for an Electric Vehicle (EV) if that vehicle contains any battery components that are manufactured in or by a FEOC. This will then be expanded further in 2025 to include any EV which contains critical materials extracted, processed, or recycled in or by a FEOC.  

For lithium producers this is problematic. The sector is heavily exposed to Chinese investment and reliant on Chinese refining capacity for battery-quality lithium chemicals. Australian mineral producers in particular rely on third-party mineral refining capacity in China able to buy spodumene concentrate and refine it to battery-quality lithium carbonate and hydroxide. In addition, of the few mineral concentrate refineries within Australia, one refinery has joint Chinese ownership. In Chile, large amounts of lithium produced are shipped to refineries within China for further upgrading to battery-quality products. In Africa, new lithium projects have seen significant investment from Chinese entities as governments look to develop their own national sources of battery metals.

Under the new IRA amendment, the presence of this material in an EV would cause problems for any manufacturer looking to offer tax subsidies on their vehicles. The main beneficiaries of this new clause will be North American-based projects in the US, Canada, or Mexico, as well as the small number of developers in FTA-compliant nations not exposed to Chinese investment. As a result, the pressure will mount further for downstream buyers of battery materials to purchase IRA-compliant material.