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Biden Administration shows that a little knowledge is a dangerous thing

Avatar photo   By: Matt Fernley

Posted on - 15 May 2024

Yesterday saw the publication of the “full” list of section 301 tariffs on Chinese imports into the US. A key focus for us was those segments related to the battery supply chain. While the 100% tariff on Chinese EVs had been widely touted (and is almost irrelevant, in our view), the US has looked to apply tariffs to the EV supply chain more widely and I can’t say that the strategy looks very joined up.

Announced tariffs on the EV supply chain include:

  • • Tariff on EVs to rise from 25% to 100% in 2024
  • • Tariff on lithium-ion batteries for EVs to rise from 7.5% to 25% in 2024
  • • Tariff on lithium-ion non-EV batteries to increase from 7.5% to 25% in 2026
  • • Tariff on battery parts to increase from 7.5% to 25% in 2024
  • • Tariff on natural graphite and permanent magnets to increase from zero to 25% in 2026
  • • Tariffs on “certain other critical minerals” to increase from zero to 25% in 2024.

The tariff increase on EVs is mostly harmless in our view. It’s more a “Keep off the Grass” warning than anything else. Currently the only EV maker that builds in China and exports to the US is Polestar and it’s for a vanishingly small amount of vehicles; practically irrelevant in the overall scheme of things.

It’s further upstream in the supply chain where we think the issue is. We fully understand the US’s wish to protect its domestic supply chain in critical minerals and anode and cathode materials. The issue for us is – what domestic supply chain?

It’s great that the US recognises that it needs to protect the nascent development of its battery supply chain, but the problem is that a mine is nothing like a processing plant. While two years might, in some cases – if one had a completed feasibility study – be enough to get a cathode or anode plant or precursor facility up and running, it is in no way enough time if you don’t have a completed feasibility study…and it’s nowhere near enough time to develop new mines which can take 7-15 years to build in the US and 5-10 years in the rest of the world.

While the US has made a clear exception for natural graphite (and does that, by the way extend to spherical graphite and anode materials? We have no idea), we still don’t know which other critical materials are included in the tariff regime because they were extremely vague… Would high purity manganese be included? 90% of HP manganese is manufactured in China, with only two facilities outside China (one in Belgium and one in South Africa). What about LFP? Currently 100% of that is manufactured in China. LFP is used in ESS batteries, which seem to be exempt for the next two years, but it’s also used in EVs. Tesla’s Model 3 Standard Range is one, but there are others, and it’s widely seen to be the future for mass market vehicles. What’s the situation on lithium? While there are now conversion plants outside China, there are vanishingly few; certainly not enough to support all of US demand.

So who is going to be the loser from these tariffs? Well, politicians would probably like you to believe that it’s China Inc. And, over time (like in five to ten years), it may very well be. But for now it’s not. It’s the US consumer. Because these tariffs will increase the cost of cell manufacturing and hence the cost of EV manufacturing. And so they will drive up the price of EVs.

Is that really what we want to be doing? Is forcing up prices of EVs really the way to proceed? I don’t believe so. Because prices directly impact demand. And the US is already struggling because it has no mass market EVs. No OEM selling vehicles into the US is selling them at mass market prices. And while that remains the case, it’s difficult to see EVs reaching the mass market. So forcing EV prices further up seems like a daft move…

It’s not like China is dumping these battery raw materials on the United States. They’re practically the only country that makes them. If the US and its allies had production of these materials, then I could understand this approach. But they don’t.

So, rather than penalising consumers, shouldn’t the Biden Administration instead include a two or three year exemption like it did for natural graphite and REEs? I fully understand that we need to build ex-China supply chains for this material and practically the only way to do that is to generate a two-tier pricing structure, but I’m not sure that this is the best way to do it.

And, let’s face it, China doesn’t have to be static in this situation. China could very well retaliate.

If I was China, the obvious comeback would be to ban or put punitive export tariffs on high purity manganese, spherical graphite, LFP and anode materials, and see how the rest of the world managed with the Energy Transition from there! We already had a warning of that with China’s imposition of a requirement for export licences on graphite last year. Might that have been a dress rehearsal for an all-out ban?

With this announcement the Biden Administration has shown that it understands many of the inputs into the battery supply chain. But I’m not convinced that it understands how the industries within that supply chain actually work. And that could be very dangerous. We can only hope that this strategy does not enflame existing geopolitical tensions because, make no bones about it, China currently has a stranglehold on battery raw materials and intermediate supply and, if it decides to throw its weight around, this move could really bite back…


Topics

Anode Cathode China Costs EVs Graphite Loser Manganese Rare Earths Section 301 Supply Chain Tariffs Trade War Two tier pricing United States US consumer Winner