President Biden’s new Inflation Reduction Act could spur a new shift towards Lithium Iron Phosphate (LFP) batteries. With $443 billion of new investment incentives on the way, America’s domestic industry will need to decouple itself from the global supply chain volatility that has been fueling inflation globally, focusing on commodities that it can access with greater security. For EVs, strict conditions will be placed on battery production, which could start a shift away from lithium ion.
By 2026, companies will have to source 80% of their battery feedstocks through the US or countries it shares a free-trade agreement with if they wish to be eligible for subsidization. Considering the US’ current lack of battery manufacturing infrastructure, it will be a monumental task for battery and EV manufacturers to set up both raw material sourcing and manufacturing within the US and its partners.
This will likely be difficult for most manufacturers, but the severity of the issue will be compounded by different battery chemistries. The location of chemical reserves will pose significant implications under the conditions imposed by the IRA. We expect a few countries in particular will benefit from this, particularly Canada, Chile, and Australia.
The overwhelming majority of the batteries used in EV manufacturing today use lithium-ion (li-ion). While other chemistries are being developed few are currently commercialized to be in consideration in the short term.
The geopolitical implications of lithium sourcing are fairly minimal, but manufacturing will continue to be the biggest issue. Chile, Australia, and Canada all have significant lithium reserves that would qualify under the IRA, but none have sufficient processing and manufacturing capabilities as of right now. Rethink expects this to increase significantly as foreign investment into these countries increase as they act as gateways to the US EV market.
Cathode materials in li-ion batteries can also vary significantly. Currently most batteries use nickel, manganese, and cobalt (NMC). All three of which face difficulties under conditions imposed by the IRA.
The main exporter of nickel ore, for example, is the Philippines, which exports around 95% of its production into China for processing. Nickel would need to be sourced from elsewhere to be compliant with the IRA. Companies like Tesla have been working to remove as much nickel from their batteries as possible due to cost and sourcing reasons anyways. The IRA continues to push them in that direction.
Manganese is comparatively abundant when compared to nickel, but the largest exporter of manganese is South Africa, so most of current production would be ineligible for subsidy under the IRA. Thankfully once again Australia has significant reserves, but they would need to significantly ramp up production to meet future demand.
Cobalt has an assortment of different issues that have led to companies like Tesla researching alternatives for years now. Not only is it incredibly expensive, at nearly $52,000 per ton at the time of writing, roughly 70% of the world’s Cobalt exports are sourced from the Democratic Republic of the Congo (DRC), whose human rights record isn’t exactly stellar to put it lightly. It would be better to get away from cobalt altogether. This is where LFP batteries come in.
The primary components of LFP batteries are lithium, iron, and phosphate, all of which are relatively abundant within the land of the US and its allies.
Australia already produces significant amounts of iron to feed global steel industries and so would need minimal intervention. Phosphate is already domestically produced in the US, with North Carolina and Florida producing 75% of that output. While production may need to increase, the US has domestic reserves it can rely on.
The main issue with LFP batteries currently surrounds energy density, LFP batteries suffer around a 14% loss compared to NMC batteries meaning more are required to get the same range, somewhat reducing cost effectiveness.
The costs to produce LFP batteries are already lower than that of NMC batteries by between 30 and 50%. The inflation reduction act will only further that divide making the choice simpler for manufacturers as they set up new manufacturing plants and the supply chains to feed them.