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Korea Inc’s big battery bet on Indonesia at risk from US restrictions

South Korean corporations are counting on the US exhibiting higher flexibility over China’s position in electrical automobile provide chains, as they make investments closely — typically with Chinese language companions — in battery supplies manufacturing in Indonesia.

A $441mn funding final month by Korean metals big Posco in a nickel smelting plant on the Indonesian island of Halmahera has taken South Korea’s hard-cash dealmaking within the south-east Asian nation to greater than $3bn for the reason that begin of 2022, the majority of it being battery-related.

Indonesia is the world’s largest producer of nickel, an important ingredient that Korea’s main EV battery corporations want for the multibillion-dollar factories they’re constructing within the US.

But the vast majority of Indonesia’s nickel manufacturing and processing is managed by Chinese language corporations, complicating Korean efforts to assemble a provide chain that fulfils US calls for for batteries freed from Chinese language possession of key parts.

“South Korea was planning to make use of Indonesia as a serious world hub for electrical automobile manufacturing,” stated Kyunghoon Kim, an affiliate analysis fellow on the Korea Institute for Worldwide Financial Coverage.

“However with out concessions from the US, will probably be tough,” he added. At greatest, Indonesia may find yourself “as a regional manufacturing hub”.

The US Inflation Discount Act gives billions of {dollars} in tax credit to battery corporations provided that a sure share of the worth of important minerals contained of their merchandise is processed or extracted within the US or by companions with free commerce agreements. 

Indonesia lacks a free commerce settlement with the US, and Washington is but to spell out the way it will outline the “overseas entities of concern” — a reference to China — that it desires to be phased out of the US battery provide chain by the start of 2025.

Korean funding has intensified underneath Indonesian president Joko Widodo, who applied an export ban on uncooked nickel ore in 2020. The transfer spurred worldwide corporations to put money into nickel processing throughout the nation’s borders, with a lot of these offers involving companions from mainland China.

South Korea’s LG Vitality Resolution, the world’s main non-Chinese language producer of EV batteries, introduced a partnership in April final yr with Posco, two Indonesian state-owned corporations and Chinese language miner Zhejiang Huayou Cobalt, with a collection of investments that might finally whole $9bn.

Then, in November, a partnership was introduced between fellow Korean battery maker SK On with Korean cathode producer EcoPro and Chinese language battery element producer Inexperienced Eco-Manufacture to supply an intermediate nickel product known as blended hydroxide precipitate (MHP) on the Indonesian island of Sulawesi.

Posco, whose chemical substances subsidiary has a $33bn provide settlement with Korea’s different battery main, Samsung SDI, signed a preliminary settlement in February with Chinese language mining agency Ningbo Liqin to supply nickel and MHP on Sulawesi.

The issue, stated Tim Bush, a Seoul-based battery analyst at UBS, is the Inflation Discount Act has given corporations till the start of 2025 — simply over 18 months away — to finish the development of a brand new, “IRA-compliant” provide chain, regardless of them having no clear sense of what stage of Chinese language involvement shall be permitted.

“This can be very tough for the Korean corporations to tug the set off on the multibillion-dollar investments that shall be required to diversify their provide chain after they nonetheless haven’t been knowledgeable of the foundations of the highway,” stated Bush.

In Could, the chief monetary officer of LG Chem, the mother or father of LG Vitality Resolution, informed buyers its working assumption was that the US authorities would apply the identical definition of “overseas entities of concern” that it makes use of for laws regarding the semiconductor trade.

That might imply that joint ventures with a Chinese language fairness stake of over 25 per cent wouldn’t qualify for the credit, in impact excluding most of Indonesia’s nickel provides from the choice provide chains the US is hoping to construct.

“The Korean corporations have gone all-in on Indonesia and now they’re in a quandary,” stated Ross Gregory, Seoul-based government director of EV consultancy New Electrical Companions.

Gregory additionally famous environmental issues surrounding carbon-intensive mining practices in Indonesia. “The danger is that the nickel they get shall be each non-IRA compliant and never clear sufficient. They urgently have to diversify.”

Nonetheless, a Europe-based nickel dealer noticed that Indonesian nickel is discounted about 30 per cent in comparison with London Steel Alternate costs for different merchandise corresponding to Australian briquettes. 

“They’re sitting there saying we are able to’t survive [without it],” they stated. “I can keep it up shopping for costly nickel or I can put myself within the recreation to purchase the most cost effective nickel on this planet.”

Posco, which took a 30 per cent stake in Australia’s Ravensthorpe Nickel in 2021, informed the Monetary Instances that “we’re diversifying nickel sourcing to Australia and New Caledonia to cut back our dependence on Indonesia, though we’re not significantly involved about our publicity to Indonesia”.

Earlier this yr, the US treasury issued tips that may make it simpler for Korean corporations to supply extra parts domestically. It implies that nickel merchandise sourced in Indonesia however processed in Korea may nonetheless be designated as IRA-compliant.

Jakarta can be lobbying Washington for Indonesia to obtain a tailor-made commerce deal on important minerals much like one agreed with Japan in March.

A Korean battery government who didn’t want to be named acknowledged that “now we have no choice however to depend on Chinese language expertise and knowhow for nickel processing at low value”, however added this meant that Washington was prone to undertake a definition of “overseas entities of concern” tailor-made to the precise wants of the battery trade.

“If they are saying any three way partnership wherein China holds even a 1 per cent stake is an entity of concern, the US could possibly be strangling itself, as no firm would have the opportunity truly to fulfill the Inflation Discount Act’s situations,” he warned.

Further reporting by Harry Dempsey in London