“Korea Inc’s Billion-Dollar Battery Bet in Indonesia on the Verge of Destruction Due to US Restrictions”

South Korean companies are counting on the United States to be more flexible about China’s role in electric vehicle supply chains, as they invest heavily – often with Chinese partners – in production of battery materials in Indonesia.

A $441 million investment last month by Korean metals giant Posco in a nickel smelter on the Indonesian island of Halmahera has boosted hard cash deals from South Korea to the South Asian country. Southeast to more than $3 billion since the start of 2022, most of it battery-related.

Indonesia is the world’s largest producer of nickel, a crucial ingredient that Korea’s leading electric vehicle battery companies need for the multibillion-dollar factories they are building in the United States.

Yet the majority of nickel production and processing in Indonesia is controlled by Chinese companies, complicating Korean efforts to build a supply chain that meets US demands for batteries without Chinese ownership of key components.

“South Korea planned to use Indonesia as a major global hub for electric vehicle production,” said Kyunghoon Kim, a research associate at the Korea Institute for International Economic Policy.

“But without concessions from the United States, it will be difficult,” he added. At best, Indonesia could become “a regional production pole”.

The American Inflation Reduction Act offers billions of dollars in tax credits to battery companies only if a certain percentage of the value of critical minerals in their products is processed or mined in the United States or by partners with free trade agreements.

Indonesia does not have a free trade agreement with the United States, and Washington has not yet specified how it will define the “foreign entities of concern” – a reference to China – that it wants to phase out. of the US battery supply chain by the start. of 2025.

Korean investment has intensified under Indonesian President Joko Widodo, who implemented a ban on the export of raw nickel ore in 2020. The move prompted international companies to invest in nickel processing within the borders of the country, many of these agreements involving mainland Chinese partners.

South Korea’s LG Energy Solution, the world’s largest non-Chinese producer of electric vehicle batteries, last April announced a partnership with Posco, two Indonesian state-owned companies and Chinese miner Zhejiang Huayou Cobalt, with a series of investments that would total eventually $9. billion.

Then, in November, a partnership was announced between fellow Korean battery manufacturer SK On with Korean cathode producer EcoPro and Chinese battery component producer Green Eco-Manufacture to produce an intermediate nickel product called hydroxide precipitate. (MHP) on the Indonesian island of Sulawesi.

Posco, whose chemicals subsidiary has a $33 billion supply deal with Korea’s other battery major, Samsung SDI, in February signed a preliminary agreement with Chinese mining company Ningbo Liqin to produce nickel and MHP. in Sulawesi.

The problem, said Tim Bush, a Seoul-based battery analyst at UBS, is that the Cut Inflation Act has given companies until early 2025 – just over 18 months away – to complete the construction of a new “IRA compliant” supply. channel, although they have no clear idea what level of Chinese involvement will be allowed.

“It is extremely difficult for Korean companies to pull the trigger on the multi-billion dollar investments that will be needed to diversify their supply chain when they have still not been informed of the traffic rules,” Bush said.

In May, the chief financial officer of LG Chem, the parent company of LG Energy Solution, told investors that his working assumption was that the US government would apply the same definition of “foreign entities of concern” that it uses for legislation regarding the semiconductor industry.

This would mean joint ventures with more than 25% Chinese ownership would not be eligible for the credits, effectively excluding most of Indonesia’s nickel supplies from the alternative supply chains the United States hopes to build.

“Korean companies have gone all-in in Indonesia and now they are in a dilemma,” said Ross Gregory, Seoul-based executive director of consultancy EV New Electric Partners.

Gregory also noted environmental concerns surrounding carbon-intensive mining practices in Indonesia. “The risk is that the nickel they get is both non-IRA compliant and not clean enough. They urgently need to diversify.

However, a nickel trader based in Europe has observed that Indonesian nickel is discounted by around 30% compared to London Metal Exchange prices for alternative products such as Australian briquettes.

“They’re sitting there saying we can’t survive [without it],” they said. “I can keep buying expensive nickel or I can get in the game to buy the cheapest nickel in the world.”

Posco, which took a 30% stake in Australia’s Ravensthorpe Nickel in 2021, told the Financial Times that “we are diversifying nickel supply to Australia and New Caledonia to reduce our dependence on Indonesia. , although we are not particularly concerned about our exposure to Indonesia”. ”.

Earlier this year, the U.S. Treasury issued guidelines this will make it easier for Korean companies to produce more components in the domestic market. This means that nickel products sourced from Indonesia but processed in Korea could still be designated as IRA compliant.

Jakarta is also lobbying Washington for Indonesia to receive a tailor-made trade deal on critical minerals similar to a agree with japan in March.

A Korean battery executive who did not wish to be named acknowledged that “we have no choice but to rely on Chinese technology and know-how for low-cost nickel processing”, but added that this meant Washington was likely to adopt a definition of “foreign entities”. concern” tailored to the specific needs of the battery industry.

“If they say that a joint venture in which China has even a 1% stake is an entity of concern, the United States could choke, because no company would be able to meet the conditions. of the Inflation Reduction Act,” he warned.

Additional reporting by Harry Dempsey in London