Korea Inc’s big battery bet on Indonesia under threat from US sanctions

South Korean companies are counting on the US showing greater flexibility over China’s role in electric vehicle supply chains, as they invest heavily – often with Chinese partners – in the production of battery materials in Indonesia.

A $441 million investment by Korean metals company Posco last month in a nickel smelting plant on the Indonesian island of Halmahera brings South Korea’s hard-cash deals in the Southeast Asian country to more than $3 billion since the start of 2022. Have given. Its related to the battery.

Indonesia is the world’s largest producer of nickel, a vital component needed by Korea’s major EV battery companies for the multibillion-dollar factories they are building in the US.

Yet much of Indonesia’s nickel production and processing is controlled by Chinese companies, complicating Korean efforts to build a supply chain that meets US demands for batteries free of Chinese ownership of key components.

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

“But it will be difficult without a concession from the US,” he added. At best, Indonesia may end up “as a regional production hub”.

The US Inflation Reduction Act offers billions of dollars in tax credits to battery companies if a certain percentage of the value of critical minerals contained in their products are processed or extracted in the US or by partners with free trade agreements.

Indonesia lacks a free trade agreement with the US, and Washington has yet to explain how it will define “foreign entities of concern” – a reference to China – that it wants to be out of the US battery supply chain from the start. wants to of 2025.

Korean investment has accelerated under Indonesian President Joko Widodo, who imposed an export ban on crude nickel ore in 2020. The move prompted international companies to invest in nickel processing within the country’s borders, with many of the deals involving partners in mainland China.

South Korea’s LG Energy Solutions, the world’s leading non-Chinese maker of EV batteries, last April announced a series of partnerships with Posco, two Indonesian state-owned companies, and Chinese miner Zhejiang Huayou Cobalt, a series of investments, Which would eventually total $9. BN.

Then, in November, a deal between Korean cathode maker Ecopro and Chinese battery component maker Green Eco-Manufacturing along with fellow Korean battery maker SK On was announced to produce an intermediate nickel product called mixed hydroxide precipitate (MHP) on the Indonesian island of Sulawesi. Went.

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

The problem, said Tim Busch, Seoul-based battery analyst at UBS, is that the Inflation Reduction Act has given companies until the beginning of 2025 — just 18 months away — to complete the creation of a new “IRA-compliant” supply chain. , they have no clear understanding of what level of Chinese involvement will be allowed.

“It’s extremely difficult for Korean companies to pull the trigger on the multibillion-dollar investments needed to diversify their supply chains when they still haven’t been informed about the rules of the road,” Bush said.

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

This would mean that joint ventures with a Chinese equity stake of more than 25 per cent would not be eligible for the credit, effectively locking most of Indonesia’s nickel supply out of the alternative supply chains the US is hoping to build.

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

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

However, a nickel trader in Europe noticed Indonesian nickel being discounted by about 30 per cent compared to London Metal Exchange prices for alternative products such as Australian briquettes.

“They’re sitting there saying we can’t survive (without it),” he said. “I can continue to buy the expensive nickel or put myself in the game to buy the cheapest nickel in the world.”

Posco, which will take a 30 per cent stake in Australia’s Ravensthorpe Nickel in 2021, told the Financial Times that “we are diversifying nickel sourcing to Australia and New Caledonia to reduce our dependence on Indonesia, although we will continue to invest in Indonesia.” Not particularly concerned about your exposure. ,

Earlier this year, the US Treasury issued guidelines that would make it easier for Korean companies to produce more components domestically. This means that nickel products that are obtained in Indonesia but processed in Korea can still be designated as IRA-compliant.

Jakarta is lobbying Washington for Indonesia to get a tailored trade deal on vital minerals similar to the one agreed 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 knowledge for nickel processing at a low cost”, but implied that Washington ” The definition of “foreign entities” was likely to be adopted. The “going concern” is tailored to the specific needs of the battery industry.

“If they say that any joint venture in which China has even a 1 percent stake is a concern, America can strangle itself, because no company will actually be able to meet the conditions of the Inflation Reduction Act.” ,” He warned.

Additional reporting by Harry Dempsey in London