In early May, the Department of Energy (DoE) issued final interpretive guidance on the definition of ‘foreign entity of concern’ (FEOC) in relation to the Inflation Reduction Act (IRA). A crucial part of the IRA for supply chain development. Additionally, the Treasury and Internal Revenue Service (IRS) finalised their ruling on the 30D Clean Vehicle Tax Credit of the IRA. A key change in it is the addition of graphite to a pre-existing category of “impracticable-to-trace” minerals. A move that many battery manufacturers have welcomed, as it allows an extra two years to transition their graphite supply chains away from FEOCs before those materials have to be traced.

What does the guidance on FEOCs entail?

An FEOC is classified as an organisation that is under the ownership, control, or jurisdiction of a foreign government from one of the specified nations: China, Russia, Iran, and North Korea. According to the recent guidance from the DoE on this matter, an entity falls under the category of an FEOC if it is based, registered, or engaged in relevant operations within a covered nation. Additionally, if 25% or more of its voting rights, board positions, or equity are held by the government of a covered nation it is considered under control of an FEOC. Alternatively, if it is effectively controlled by an FEOC through a license or contract, it is considered an FEOC. Under this clarification it remains unclear whether the planned CATL licensing agreements with Ford and GM will be able to proceed, with confirmation of ‘effective control’ still needed.

What does reclassifying graphite as an “impracticable to trace” mineral mean?

As an impracticable to trace mineral, graphite falls into the same category as ‘minerals contained in electrolyte salts, electrolyte binders, or electrolyte additives’. Under this classification players producing batteries using graphite from an FEOC will still be eligible for IRA tax credits, however, this will only be until the 1st January 2027. From 2027, players using graphite from FEOCs will be penalised. Consequently, the updated IRA guidance now requires the automotive sector to submit a proposal by 2027 outlining steps to decrease its dependency on graphite sourced from FEOCs.

Why has graphite been reclassified?

Graphite, both natural and synthetic, is used as anode material in most lithium-ion batteries, comprising up to 30% of a battery’s weight and 3-4% of a battery’s value. China dominates the global graphite supply chain responsible for around 90% of refining. With some of the largest graphite reserves in the world and the most advanced refining, extraction and processing capabilities, China is close to impossible to avoid when sourcing graphite anode material.

A positive reaction from industry

The reclassification has been welcomed by many, especially Korean battery producers such as LG Energy Solution, Samsung SDI, and SK On. All of whom have large export markets to the US and multiple arrangements to build facilities there and are heavily reliant on Chinese graphite at present. The reclassification allows the industry two years to transition away from Chinese graphite sources. Subsequently, the Korean government has pledged KRW9.7 trillion (USD7.1 billion) to policy financing in the next two years.

North American graphite players have not expressed the same positivity, with many in an early stage and still in need of a significant amount of funding to get up and running in the coming years. The White House has reportedly requested to meet with miners and graphite producers irked by the new regulation, with discussions likely to focus on the fact that despite the extension, OEMs will be required to prove they are inking agreements to source non FEOC graphite for post-2027.

Rho’s Evaluation, clarification and change that needed to come

The re-classification of graphite was needed otherwise almost no vehicles on the US market would have access to the IRA tax credit eligibility which in turn would have had further knock on impacts on consumer sentiment towards the purchase of an EV.

Multiple supply agreements for new source of both synthetic and natural graphite have been inked in the past few months, however the majority of these are not set to come online until 2026 at the earliest with more meaningful volumes in 2027. This change allows times for those facilities and supply chains to develop for vehicles to retain eligibility later in the decade.

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Sources: Federal register, DoE