FEOC definition leaves most Indonesian nickel outside IRA tax credits | Hotter Commodities

The US Department of Treasury has released its definition of a Foreign Entity of Concern (FEOC) for the purposes of the Inflation Reduction Act (IRA) – and there are big implications for nickel

A Foreign Entity of Concern (FEOC) includes any foreign entity that is “owned by, controlled by or subject to the jurisdiction or direction of a government of a covered nation”. Those countries that currently fall into this “covered nation” category are China, Russia, North Korea and Iran.

The phrase has been subject to speculation as to what level or nature of ownership would constitute ownership or control by a foreign government and what it would mean to be “subject to the jurisdiction or direction” of a foreign government.

And now we know.

Starting from next year, with a period of transition, companies that have a more than 25% ownership or control by a FEOC – including board seats, voting rights or equity – will not be eligible for tax credits available under the Inflation Reduction Act (IRA).

“To strengthen the security of America’s supply chains, beginning in 2024, an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC, and, beginning in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed or recycled by a FEOC,” the Department stated.

The FEOC definition, announced by the US Treasury Department on Friday, December 1, is particularly important to automakers and battery producers in the context of China, given that the country’s control of the supply chain for critical minerals such as graphite and rare earths, as well as the majority of the world’s lithium processing capacity.

It is also important in the context of China’s investments overseas – in particular for nickel in Indonesia. The Southeast Asian nation is on track to account for an estimated 60% of global nickel supply by 2025 and 75% of global nickel supply by 2030, making Indonesian minerals critical to the production of batteries for electric vehicles (EVs).

Herein lies the issue when it comes to the FEOC definition. The bulk of Indonesian nickel projects have a Chinese and an Indonesian shareholding base – normally Indonesian in the mining phase, and Chinese in the smelting/refining phases.

There are, of course, western companies that are also active in nickel in Indonesia.

But except for major nickel projects operated by PT Antam, owned by the Indonesian government, along with most operations of PT Vale Indonesia and a planned joint venture between Eramet and BASF, the remaining projects of scale in the country have more than 25% Chinese ownership.

That includes the vast majority of the roughly 2.2 million-2.3 million tonnes per year of existing nickel capacity in Indonesia, as well as the 1.4 million tpy of capacity under construction, according to estimates by Macquarie’s Jim Lennon.

That’s a lot of nickel that will not be eligible for IRA tax credits.

Chinese companies active in Indonesia include Tsingshan Holdings, CNGR Advanced Material Co, Huayou Cobalt, and Lygend Resource Technology Co, among others.

The issue extends to some of the western projects, too.

Eramet’s Weda Bay project, for instance, is 51.3% owned by China’s Tsingshan.

US automaker Ford Motor Co, meanwhile, has an equal joint venture agreement with PT Vale Indonesia and Huayou Cobalt to build a nickel plant in Indonesia.

The US car company has already faced a backlash at home after it announced plans to use battery cell technology from Chinese firm Contemporary Amperex Technology Co., Limited (CATL) at its planned $3.5 billion battery cell plant in Michigan.

Fellow US automaker General Motors’ investment in the production of EVs in Indonesia is part of a joint venture with Chinese firms SAIC Motor Corp Ltd and Wuling Motors.

The FEOC rules pretty much put an end to market assumptions that a wall of Indonesian nickel will be available to enter the US battery supply chain. It won’t be — at least not with the generous tax credits available under the IRA.

Free Trade Agreement

Don’t forget that Indonesia is negotiating for, but still does not have, a Free Trade Agreement (FTA) with the US.

That’s important, because new EV tax credits available through the IRA require batteries to be built with at least 40% of the value of their minerals coming from the US or a country with which it shares an FTA; a percentage that increases annually.

Indonesia’s potential FTA is a topic that has attracted controversy in the US, leading a group of senators to write a bi-partisan letter expressing their concern that a limited FTA could be agreed.

They cited labor rights, environmental protection, safety and human rights, along with a desire to develop domestic sourcing opportunities, as well as sourcing opportunities from countries that presently have an FTA.

It’s not as if the US is a huge producer of nickel, nor has vast untapped reserves.

In 2022, the underground Eagle Mine in Michigan produced roughly 18,000 tonnes of nickel in concentrate, which was exported to smelters in Canada and elsewhere. The majority of the country’s primary nickel imports came from Canada, at 45%, followed by Norway, Australia and Finland.

But the US does have nickel investments in the works, such as Talon Metals’ Tamarack project in Minnesota. More importantly, the US is working with partners in countries like Australia, a close second to Indonesia for its reserves of nickel, as well as Brazil and Canada, which also hold sizeable reserves, to further grow the sector.

Tracking

The onus will now be on manufacturers to conduct due diligence that complies with industry standards of tracing for battery materials.

This includes ensuring sustainability practices are in place. A number of red flags have already been raised related to labor standards, waste management, carbon emissions and biodiversity impacts at Indonesian operations; something the government has said it is addressing.

This will require a huge step-up in the use of tracking technology like Circulor, which has been working for the past several years to ensure traceability of supply chains with original equipment manufacturers (OEMs), including automakers and battery manufacturers as well as miners and processors.

That work will become even more critical, given claw back measures allowing for the return of tax credits paid out if companies are found to not be compliant with the FEOC definition.

A corporate restructuring to get below the 25% is the only way to avoid being a FEOC, a route that some companies will likely look to pursue.

All of this means that non-Indonesian nickel projects, provided they meet relevant ESG criteria, will sell out very quickly – assuming they can get funded and built.

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.

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