Is the Senate climate accord good for lithium battery stocks?

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After Wednesday’s announcement that Senators Joe Manchin and Chuck Schumer had reached an agreement on a climate and tax package, battery stocks and the battery supply chain, including lithium miners, soared . However, on closer inspection, the bill is a bit more complex. and has varying implications that are important for investors to understand.

Tax credits and loans for battery production

The bill (full text here) contains an “Advanced Manufacturing Production Credit” under Section 5 for “Investment in Clean Energy Manufacturing and Energy Security” which will provide a tax credit for production batteries themselves as well as “active electrode materials” such as lithium carbonate or cobalt.

For the purposes of this article, I’m not going to dive into the exact tax credit calculations (which include fun numbers like $35 times the kilowatt-hour capacity of a cell) because that’s so far of a draft and can deal with other modifications; looking at the big picture is more important. However, for those interested, see page 417.

This funding could benefit companies looking to manufacture batteries in the United States as well as lithium companies that are expanding their refining capacity.

There aren’t many big games here for American battery manufacturing, which is part of why the bill seeks to boost the industry. Microvast (MVST), Solid Power (SLDP), QuantumScape (QS) and Romeo Power (RMO) are all still largely speculative bets on different technologies.

The definition of “qualified advanced energy projects” has also been expanded to include charging infrastructure, potentially great news for Blink Charging (BLNK) and ChargePoint (CHPT).

More complicated EV/storage incentives

For manufacturers of electric vehicles; such as Tesla (TSLA), General Motors (GM), Ford (F), Stellantis (STLA), Rivian (RIVN) and Lucid (LCID); this bill is a clear victory with plenty of new funds available to build production facilities in the United States and a removal of the 200,000 credit per manufacturer cap.

The main benefit for lithium producers and battery makers from the new electric vehicle credit scheme will be the increased demand this bill could stimulate, as other incentives are slightly more unclear.

The bill, in its current form, would increase the allowance for a clean energy/energy efficiency tax credit (for homes and businesses) that includes the purchase of battery storage. The most notable part of the bill is the electric vehicle tax credit which now takes into account the manufacturing origin of the battery and the origin of the materials of the critical minerals inside (including lithium , nickel and aluminum).

For a vehicle to qualify for the credit, it must meet critical battery component and mineral requirements, with each requirement worth 50% of the $7,500 tax credit. And, of course, to have its final assembly in North America as well (not in the USA, mind you, #USMCA #NAFTA).

For the battery component section, the battery components must be manufactured in North America. And the percentage value of battery components that must be made in North America accelerates from a 50% base (“whenever the secretary says so”) and accelerates after 2024 and 2025 where it is 60% before climbing by 10% per year until 2028.

For critical minerals (mainly lithium), they must come from a country with which the United States has a free trade agreement or be recycled in North America; they must represent 40% of the value of the minerals contained in the battery from 2024, this percentage then increasing each year by 20% until it peaks at 80% after December 32, 2026.

For the recycling part of this, two companies could benefit: Li-Cycle (LICY) and American Battery Technology Company (OTCQB: ABML). Of the two, Li-Cycle is much more attractive and better positioned to benefit from a distributed network of recycling centers and take-back agreements in place for manufacturing waste.

As for the critical minerals portion (and let’s be honest, we’re all here to talk about lithium, sorry about nickel), it should only come from a “free trade” country, not North America.

The United States has the following free trade agreements with 20 countries (USMCA covering Canada and Mexico, also listed separately):

  • Australia
  • Bahrain
  • Canada
  • Chile
  • Colombia
  • Costa Rica
  • Dominican Republic
  • El Salvador
  • Guatemala
  • Honduras
  • Israel
  • Jordan
  • Korea
  • Mexico
  • Morocco
  • Nicaragua
  • Oman
  • Panama
  • Peru
  • Singapore
  • USMCA

For those with a keen eye and mind for lithium, you might notice that this list includes Chile and Australia. Which are by far the world’s largest producers of lithium. Now, that might rattle some for the next decade, but a big reason this bill was drafted to include free-trade countries is probably the lack of US supplies.

In terms of benefits for particular companies, this bill can be used to incentivize purchase from qualified production sites so that vehicles manufactured in the United States are eligible for the full tax credit.

There are several companies investing in home lithium that will benefit to varying degrees:

  • Lithium Americas Corp. (LAC) at Thacker Pass has the largest US mine expected to come on stream within the next few years (although it also has an Argentinian project that will not benefit from this percentage requirement).
  • Piedmont Lithium (PLL) will benefit even if its main project in North Carolina fails and it depends on foreign mines for spodumene, because the bill cares about where the final chemical comes from and Piedmont plans to produce lithium hydroxide in the United States.
  • Berkshire Hathaway’s (BRK.A)(BRK.B) Salton Sea project could potentially receive more grants, but given the company’s cash burden, it doesn’t really need it and its project remains speculative.
  • Albemarle (ALB) owns the only US mine currently in production as well as significant assets in Chile and Australia.
  • Livent (LTHM) has global production but will benefit from part of the tax credit and continues to expand in Canada and the United States (although its Chinese and Argentinian investments will be left out)

Foreign miners can also benefit if their production is mainly located in one of the above-mentioned countries:

  • Sociedad Química y Minera de Chile SA (SQM) is (as its name suggests) Chilean and a huge producer of lithium.
  • Pilbara Minerals (OTCPK: PILBF) is Australian and is working on a 43k/yr lithium hydroxide plant in South Korea through a JV which will also benefit from its free trade status.
  • Electra Battery Materials (ELBM) is a Canadian cobalt producer with a potential nickel mine in the United States.

All in all, don’t expect a magical appearance of a US domestic lithium supply chain after this bill passes. There are still many hurdles facing the industry and this is largely the reason behind the term “free trade”. This section is largely about letting go of reliance on China.

These new incentives will hopefully accelerate the adoption of electric vehicles and battery storage for homes and business buildings, which in turn will drive demand for lithium. It may also help qualifying lithium producers earn a slight bounty, but I wouldn’t count on it. Companies like Sigma Lithium (SGML), producing in Brazil outside the effects of this bill, have had no difficulty signing off-take agreements before.

Fuel cells also benefit from a tax credit

Another notable amendment that this bill proposes is to replace the expression “eligible plug-in electric motor” with “clean” in the definition of clean vehicles eligible for the aforementioned tax credits.

This is important for companies focused on hydrogen fuel cell cars, as they are now eligible for the same grants, loans and tax incentives as electric vehicle companies. This could be important for companies such as Ballard Power Systems (BLDP), Plug Power (PLUG), FuelCell Energy (FCEL) and Bloom Energy (BE).

Uncertainty remains

As with any pending legislation, there is always a high degree of uncertainty as to its final form. Although it is the result of long-running negotiations between Schumer and Manchin, the bill still needs to be debated in the Senate this week and then go to the House where it could be amended again. Senator Kyrsten Sinema is also expected to be a key vote on the bill and could seek changes.

Carry

This climate bill is important legislation with many different ramifications for the US battery and electric vehicle industries. The incentives it contains could benefit projects in the prescribed free trade area, but given the amount of lithium production already present in these countries, I do not expect a significant change in investment. For hydrogen fuel cell companies, their inclusion in new incentives could be a game-changer for those struggling as they burn through cash. Overall, the takeaway is that if this passes before Congress suspends, we can probably expect a resumption of related names on a perceptual basis, although the effects are slightly more complicated.

About Matthew Berkey

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