South Korea, home to three of China’s biggest rivals in the...

South Korea, home to three of China’s biggest rivals in the battery sector — Samsung SDI Co., LG Energy Solution Ltd. and SK On Co. — is seen by some as the solution. Its status as a free trade partner with the US has made it attractive to western carmakers scouring the globe for supplies of battery chemicals like nickel sulfate, cobalt sulfate and lithium hydroxide.

The country has no meaningful mined reserves of battery metals, but a barrage of investment is helping to turn it into one of the world’s biggest processing hubs. Since the IRA came into effect, Korean companies — some in joint ventures with US carmakers — have committed almost $48 billion to build new plants to make chemicals, cathodes and finished batteries at home and in North America, according to Bloomberg calculations.

But they too are struggling to develop new supply chains free of Beijing’s influence. Korea’s battery makers have historically been reliant on raw materials sourced from China. Nevertheless, the potentially lucrative prize on offer for Korean companies that stay on the right side of the IRA has encouraged an investor frenzy that last year sparked wild moves in stocks linked to Korea’s battery sector.

The race is taking South Korea’s biggest producers of industrial metals into unfamiliar territory: Steel-making giant Posco Holdings plans to build two lithium processing plants using raw materials from Australia, while copper smelter LS MnM. and Korea Zinc Co. are both pushing into production of nickel sulfate.

LS MnM offers a blueprint for what a non-Chinese supply chain could look like. The firm plans to build two processing plants in South Korea, making the first-stage investment of 670 billion won ($495 million) by 2026. The intention is to make battery chemicals using mined nickel and cobalt imported from countries with free trade agreements with the US. Those chemicals will be used to make battery cathodes for sale to Korean manufacturers who will export the finished cells to the likes of General Motors, Tesla, Volkswagen AG and Ford.

A much bigger expansion will, however, be needed to meet the expected demand of US carmakers. And even if they can secure sufficient raw materials from compliant suppliers, they’ll still face the daunting prospect of competing with Chinese rivals over the cost of producing the refined chemicals.

A flood of Chinese investment into Indonesia’s nickel industry has helped give the country a huge cost advantage over other producing nations, which include Australia and the Philippines. With prices plunging, many miners outside Indonesia are being forced to mothball operations.

“Our customers are demanding the same prices offered by Chinese makers,” said Jung Gon Hwang, head of the corporate strategy team at LS MnM. “For now, we are looking for more of those materials where China hasn’t invested yet.”

Diverting raw material flows away from China also brings political jeopardy for South Korea, which is already squeezed between its closest ally, the US, and its biggest export partner, China.

The decision by Beijing to place controls on exports of graphite in December underscored the risks that China’s neighbors face as the US seeks to challenge its dominance of the global metals supply chain.

The solution for some Korean firms is to partner with Chinese companies in joint-venture arrangements that are designed with the FEOC rules in mind. Chinese firms are lining up to invest in South Korea’s battery industry because they want to use it as a gateway to the US market, in a trend that’s exposing the limits of the IRA’s ambition to create a truly alternative supply chain.

South Korea’s finance minister has stressed the importance of its economic links to Beijing. “China is still the closest economic partner to us and we will keep that in mind,” Choi Sang-mok told a hearing of lawmakers on Dec. 19. “We will put our national interest first in terms of economic cooperation with China.’’