"U.S. Energy Department Draft Defines 'Foreign Entity of Concern' and Impacts on Critical Minerals Supply Chain"

The U.S. Department of Energy issued a draft defining the interpretation of “Foreign Entity of Concern” (FEOC) on December 4th. It specifies that a FEOC is a company “owned by, controlled by, or subject to the direction” of the government of a covered nation, and the cut off line lies at 25% equity interests. China is one of the explicitly covered countries.

Organizations that have such equity ownership, and engage in the extraction, processing, or recycling of critical minerals, the manufacturing or assembly of components, or the processing of materials in a covered nation, will be considered as a FEOC, and therefore not be eligible for the credit offered by the IRA and the IIJA.

The restrictions on raw materials will alter the dynamics of lithium-ion battery supply chain. Products supplied by major Australian lithium mines such as Greenbushes and Mt Marion could lose eligibility for the credit due to their substantial Chinese ownership, whereas products associated with companies like Liontown and Mineral Resources would keep eligibility for the credit.

The draft highlights the risks of foreign or jointly owned factories operating within a covered nation, meaning that such plants in China will be subject to scrutiny. To determine whether Chinese companies’ oversea projects will be affected or not, a case-by-case examination is needed.

The draft is currently in the comment period, leaving rooms for changes. However, professionals believe that significant changes are unlikely