How the Inflation Reduction Act Impacts Wire & Cable

How the Inflation Reduction Act Impacts Wire & Cable

How the Inflation Reduction Act Impacts Wire & Cable

Author: Kassie Teagarden, Senior Content Marketing Specialist, LAPP Tannehill

Let’s explore what the Inflation Reduction Act is and how it affects the wire and cable industry with its vigorous energy-efficient and climate change goals. The supply and demand of critical commodities such as copper, nickel, cobalt, and silver is resulting in major price fluctuations in the market.

Discover other factors that are affecting distributors and manufacturers in the market today in our recent blog, Global Supply Chain Disruptions Impacting the Wire and Cable Industry.

What is the Inflation Reduction Act?

In August, President Biden signed the Inflation Reduction Act of 2022, which addresses the largest investment towards clean energy and emissions in U.S. history. The clean energy and emissions portion alone totals a whopping $369 billion.

Senate Majority Leader Chuck Schumer stated, “After more than a year of hard work, the Senate is making history. I am confident the Inflation Reduction Act will endure as one of the defining legislative feats of the 21st century.”

The Inflation Reduction Act includes:

  • 15% minimum tax on corporations with at least $1 billion in revenue to help pay for climate and health care
  • 95% sales tax penalty to companies that refuse to negotiate drug prices with Medicare in an effort to reform prescription drug pricing
  • Higher enforcement by the IRS to catch more tax cheats among the extra wealthy
  • $369 billion investment in energy security and climate change
  • Affordable Care Act extension through 2025 and expansion of eligibility
  • Funding to compensate farmers during the Western U.S. drought who voluntarily conserve their water usage
  • A limit to business losses that individual taxpayers can deduct on state and local taxes
  • 1% tax at the time of stock buybacks for shareholders investing in corporate stock

(Probasco J. The Inflation Reduction Act of 2022. Investopedia. August 16, 2022. Accessed November 28, 2022. https://www.investopedia.com/inflation-reduction-act-of-2022-6362263.)

The Inflation Reduction Act, or IRA, aims to reduce the national deficit of the United States by over $300 billion. Currently the national deficit sits at around $1.38 trillion. The last surplus was in 2001.

The act is not as aggressive as Democrats initially wanted – the approved $740 billion act was once idealized on a $3.5 trillion budget with the original Build Back Better legislation.

The worry is that the ‘slimmed-back’ bill will barely put a dent in the total deficit reduction and that it is overly ambitious for its stated timeframes.

Although the Inflation Reduction Act will only reduce the total national deficit by about 4%, it is described by environmentalists as a ‘breakthrough’ on climate policy due to its promise of 40% emissions reduction by 2030.

Inflation Reduction Act Spending $433 billion
Climate Change + Energy Security $369 billion
Extension of Affordable Care Act $64 billion
Inflation Reduction Act Revenue $737 billion
Prescription Drug Pricing Reform $265 billion
15% Corporate Minimum Tax $222 billion
Loss Limitation Extension $52 billion
1% Stock Buyback Tax $74 billion
Enhanced IRS Tax Enforcement $124 billion
Estimated Total Deficit Reduction $300+ billion

Inflation Reduction Act Efforts to Get More EVs on the Road

With the biggest concerns of potential electric vehicle (EV) buyers are high purchase prices, limited driving range, and lack of charging stations around the U.S., the Inflation Reduction Act has provisions in place to try to overcome these challenges.

According to Reuters, less than 1% of the 250 million vehicles in the U.S. are electric in 2022, but with recent projections of climate change initiatives, more than half of all vehicles on the road will be electric by 2050.

Inflation Reduction Act Offers Tax Credits for EVs & Charging Equipment

If you’ve been thinking of investing in an electric vehicle, now may be the time to do it. There are more incentives around purchasing an EV today in the U.S. than there ever has been.

The previously existing EV-related tax credit forced consumers to purchase their EV at full cost to then claim the deduction when filing taxes.

The new bill gives consumers the tax credit of up to $7,500 for any U.S. citizen who purchases a new electric vehicle through 2032 – but this time it’s already incorporated into the sale of the vehicle at the dealership.

The IRA also includes a $4,000 tax credit towards the purchase of a used electric vehicle.

To be qualified for this clean vehicle tax credit, you would need to purchase a vehicle where the final assembly occurred in North America – which means there is a list of qualifying electric vehicles of 2022 models and early 2023 models to choose from.

The popular Tesla models do not qualify to choose from as they have already met their sales capacity to be eligible – but there are other electric vehicles that qualify such as the Audi Q5, BMW 330e, Ford F-150 Lightning, Jeep Wrangler 4xe, Nissan Leaf, and more listed by the U.S. Department of Energy.

You’ll also need to fall within an annual income of $150,000 or less when filing single or $300,000 or less when filing jointly to qualify.

Bar Graph showing amount of copper used in electric vehicles

The act allocates $3 billion to the United States Postal Service (USPS) to purchase EVs for their mail-delivery fleet.

University of Michigan researchers have predicted that an all-electric fleet would reduce lifetime greenhouse gas emission by 14.7 to 21.4 million metric tons of carbon dioxide.

The previously existing federal tax credits towards EV charging stations and equipment had expired in 2021.

The Inflation Reduction Act not only revives the tax credit of 30% (up to $1,000) on hardware and installation for individual/residential use but it also offers businesses 6% (up to $100,000 per unit) for commercial use – both tax credits being extended until 2032.

These tax credits serve as an incentive for energy-conscious consumers to purchase electric vehicles and charging equipment at a more up-front affordable price in the act’s efforts to get more EVs on the road.

Read more about copper required for various types of electric vehicles in our blog post Relentless Copper Prices Continue to Rise.

Can supply keep up with copper demand needed to achieve IRA initiatives?

More electric vehicles on the road means more copper usage for EV manufacturers… thus driving up the demand for copper. Is there enough copper to supply these green energy initiatives?

Metal analyst Paul Gait and his team of market experts say, “Innovation in batteries is enabling an electric revolution that has massive ramifications. It took 120 years to build the modern copper industry. The electric vehicles revolution could require the supply base of copper to double again, but this time in only 20 years. This will be a prodigious feat and is simply unachievable at today's commodity prices.”

“The total requirement is 35.8 million tonnes of copper equivalent production within the next twenty years. The real issue is how the supply side moves to accommodate [demand] and what the price elasticity of supply is. Where commodities are economically scarce, any increase in demand growth beyond current levels will be very hard to meet.”

(DeFotis D. 7 Commodity Winners in Electric Car Revolution. Barron’s. February 22, 2017. Accessed November 30, 2022. https://www.barrons.com/articles/7-commodity-winners-in-electric-car-revolution-1487776843.)

Global copper demand has doubled from 25 million metric tons today to 50 million metric tons in 2035. S&P Global estimates that, globally, we’ll be short of around 1.6 million tons of copper by 2035 and they warn that we should recognize this now to try to get ahead of copper supply.

Lead times for new mines can take 5-20 years on average to be ready for the start of the mineral extraction process after exploration, discovery, and development.

One of the caveats of the Inflation Reduction Act is that the EV tax credits only apply if the materials used in the vehicle production comes from the U.S. or from countries that the U.S. has a free trade agreement with due to its commitment to increasing the U.S. supply of critical commodities.

How the U.S. plans on ramping up domestic supply of critical minerals

The U.S. is currently falling extremely short of critical commodities for EVs including copper, lithium, nickel, cobalt, graphite, and manganese. To put it more simply, the U.S. needs more mines.

The Sonoran Desert is where one of the biggest deposits of copper is on earth – estimating 18 million metric tons – which would supply more than half of the projected EVs on our roads by 2050.

About two-thirds of this desert is in Mexico’s Baja California and the state of Sonora while the rest is in Southern Arizona.

The U.S. produces 1.2 million metric tons of copper annually with its biggest mine, Morenci, in Arizona. The copper mine is predicted to be exhausted by 2040 with its annual production slowing at a rate of around 400,000 metric tons per year.

Rio Tinto, a global mining corporation, predicts that about 450,000 metric tons of copper can be produced per year at the Resolution Copper Mine in Arizona, but the project has been stalled due to conflict with the Apache Native American tribe claiming the sacred land as a reserve site for ceremonies.

Talon Metals, a mining company in Tamarack Minnesota, has a goal of providing the largest source of nickel in the U.S. while also providing a source of other minerals including copper, iron, and cobalt.

There are also concerns from locals and the Mille Lacs Band of Ojibwe (whose tribal land is only 2 miles away from the mining site) that pollution could impact the wetlands where native tribes fish and hunt and where locals get their water.

Todd Malan, Chief External Affairs Officer and Head of Climate Strategy at Talon Metals stated, “Selection of our Battery Minerals Processing Facility for $114.8 million in funding from the Bipartisan Infrastructure Law (BIL) by the Department of Energy is a strong signal that the United States intends to harness its own mineral resources like the nickel, iron, cobalt and copper in the Lake Superior region to become ‘mineral independent’.”

“There is a clear bipartisan consensus that we must end America’s dependence on China, Russia and other foreign sources for the raw materials required in the energy transition that is required to address climate change. Responsible domestic mining and battery recycling are the solution.”

President Biden has been under immense pressure to not only carry out plans to make the Inflation Reduction Act’s successful by mining critical commodities within the U.S., but to also come to a resolution without upsetting environmentalists and indigenous tribes.

Learn more about How Copper Plays a Role in Future Sustainability.

How the Inflation Reduction Act Affects Copper Prices

Although copper prices aren’t nearly as high as they’ve been in the last few years, they aren’t expected to stay this low for very long.

Copper prices were at $4.46 per pound on December 31st, 2022; $3.23 per pound on July 15th, 2022 (the lowest it’s been since Nov of 2020); and $3.80 per pound on December 5th, 2022.

Graph indicating COMEX copper prices from December 2021 through December 2022.

Graph indicates high copper prices in early 2022, a significant drop mid-year, and a slow steady rise once again at the end of 2022.

ING believes copper prices will remain under pressure until global growth outlook improves stating, “Recession fears, China's slowdown due to its Covid-19 restrictions, and the Fed’s interest rate hiking path will continue to drive copper’s short-term price outlook, however tightening supply should maintain the red metal’s price support above $7,500/t throughout 2023.”

(Manthey E. Macro headwinds to keep pressure on copper prices. ING Bank. November 30, 2022. Accessed December 5, 2022. https://think.ing.com/articles/macro-headwinds-to-keep-pressure-on-copper-prices.)

Copper prices are expected to steadily rise over the next few years to support the growing demand for energy efficient products. As for now, copper prices remain resilient…

How Inflation Affects U.S. Consumers Purchasing Energy Efficient Products

The International Monetary Fund states, “Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024.”

Subsequently, the inflation of groceries, electricity, gas, health insurance, airfare, and rent has significantly decreased the average consumer’s disposable spending – thus reducing the rate at which consumers have the disposable income required to purchase luxury products.

Even the most green-conscious, energy-saving consumer would have to prioritize their basic needs and budget for the cost of living before being able to invest in an EV or solar panels.

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