Tesla Stock Fell. What a New Battery Supplier Might Matter for Tariffs.

Coming into Wednesday trading, Tesla stock was down about 20% year to date and up about 44% over the past 12 months. (AFP via Getty Images)

Tesla stock rose early Wednesday, but gains faded after the Federal Reserve held interest rates steady.

The news of the day for Tesla investors: It has a new battery supplier, according to a report.

Shares of the electric-vehicle maker traded as high as $324.45, but closed down 0.7% at $319.04, while the S&P 500 and Dow Jones Industrial Average also gave up early gains, finishing down 0.1% and 0.4%, respectively.

The early move higher came after Reuters reported that South Korea’s LG Energy Solution , or LGES, signed a $4.3 billion deal with Tesla to supply lithium iron phosphate, or LFP, batteries. LFP batteries don’t use more expensive, and controversial, elements such as cobalt. They have become common in the industry.

Reuters cited LG in its story. Tesla didn’t respond to a request for comment about the report.

That’s a new supply relationship for Tesla. To date, Elon Musk’s EV maker has relied on internal production, Panasonic, and China’s Contemporary Amperex Technology Co. Ltd., better known as CATL. The latter is the world’s largest maker of lithium-ion batteries.

Diversifying and adding suppliers can be a good idea for many companies. It should also provide Tesla with more tariff flexibility. The Trump administration hasn’t announced U.S. trade deals with South Korea and China, but the potential tariffs on Chinese imports could be much higher than those on South Korean imports. What’s more, LGES has U.S. battery-making facilities that would be tariff-free.

Tesla, of course, uses batteries in its EV business. It also has a large battery-storage business. Musk spoke about the potential for the storage business when Tesla reported second-quarter numbers on July 23.

“I think batteries are going to be a massive thing,” said Musk. “Not that many people appreciate just how gigantic the scale of battery demand is,’ adding that the sustained output of the U.S. power grid is roughly one terawatt, but the average usage is less than half of that. (Utilities have to meet peak demand, but air conditioners aren’t blasting all the time.) Using batteries to store energy when demand is low means less new power-generation capacity is needed. Batteries can help make a more efficient grid.

Tesla’s energy generation and storage business posted second-quarter sales of $2.8 billion while the car business saw sales of $16.7 billion.

Coming into Wednesday trading, Tesla stock was down about $11, or 3.4%, since the company’s second-quarter earnings report.

Results were roughly in line with Wall Street expectations, but Musk warned of some “rough quarters” ahead with the U.S. EV industry losing the federal purchase tax credit and other regulatory support. Tesla management also implied that its long-awaited lower-priced vehicle was a stripped-down version of the company’s Model Y and not a completely different car. That disappointed some investors, too.

Write to Al Root at allen.root@dowjones.com