The world will pay a high price if China cuts off supplies of chipmaking materials

Analysis by Laura He, CNN

Hong Kong (CNN) — Just one month after China announced it would curb exports of germanium and gallium, both essential for making semiconductors, its overseas shipments of the materials fell to zero.

Beijing says it has since approved some export licenses but the restrictions are a stark warning that China has a powerful weapon it can deploy in the escalating trade war over the future of tech. The curbs came after the United States, Europe and Japan restricted sales of chips and chipmaking equipment to China to cut off its access to key technology that can be used by the military.

“It is still early to tell how tight the restrictions would be. [But] if China ends up blocking a large amount of exports, it will cause a disruption in the supply chain for the immediate consumers,” said Xiaomeng Lu, director for geotechnology at Eurasia Group.

China enjoys a near monopoly on the production of the two elements. Last year, it accounted for 98% of the global production of gallium and 68% of refined germanium production, according to the US Geological Survey (USGS).

While there are alternatives for the United States and its allies, constructing an independent supply chain for gallium and germanium processing could require a “staggering” investment of over $20 billion, according to Marina Zhang, an associate professor at University of Technology Sydney. And it could take years to develop.

“Refining technologies and facilities for processing gallium and germanium cannot be built overnight, particularly considering the environmental implications of their extraction and mining,” she wrote in July.

But there may be no other option but to do so.

Although the minerals account for only “several hundred million dollars” in global trade, according to Zhang, they are critical to the supply chains of the international semiconductor, defense, electrical vehicle and communications industries, which are each worth hundreds of billions of dollars.

China’s dominance

China has dominated the production of both elements for at least a decade.

Gallium is a soft, silvery metal and is easy to cut with a knife. It’s commonly used to produce compounds that can make radio frequency chips for mobile phones and satellite communication.

Germanium is a hard, grayish-white and brittle metalloid that is used in the production of optical fibers that can transmit light and electronic data.

Neither is found on their own in nature. They are usually formed as a byproduct of mining more common metals: primarily aluminum, zinc and copper.

The processing of the elements can be “costly, technically challenging, energy-intensive and polluting,” according to Ewa Manthey, a commodities strategist at ING Group.

“China dominates production of these two metals not because they are rare, but because it has been able to keep their production costs fairly low and manufacturers elsewhere haven’t been able to match the country’s competitive costs,” he said.

From 2005 to 2015, China’s production of low-purity gallium exploded from 22 metric tons to 444 metric tons, according to data compiled by the Center for Strategic and International Studies in Washington.

Analysts from the think tank said China’s leading position in the aluminum industry has allowed it to establish a dominant share of global gallium production.

Moreover, China’s government has implemented strategic policies to boost production, including a requirement for the country’s aluminum producers to create the capacity to extract gallium.

This is why, over the past 10 years, manufacturing gallium has become essentially economically nonviable outside China.

Between 2013 and 2016, Kazakhstan, Hungary, and Germany all ceased primary production of gallium. (Germany announced in 2021 it would restart production because of rising prices.)

Other suppliers

There are alternative suppliers, though.

According to the USGS, Russia, Japan, and Korea produced a combined 1.8% of global gallium in 2022. For germanium, Canada’s Teck Resources is one of the world’s largest producers. American company Indium Corporation is also a top global manufacturer of germanium compounds and alloys.

And Canada’s 5NPlus and Belgium’s Umicore produce both elements.

But “it would take time to bring online alternative sources of supply,” Chris Miller, author of “Chip War” and an economic historian, told CNN.

It could also be expensive.

Global mining companies can get into the business of selling germanium and gallium if China seeks to choke off supply, said Gregory Allen, director of Wadhwani Center for AI & Advanced Technologies at CSIS.

“This would not be instantaneous, but some global mining and refining firms have signaled their intent to do so.”

In July, Russian state owned conglomerate Rostec told Reuters that it’s ready to boost output of germanium for domestic use after China announced curbs on exports.

Netherlands-based Nyrstar also said it was looking at potential germanium and gallium projects in Australia, Europe and the United States.

“Even if users run out of supplies of these minerals, gallium can be swapped for silicon or indium in the wafer making process,” Lu from Eurasia Group said.

Zinc selenide is a lesser but functional substitute for germanium in certain applications, she added.

Rising prices

Recycling is another option.

Last year, the US Defense logistics Agency introduced a program to recycle optical-grade germanium used in weapon systems.

“Factory floor scrap has already accounted for a source of supply. Germanium scrap is also recovered from decommissioned tanks and other military vehicles,” Lu said.

In August, China didn’t sell any germanium or gallium outside its borders. The numbers could bounce back in September, as the Commerce Ministry said it had approved some export licenses for Chinese companies.

Initially, prices for the two elements are likely to rise, Manthey said.

Prices of gallium stood at 1,965 yuan ($269) per metric ton on Tuesday, up more than 17% from June 1, according to ebaiyin.com, a Chinese metal trading service website.

Prices for germanium increased about 3% during the same period.

“Higher prices will in turn increase competition by making production more cost-competitive again in countries like Japan, Canada and the US, which will in turn reduce China’s dominance in both markets,” Manthey said.

“It will take time to build processing plants, but over time, the markets and supply chains will adjust,” he added.

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