The past week some further cracks have appeared in the ongoing tussle between US and China. While Yellen visits China trying to show that things are fine or will be fine between the economic behemoths, the reality seems the opposite. After US put restricts on Chinese companies, the latter has retaliated with curbs on two essential and critical elements for the modern economy: gallium and germanium. While the total size of these two metals is not significant when compared to others such as iron, copper and coal etc, it is their unique characteristics and the highly concentrated production and refining (mostly in China) that makes this development so relevant to the global economy.

First, let’s talk a little bit about the two metals, their largest suppliers and other fun facts.

Germanium and gallium are valuable metals used in various industries. Germanium is primarily a by-product of zinc production and coal fly ash, with China being the largest producer, accounting for around 60% of the world’s supply. Other significant producers include Canada, Finland, Russia, and the United States. Last year, China exported 43.7 metric tons of germanium, and its consumption was worth approximately $39 million, a 10% increase from the previous year.

Gallium is found in trace amounts in zinc ores and bauxite, and it is mainly produced during the aluminum production process. China dominates gallium production, accounting for about 80% of the global output. Europe, Japan, and Canada also contribute to gallium production. China exported 94 metric tons of gallium in 2022, showing a 25% increase from the previous year. The United States imported gallium metal and gallium arsenide (GaAs) wafers worth approximately $3 million and $200 million, respectively, in 2022.

Other countries such as Japan, Russia, South Korea, Germany, and Kazakhstan produce smaller amounts of gallium, with some contributions coming from recycled materials. Teck Resources in Canada is the largest germanium producer in North America, while companies like Indium Corporation in the US and Umicore in Belgium produce both germanium and gallium.

These metals are vital in various applications. Germanium is used in fiber optic cables, high-speed computer chips, plastics, infrared radiation, military devices, and low-carbon technologies like solar cells. Gallium arsenide, used in semiconductor wafers, provides higher frequencies, heat resistance, and lower noise compared to silicon devices. It finds applications in radars, radio communication devices, satellites, and LEDs.

Although substitutes like silicon and indium can be used in certain applications, they often come at the expense of performance. The prices of gallium and germanium have been increasing, with gallium at 99.99% purity assessed at 1,775 yuan ($245) per kg and germanium ingot priced at 9,150 yuan ($1,264) per kg in China.

There have been concerns about potential supply restrictions in the past, as seen with China’s restriction of rare earths exports to Japan in 2010. Such restrictions can have significant implications for industries relying on these metals. Rare earth magnets, for example, are used in wind turbines, electric vehicles, and defense applications.

In summary, germanium and gallium are essential metals used in various industries, and China is the largest producer of both metals. These metals have critical applications in high-speed computer chips, defense, renewable energy, and other technologies. While there are substitutes available, they may not offer the same level of performance. The prices of these metals have been increasing, and there have been concerns about potential supply restrictions in the past.

Reactions by different countries

The recent development had sent a wave of concern across the world as countries try to look for alternative resources. In Germany industrialists met reflecting how perilous it is for them to solely rely on China for these metals (and many other things).

Japan and South Korea are the largest importers of Germanium and Gallium. South Korea convened an emergency meeting while Taiwan is also worried of the expected increase in prices. It is important to note that the price of Gallium has registered a 27 percent increase in one week.

Implications

The introduction of China’s new export regime for gallium and germanium is expected to have significant implications for the global market. The extent of the impact will depend on factors such as the severity of the controls implemented and the response from western governments and companies. Currently, it is anticipated that these controls will result in higher prices and longer delivery times for gallium and germanium.

The increased costs and logistical challenges arising from these controls could make it more expensive and complicated for western companies to manufacture electronic devices. Consequently, consumers may experience higher prices for these products. Moreover, western companies might find it difficult to compete with their Chinese counterparts in the global market. Similar to the global microchip shortage during the COVID-19 pandemic, these developments have the potential to significantly affect the global economy.

Predicting the long-term effects of these controls is challenging due to the numerous variables at play. However, existing stockpiles of these elements could provide some temporary relief. The United States has indicated that it possesses germanium inventory, although gallium stockpiles are not mentioned.

To mitigate the impact, western manufacturers may be compelled to diversify their supply chains by sourcing components from countries that are still able to export gallium and germanium. However, this approach could lead to increased costs and complexities in procurement processes.

Another potential solution is to ramp up production from alternative sources. In the past, germanium has been derived from minerals mined in Germany, Latin America, and Africa, making these options viable again. Additionally, investments in research and development could explore the creation of devices that are less reliant on these critical materials. However, such endeavors would require time to yield practical results.

In summary, the implementation of China’s export controls on gallium and germanium is poised to have significant consequences. Higher prices and delivery delays are expected, impacting the production of electronic devices and potentially affecting consumer prices. Western companies may need to seek alternative supply sources or invest in research for less material-reliant devices. The long-term effects are uncertain, but the situation highlights the need for diversified supply chains and innovative solutions in the global market.

P.S.

I wrote about this and its impact on oil markets for oil price. Feel free to read it as well:

https://oilprice.com/Energy/Energy-General/The-Bearish-Case-For-Oil-Markets.html