China dominates key raw materials in global semiconductor production

Just one month after China announced it would restrict exports of two metals needed to make semiconductors, germanium and gallium, its overseas shipments of the materials have dropped to zero.

Beijing said it had approved some export licenses, but the restrictions are a clear warning that China has a powerful weapon it can deploy in the escalating trade war over the future of technology.

The restrictions come after the United States, Europe and Japan restricted the sale of semiconductor chips and semiconductor manufacturing equipment to China, cutting off access to key technology that could be used by the Chinese military.

“It’s still early to know how tight the restrictions will be, but if China blocks a large amount of exports, it will cause disruptions in the supply chain for direct consumers,” said Xiaomeng Lu, chief technology officer at risk consultancy Eurasia Group.

While there are alternatives for the US and its allies, building an independent supply chain to process gallium and germanium could require a “staggering” investment of more than $20 billion, according to Marina Zhang, associate professor at the University of Technology Sydney (Australia). And it could take years to develop.

“The technologies and refining facilities to process gallium and germanium cannot be built overnight, especially considering the environmental impacts of mining these metals,” said Associate Professor Marina Zhang.

But there may be no choice but to do so. Although minerals account for only “a few hundred million dollars” in global trade, they are crucial to the supply chains of the semiconductor, defense, electric vehicle and telecommunications industries, each worth hundreds of billions of dollars, according to Marina Zhang.

China's dominance in the production of gallium and germanium metals

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

Gallium is a soft, silvery metal that is easy to cut with a knife. It is often used to make compounds that can create semiconductor chips used in mobile phones and satellite communications.

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

Neither of these metals is found naturally. They are usually formed as a by-product of mining common metals such as aluminum, zinc, and copper.

Processing these metals can be “expensive, technically challenging, energy-intensive and polluting,” according to Ewa Manthey, strategist at Dutch multinational banking and financial services giant ING Group.

“China dominates the production of these two metals not because they are rare, but because they can keep production costs quite low and producers elsewhere cannot match these competitive costs,” said Ewa Manthey.

According to data compiled by the Center for Strategic and International Studies (CSIS) in Washington (USA), from 2005 to 2015, China's production of low-purity gallium metal skyrocketed from 22 tons to 444 tons.

China's leading position in the aluminum industry has allowed it to take a dominant share of global gallium metal production, analysts from the research center said.

Furthermore, the Chinese government has implemented strategic policies to boost production of this metal by requiring domestic aluminum producers to step up Gallium mining.

This is why over the past 10 years, Gallium production has essentially become economically unviable in markets outside of China.

Between 2013 and 2016, Kazakhstan, Hungary and Germany all stopped producing primary gallium. However, in 2021, the German government announced that it would restart gallium production lines due to rising prices for the metal.

Besides China, what other countries supply Gallium and Germanium metals in the world?

According to the US Geological Survey, Russia, Japan and South Korea together produced 1.8% of the world's total gallium in 2022. For Germanium, Canada's Teck Resources is one of the world's major producers. The US company Indium Corporation is also the world's leading producer of Germanium compounds and alloys.

Meanwhile, Canada's 5NPlus and Belgium's Umicore are producers with the capacity to produce both metals.

However, according to Professor Chris Miller, author of the book "Chip War" and an American economic historian, it will take a long time for countries to replace the supply of these metals.

Global mining companies could enter the business of selling germanium and gallium if China seeks to cut supply, said Gregory Allen, director of the Wadhwani Center for Artificial Intelligence and Advanced Technology at CSIS. This won’t happen immediately, but some global mining and refining companies have signaled their intentions to do so.

In July, Russia's state-owned Rostec corporation told Reuters it was ready to increase production of Germanium metal for domestic use after China announced export restrictions.

Netherlands-based Nyrstar also said it is looking at potential Germanium and Gallium metal production projects in Australia, Europe and the US.

Germanium and Gallium Metal Prices Rise After China Restrictions

China will not sell any Germanium or Gallium to foreign companies in August 2023. By September 2023, China's Ministry of Commerce said it had approved some export licenses for the metals to Chinese companies.

Although the Chinese government has allowed Germanium and Gallium metals to be exported again, their prices have increased significantly, with Gallium standing at $269 per ton on September 10, 2023, up more than 17% compared to June 1, 2023. Meanwhile, Germanium prices have increased less, only about 3% in the same period.

Higher prices will increase competition by making production costs more competitive in countries like Japan, Canada and the US, reducing China’s dominance in those markets, economists say. It will take time to build processing plants, but over time the market and supply chains will adjust.