The Unforeseen Consequences: China's Chipmaking Material Cutoff Could Devastate Global Industry

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Following China's recent declaration to limit the export of germanium and gallium - crucial elements in semiconductor production - the country saw a significant drop in its shipment of these materials to other countries, reaching zero within a month.

Beijing has approved some export licenses, but the restrictions serve as a clear warning that China possesses a powerful weapon to utilize in the escalating trade war concerning the future of technology. These limitations were imposed in response to the United States, Europe, and Japan's restrictions on the sale of chips and chipmaking equipment to China, aiming to sever its access to critical military technology. Xiaomeng Lu, the director for geotechnology at Eurasia Group, cautioned that the extent of these restrictions remains uncertain but blocking a significant volume of exports could disrupt the supply chain for immediate consumers.

China currently has a significant advantage in the production of two elements. In 2020, it was responsible for 98% of global gallium production and 68% of refined germanium production, as reported by the US Geological Survey (USGS). Creating a separate supply chain for these elements, which is feasible for the United States and its allies, would entail a colossal investment of over $20 billion and a lengthy development process, as stated by Marina Zhang, an associate professor at the University of Technology Sydney.

"Construction of more efficient gallium and germanium processing technologies and facilities cannot occur overnight, especially when taking into account the environmental consequences associated with their extraction and mining," she stated in July.

Employees operate machines at a dust-free workshop of a semiconductor factory on March 1, 2023 in Siyang County, Suqian City, Jiangsu Province of China.

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China just played a trump card in the chip war. Are more export curbs coming?

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

Chinas dominance

China has been the predominant producer of both elements for over a decade. Gallium, a malleable and lustrous metal, can be easily cut with a knife. It is widely employed in the manufacturing of compounds that enable the creation of radio frequency chips for mobile phones and satellite communication.

Germanium, a metalloid with a hard and brittle nature, appears in a grayish-white hue and finds extensive use in the manufacturing of optical fibers capable of transmitting both light and electronic data. It is worth noting that germanium, along with its counterpart, is not naturally occurring and is typically formed as a byproduct during the extraction of commonly found metals like aluminum, zinc, and copper.

According to Ewa Manthey, a commodities strategist at ING Group, the processing of these elements can be expensive, technologically demanding, energy-consuming, and environmentally harmful. She explains that China's dominance in the production of these metals is not due to their scarcity, but rather because the country has been successful in keeping production costs low. Other manufacturers have not been able to match China's competitive cost advantage.

On May 30, 2022, gallium oxide wafers with a diameter of 2 inches (50.8 mm) were examined by researchers at Zhejiang University Hangzhou International Science and Innovation Center in Hangzhou, Zhejiang Province, China. The Advanced Semiconductor Research Institute of Hangzhou International Science and Innovation Center successfully produced these gallium oxide wafers, which belong to the fourth-generation semiconductor materials. Compared to other semiconductors, gallium oxide devices can withstand higher voltages, have a smaller size, and offer lower power loss. These advantageous properties make gallium oxide applicable in various fields such as new energy vehicles, rail transit, and renewable energy power generation, leading to reduced energy consumption. (Photo credit should read CFOTO/Future Publishing via Getty Images)

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China just stopped exporting two minerals the world's chipmakers need

According to data compiled by the Center for Strategic and International Studies in Washington, China's production of low-purity gallium experienced a significant increase from 22 metric tons to 444 metric tons between 2005 and 2015. Analysts from the think tank attribute China's leading position in the aluminum industry to its establishment of a dominant global share in gallium production.

Additionally, the Chinese government has enacted strategic measures to enhance production, such as mandating that aluminum producers in the country develop the capability to extract gallium. Consequently, manufacturing gallium outside of China has largely become economically unfeasible during the past decade.

Between 2013 and 2016, primary production of gallium was discontinued by Kazakhstan, Hungary, and Germany, with Germany announcing in 2021 its intention to resume production due to the increasing prices.

Other suppliers

Alternative suppliers exist.

In 2022, Russia, Japan, and Korea contributed a combined 1.8% to the global gallium production, as stated by the USGS. Teck Resources, a Canadian company, is one of the leading producers of germanium worldwide. The Indium Corporation, an American company, is also a prominent manufacturer of germanium compounds and alloys at a global scale.

Both Canada's 5NPlus and Belgium's Umicore are capable of producing both elements. However, According to Chris Miller, the author of "Chip War" and an economic historian, it would require some time to establish alternative sources of supply.

It could also be expensive.

On November 5, 2012, a photograph was taken at Tradium GmbH in Frankfurt, Germany, showcasing a bar of Germanium. Germanium is predominantly utilized in the field of ultra optics. Tradium GmbH is renowned as one of Europe's largest dealers in technology metals and rare earths.

China retaliates in the battle for chips by implementing export restrictions on essential raw materials. According to Gregory Allen, director of the Wadhwani Center for AI & Advanced Technologies at CSIS, global mining companies have the opportunity to engage in the sale of germanium and gallium if China decides to restrict the supply.

Some global mining and refining companies have expressed their willingness to make the shift, although it may not happen immediately. In July, Reuters reported that Rostec, a Russian state-owned conglomerate, stated its readiness to increase germanium production for domestic consumption following China's export restrictions.

Nyrstar, a Netherlands-based company, is currently exploring opportunities for germanium and gallium projects in Australia, Europe, as well as the United States.

According to Lu from Eurasia Group, even if there is a shortage of these minerals, gallium can be substituted with silicon or indium during the wafer manufacturing process.

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 inweapon systems.

"Supply of the factory floor scrap has already been accounted for, and Germanium scrap is also obtained from decommissioned tanks and other military vehicles," Lu stated.

In August, China refrained from selling any germanium or gallium internationally. However, the situation may improve in September, as the Commerce Ministry disclosed the approval of export licenses for Chinese companies.

Manthey predicted that prices for both elements would experience an initial increase. Gallium prices reached 1,965 yuan ($269) per metric ton on Tuesday, marking a surge of over 17% since June 1, as reported by ebaiyin.com, a Chinese metal trading service website.

Germanium prices experienced a approximately 3% price surge within the same timeframe, leading to increased competition among countries such as Japan, Canada, and the US. This surge is anticipated to weaken China's dominance in both markets, Manthey explained.

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