China’s restrictions on exports of three specialty metals to the United States, prompted by a geopolitical standoff with the United States, have already caused widespread market turmoil. The imposition of tighter restrictions by Chinese authorities looks set to have far-reaching consequences for the supply chains that feed the US defense and semiconductor industries – a critical technology sector.
This month, Beijing banned exports of gallium, germanium and antimony destined for the United States, in a move that is unexpectedly escalating into a technology war.
The metals are important because they have critical uses in many Western industries, from military technology to semiconductors, missile systems and satellites.
The ban may seem symbolic at first glance, given that restrictions imposed more than a year ago had virtually eliminated direct exports of Chinese gallium and germanium to the U.S. That pushed up prices and made it harder for importers to stockpile the goods.
But the market turmoil could spark panic, as Beijing could further restrict supplies to foreign companies and countries that help U.S. manufacturers evade inspections.
For example, the measures could prevent international companies from reprocessing Chinese gallium, germanium and antimony in third countries and then reselling those products to the U.S. The end-users of these metals – such as the semiconductors for computer processors, aerospace and defense sectors – could be forced to try to use less material, recycle more or strike deals with the few Western companies that can potentially start new production.
There are also concerns that other critical materials could be targeted if trade tensions escalate. Chinese metal reprocessed elsewhere and headed to the U.S. has been a lifeline for American manufacturers, particularly in the gallium market. But those flows are likely to decline as suppliers fear harsh retaliation from Beijing.
Fear of Chinese blacklisting and price spikes
The small size of these markets and the limited liability companies involved means that these sales would be easy to track down, and a blacklisting by China would have a huge impact on the companies involved.
It would be relatively easier for China to stop gallium shipments via third countries, given that it is a niche market. Japan’s imports from China have halved this year due to the negative impact of trade restrictions.
The impact on supply chains varies, but importers and suppliers generally expect Beijing’s ban to shake up global markets and send metal prices soaring in the coming months. Prices are already high.
Germanium – which is more than 300 times more expensive than copper – and antimony have hit record highs, while gallium is at a 13-year high, according to data from Fastmarkets.
Since last year’s restrictions, several specialty manufacturers in the industry have warned of risks to securing component supplies or selling their products if they become more expensive to manufacture.
They include French night-vision technology company Exosens SAS and Lumentum Holdings Inc., which makes lasers for the semiconductor, defense and renewable energy sectors.
AXT Inc., a semiconductor manufacturer that makes gallium products in China to supply factories in the U.S., said that in some cases the government has not issued export licenses and exports are not proceeding.
In the long term, industry experts say the challenge will be securing new or alternative supplies and finding processing plants that can convert the metals into the ultra-pure forms that industries need.
There is also the question of whether China could target other commodities. It is the main supplier of dozens of critical minerals, but analysts and traders are focusing on those that have key defense applications and that the United States does not produce in significant volumes. The list of minerals includes hafnium, zirconium, tungsten, titanium and indium, they said.
For smaller manufacturers that really depend heavily on the availability of this material — almost regardless of price — that is the problem.
Here is a metal-by-metal breakdown of how China is disrupting the supply chains of Western defense and semiconductor manufacturing industries — and the impact.
Gallium
Like other minor metals germanium and antimony, gallium is usually extracted as a by-product from the mining and refining of commodities such as zinc, copper, aluminum, and gold.
Annual production of gallium totals less than 1,000 tons, with China producing almost all of it. To emphasize the tiny market, China’s aluminum industry – which extracts gallium as a by-product – churns out more than 40 million tons each year. In addition to being by far the leading aluminum producer, its refineries are also required by law to recover gallium.
International producers could theoretically increase their production of gallium by investing in ways to export it as a by-product.
Rio Tinto said last week it was looking into whether it would be worth doing so in Canada, and Metlen Energy & Metals SA is exploring something similar in Greece. Despite gallium’s price, some would-be producers have been hesitant to invest and have sought commitments from U.S. and European governments to finance projects.
Some refiners also want minimum price guarantees from manufacturers in exchange for long-term deals. That’s because suppliers worry that prices could collapse if China lifts export restrictions or the metal flows through other channels.
That’s a particular concern for gallium, given that China had excess capacity before the ban, which means it risks creating a domestic oversupply.
Germanium
Germanium is an example of how trade restrictions – including sanctions affecting Russian metals and mining – are shutting out international traders from the market, reducing their role as suppliers of last resort in times like these. Along with a handful of Chinese producers and a few overseas alternatives, supplies of secondary metals have traditionally been controlled by a group of traders operating mainly in London, New York, Hong Kong and Tokyo.
They build up stocks when supplies are plentiful, before waiting – sometimes for years – to sell them when the metal is scarce.
But since China’s restrictions last year, many have frozen trade in the affected metals, with customs officials approving shipments only to approved end-users. Exports of germanium and gallium to traders’ main storage hubs in the Netherlands and Hong Kong have collapsed to zero. That means less immediate supply of the metal.
In a geopolitical crisis, the only thing that keeps flowing is usually the metal. With traders ill-equipped to fill the gap, manufacturers are tapping their own safety stocks, seeking to lock in additional supplies from a handful of alternative Western refineries and asking governments for help in creating more resilient supply chains.
Beijing’s control over the germanium market is looser than it is over gallium, but it remains a concern for the U.S. as it seeks to become less dependent on Chinese supplies. Following China’s restrictions last year, the Biden administration sent diplomats to Belgium and the Democratic Republic of Congo to secure critical supplies of the mineral for domestic manufacturers, including defense and aerospace contractors who need ultra-pure forms of germanium to keep satellites in orbit and produce missiles.
The United States once dominated the supply of germanium more than China does today. Cold War-era scientists pioneered a process that produced one of the purest materials ever—with contamination estimated at just one in 10 trillion people.
Umicore SA, which converts germanium for use in high-tech products such as thermal imaging systems and radiation detectors, has partnered with Congo to process the metal from mines, in a deal brokered by U.S. authorities. A key question is how quickly it can ramp up supplies.
Antimony
Like many secondary metals, antimony – widely used in ammunition – has been in high supply for much of this century as China’s rapid industrial expansion boosted production. But that has changed in recent years as geological reserves have shrunk.
While illegal exports through Vietnam in the past helped relieve supply pressures, better border monitoring and supply chain control by Western manufacturers have seen cross-border flows decline in recent years, according to the CRU.
The few deposits developed in countries like Tajikistan, Myanmar and Turkey are not large enough to fill the gap in Chinese supply, and the big worry is when and where new mines will be found. The only known U.S. deposit is in an abandoned gold mining area in Idaho, and the U.S. Department of Defense has backed developer Perpetua Resources Corp. to help start production. That could ease the U.S. antimony shortage, potentially meeting more than 30 percent of its needs. The problem is that development could take years, and much more is needed to fill the global shortfall.
Many end users remain concerned about supplies. The trade war has broad implications as geopolitical tensions reshape supply chains.
