The New Metal Battleground, The Wire China, July 9, 2023.
By Isaiah Schrader and Aaron Mc Nicholas
China has announced export controls on two little-known metals that are key to chipmaking and other advanced technologies.
Source: The Wire China
n the ongoing contest for control over global supply chains, China has always had one strong card in its deck: Its dominance over the supply of rare earths and other raw materials vital to several advanced technologies. This week, it decided to play that card.
The Ministry of Commerce on Monday said it would impose export controls on two little-known metals, gallium and germanium, effective August 1. The move sent shares of Chinese rare-earth miners rising, with investors expecting prices to increase. But it will also have alarmed governments already contending with high inflation and concerns over the openness of global trade.
China produced 98 percent of the world’s gallium supply last year, according to the U.S. Geological Survey, with the metal prized for its ability to convert electricity into light and used to produce LEDs and lasers. Its compounds, such as gallium nitride and gallium arsenide, are strong conductors which can substitute for silicon in semiconductors.
Germanium is another semiconductor, commonly used to help produce fiber optic cables and infrared optical materials, from night vision goggles to thermal-imaging cameras, according to the U.S. Geological Survey: Its data shows China produced 68 percent of the world’s supply of the metal in 2021.
This week, The Wire explores these two elusive, yet crucial, elements and the potential effects of China’s export controls on global supply chains.
CHIPS CONFLICT
Beijing’s move to restrict gallium and germanium supply is a response to Western government efforts, led by the U.S., to crimp China’s chipmaking capacity, particularly in the most advanced semiconductors. On June 30, the Dutch government announced new export controls on lithography systems that are key to semiconductor manufacturing: Dutch company, ASML Holdings, dominates the market for these machines. The U.S. imposed its own semiconductor export controls in October 2022, restricting China’s access to advanced computing chips used in military systems.
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The full details of China’s export controls aren’t yet known, but any restrictions could delay production and lead to price rises across the semiconductor industry.
“Because the industry is so incredibly complex and sophisticated, the smallest change can have an enormous effect and that’s why niche materials like this are really important,” says Joris Teer, a strategic analyst at The Hague Centre for Strategic Studies.
Chinese companies such as the Aluminum Corporation of China (usually known as Chalco) and the East Hope Group mine the raw ores used to produce gallium and germanium — including bauxite ore for aluminum and zinc ore — and separate out the metals. In the case of gallium, companies in China as well as the U.S., Japan and Canada purchase and process the metal into high-purity refined gallium and gallium compounds.
One of those compounds, gallium nitride, is at the center of new developments in advanced chip manufacturing that have increased gallium’s desirability. Chips using the compound could eventually replace silicon-based chips, according to Vertex Holdings, a venture capital firm that makes investments in semiconductor companies. This is due to their superior performance in high-power applications, such as in electric vehicles. EPC Space, a gallium nitride producer, says its semiconductors are also able to withstand higher temperatures and levels of radiation than silicon chips, making them valuable for use in military technologies.
Experts say China is lagging behind when it comes to gallium for this purpose.
“They [the Chinese] don’t know how to layer the gallium onto a semiconductor,” says James Lewis, director of the Strategic Technologies Program at the Center for Strategic and International Studies, adding that Beijing’s typical solution to its semiconductor problem has been to turn to espionage.
“China’s motto is ‘Spying R Us,’” he says. “They want to get into the tech transfer game as well.”
Gallium nitride was at the center of an indictment brought by the Department of Justice against seven men in 2018, in which Chinese agents were alleged to have stolen chips using the compound from Wolfspeed, an American semiconductor firm. One of the seven, a U.S. citizen named Yi-Chi Shih, was sentenced in 2021 to more than five years in prison.
Source: The Wire China
Source: LeadLeo Research Institute, company announcement
ALTERNATIVE SUPPLIES?
Although gallium and germanium are relatively plentiful elsewhere in the world, China has come to dominate mining of these and other critical raw materials, such as rare earths, in recent decades. This is due to a confluence of factors including — at least initially — cheap labor costs, an enormous labor population, bank funding, as well as lower environmental standards.
“For a very long time, China was willing to shoulder all of the environmental costs that come with the mining of gallium and germanium, as well as rare earths,” says the Hague Centre’s Teer. The Bayan Obo mine in Inner Mongolia, home to the world’s largest known rare earth deposit, releases 340,000 to 420,000 cubic feet of waste gas for every ton of rare earth material mined, according to estimates from the Chinese Society of Rare Earths. The same amount of biogas can power up to 750 homes per year, according to Quantum Biopower, a waste management company.
Such factors have made it difficult for other nations to compete in rare earth mining, says Sarah Bauerle Danzman, an associate professor at Indiana University who studies international investment. The United States once hosted the world’s biggest rare earths mine in Mountain Pass, California, but began relying heavily on Chinese imports in the years before the mine’s closure in 2002. Over the last decade, the U.S. has imported 80 percent of its rare earths supply from China. (The Mountain Pass mine reopened under new management in 2018, but faces a long road to regain its former status.)
Source: The Wire China
Constructing alternative supply chains for gallium and germanium elsewhere would be both costly and time-consuming. For newly discovered deposits of critical raw materials, it takes on average 16.5 years for a mining project to start production, according to the International Energy Agency.
“The question really becomes to what extent, [in order] to create greater security of supply, are we [Western countries], first of all, willing to take environmental pain?” adds Teer. “The second question is, are we willing to kickstart the projects with public money and take the economic pain in time? The clock is ticking and the problem is too big for singular companies.”
Still, some experts say that other countries with deposits could be willing to bear the startup costs of mining them. Higher prices for the metals “will just incentivize other countries and companies based in other countries to invest more in restarting production,” filling supply chain shortages, says Bauerle Danzman.
In the long run, it will be difficult for China to keep weaponizing its supply of rare earths as it threatens to do with gallium and germanium, she adds.
“China’s growth model has been so focused on becoming integral to global supply chains, specifically through exports; it really does limit how much it can use its space in that supply chain to extract concessions in a kind of economic and coercive way,” she says.
There are doubts, too, as to whether China will be able to enforce export controls as fully as the Dutch restrictions on lithography system exports. Analysts note that unless Chinese export controls are applied uniformly across the world, gallium and germanium could still reach the U.S. and Europe via third countries.
“The ASML boycott is so effective and precise because it’s a system that you have to transport in multiple jumbo jets,” says Teer.
“It’s about the most complex system that we ever made in world history, and also requires structural maintenance and system updates by the company. Unlike those systems, these materials and components function independently of their supplier after purchase.”