China's export restrictions on germanium and gallium will likely have short-term ripple effects across the metals-dependent semiconductor industry, but long-term impacts on the technology and mining sectors are less certain, experts told S&P Global Commodity Insights.

Beijing will impose controls on exports of gallium and germanium and their chemical compounds beginning Aug. 1 to "safeguard national security and interests," the Ministry of Commerce and General Administration of Customs said in a July 3 notice. "The export control is not an export ban, and permits will be granted if exports comply with the relevant regulations," Shu Jueting, spokesperson for the Ministry of Commerce, said at a July 6 press conference.

Gallium and germanium are used in a variety of applications including semiconductors, fiber optic cables and computer chips. In 2022, China produced 98.2% of the world's primary gallium and was a leading producer and exporter of germanium, according to the US Geological Survey. The US has a net import reliance of 100% for gallium and more than 50% for germanium, and the country imported 53% of its gallium and 54% of its germanium from China between 2018 and 2021, according to the survey.

Although the US heavily relies on imports of the two metals, the aggregate volume sourced by the US from abroad is relatively small. The US and Italy each imported a combined 1,535 metric tons of gallium and germanium from China in 2022, making them the smallest importers of the two metals that year among the top six importing countries, according to S&P Global Market Intelligence data. Japan, the largest importer, sourced 6,222 metric tons of germanium and gallium from China in 2022.

Long lead times to create new metals supply chains and uncertainty about how China will enforce the export controls is expected to create disruptions in the semiconductor and mining industries alike.

"The uncertainties involved in China's announcement mean there will likely be a short-term scramble to find alternative gallium sources," said Matthew Funaiole, vice president of the iDeas Lab, chair in innovation, and senior fellow of the China Power Project at the Center for Strategic and International Studies. "This will likely drive up prices of the metal and could cause a limited supply crunch."

Limited options

Supporters of metals supply chain onshoring, including the Biden administration, were quick to condemn the export controls.

"China's latest export restrictions are another shot across the bow aiming at our competitiveness and economy; we must move with urgency to ramp up domestic mineral production and processing and develop the secure, reliable mineral supply chains needed to underpin our economic and national security," said Conor Bernstein, vice president of communications at the National Mining Association.

The US Commerce Department, which enforces trade laws, pointed to cooperation with allies to mitigate the impact of such restrictions.

"The United States will engage with our allies and partners to address this and to build resilience in critical supply chains," a Commerce Department spokesperson said in an email.

US Treasury Secretary Janet Yellen began a multiday visit to China on July 6 and said the export controls "remind us of the importance of building resilient and diversified supply chains" during July 7 remarks.

For the US and other countries that may now hope to source gallium and germanium from outside China, difficulties lie less in acquiring raw materials and more in constructing processing infrastructure, in which China has long led the way.

"Germanium is principally a byproduct of the zinc industry," said Jack Lifton, co-chairman of the Critical Minerals Institute, pointing to Canada-based Teck Resources Ltd.'s germanium production in conjunction with its North American zinc operations. "[But] even if we mined germanium here, it's processed in China."

The case for gallium processing capacity is similar.

"Gallium is not especially rare, but it requires installation of specialized equipment to extract it from bauxite ore during the aluminum production process," said Funaiole. "This would take time to install and may require governments to consider offsetting the risk and costs for domestic production."

Although some companies such as diversified miner Nyrstar NV are considering building germanium and gallium processing facilities outside of China, the opening date of those sites will be after the new export restrictions go into effect.

Short-term price surge

Chinese gallium exports and prices are expected to surge in the short term as foreign companies increase purchases before the export curb comes into effect. But this might be short-lived, analysts said.

Shanghai Metal Markets' 6N high-purity gallium prices rose to 2,325 Chinese yuan per kilogram on July 7, increasing from 2,025 yuan on July 3.

China has ramped up gallium production in recent years, and downstream demand has been unable to absorb domestic supplies, Wang Chao, an analyst at consultancy Mysteel Global, wrote in a July 5 note. The export curbs would add sales pressure to smelters, making traders hesitant due to high price fluctuations. The export controls will also be negative for germanium, as domestic demand might not be able to fill the gap of shrinking export orders, Wang said.

Turning to stockpiles

Experts said how the semiconductor industry will react to the export rules depends on how long they are in effect.

"Intel Corp. in the US, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) in Taiwan, Samsung Electronics Co. Ltd. in Korea — I don't think any of them would have much more than six months inventory [of germanium and gallium], so if this is a prolonged ban, you will have some tremendous impact," said Alastair Neill, director of the Critical Minerals Institute.

Those impacts could include shortages and price increases.

"The international producers will not be able to meet demand, and that will result in severe shortages, significant price increases and disruption to supply of the tech products that rely on gallium and geranium," said Peter Arkell, chairman of the Global Mining Association of China.

In the longer term, chipmakers could also turn to recycled or silicon-based materials to reduce reliance on China but would risk higher costs and sacrificing performance.

"Assuming it became impossible to import gallium from China, increased recycling would probably plug the gap over time," Nomura analysts Yuji Matsumoto and Tomoya Nakagawa wrote in a July 4 note. "However, this would not happen overnight, and output would be at risk in the meantime."

Demand might also shift to alternative products, according to Nomura. For example, Sumitomo Electric Industries Ltd., a top producer of gallium nitride devices used in power amplifiers for mobile base stations, could shift to silicon-based laterally diffused metal oxide semiconductors.

Spokespeople for global semiconductor makers TSMC, Infineon Technologies AG and NXP Semiconductors NV all said their businesses did not expect the export restrictions to have a direct or significant impact on their operations. US-based Intel did not respond to a request for comment.

As of July 6, US$1 was equivalent to 7.25 Chinese yuan.

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