Gallium and germanium stole the headlines this week. The even bigger headline, in our view: China’s asymmetric play underlines the importance of investing in upstream resources. Meanwhile, Europe dubs aluminum a critical raw material, Moderna takes a chance of the China market, and Toyota claims a battery breakthrough. Plus: what to make of news about mineral deposit discoveries.
This week’s big news is China’s decision to restrict exports of gallium and germanium, two strategic metals used in semiconductors, defense technologies, and renewable energy products.
To be sure, Beijing hasn’t (yet) banned exports of the metals. Beginning August (link in Chinese), Chinese sellers will have to submit certificates of end use and end users to apply for a dual-use export license from the ministry of commerce. That gives the Chinese government greater discretion on which foreign buyers can obtain the metals, and in what quantities.
And China needs to balance trade-offs, too: crimping gallium and germanium too much could constrain the availability of chips for EVs, in turn limiting EV production and concurrent rare earth magnet demand, which would hurt China’s magnet industry just as global demand is taking off.
For now, it’s unclear how the curbs will ripple through supply chains. The US primarily sources gallium from China. The Semiconductor Equipment Association of Japan says it’s difficult to know if this will cause shortages. Taiwan’s TSMC and Dutch-based NXP Semiconductors say they don’t foresee direct impact. Dowa Holdings, the world’s top producer of high-purity gallium, says it’s investigating.
One thing is clear, though: China has built up asymmetric control over upstream nodes. That gives China outsized leverage over supply chains, even in industries where they do not currently dominate higher-value-add, downstream segments.
Plus, China has proven capable of turning its upstream influence into total dominance. Take rare earths: China’s 2010 ban on rare earth exports roiled global markets, sending prices of the metals skyrocketing before they crashed—forcing non-Chinese producers into bankruptcy. That suited China just fine. Over time, it built up near-total control of midstream processing and downstream magnet-producing capacities. In fact, it now snaps up rare earth raw materials from abroad.
The big lesson? Industrial power is built on upstream foundations.