The 2010 rare earths trap could offer insights into strategy Critical Minerals Alliances 2023 - September 12, 2023
As the White House continues to dole out hundreds of billions of dollars to position America as the global leader in clean energy and digital technologies, Beijing initiates a strategy to put America in check with the global economy equivalent of pawns.
These pawns in the technology chess match between the U.S. and China are gallium and germanium, a pair of semiconductor metals used to make the computer chips essential to every facet of modern life.
Before all the major news outlets posted headline stories covering China's plans to restrict exports of gallium and germanium to "safeguard national security interests," most people outside of the realms of mining and chipmaking had never heard of these tech metals.
The reason for this ambiguity is both metals are rare and rarely used outside of the tech and green energy sectors.
According to the U.S. Geological Survey, roughly $39 million of germanium and $225 million of gallium metal and gallium arsenide semiconductor wafers were used by American manufacturers during 2022.
While these numbers pale in comparison to industrial metals like copper ($33 billion) and zinc ($4 billion), gallium and germanium have tremendous market leverage due to their uses in high-tech and green energy products.
Gallium serves as a primary ingredient in semiconductors vital to next-generation smartphones, telecommunication networks, automobile electronics, light-emitting diodes (LEDs), thin-film solar panels, and medical devices.
Germanium is a powerful ingredient in fiber optics, night vision devices, triple-layered solar panels, and transistors for classic and quantum computers.
Various semiconductor products made from both critical tech metals are used to make the computer chips used in virtually every electronic device. The scarcity of new vehicles for sale on showroom floors in the U.S. during and after the COVID pandemic is an example of how a lack of these computer chips can stall the global economy.
"China has hit the American trade restrictions where it hurts," Peter Arkell, chairman of the Global Mining Association of China, said in July.
This isn't the first time China wrought its critical metals dominance as a pain-inflicting pawn against those standing in the way of Chinese interests.
In 2010, the Middle Kingdom employed a similar strategy to leverage its near-complete monopoly of the production of rare earths, a suite of tech metals that also have large global economy implications that belie their relatively small market time. At that time, China demonstrated that it could hurt outside interests and bolster its own by both turning off and on the rare earth spigot.
A review of China's rare earths playbook could be useful to companies and governments hoping to build non-Sino gallium and germanium supply chains.
To avoid future disruptions of supplies of the computer chips critical to U.S. manufacturing, supply chains, and national security, President Joe Biden signed the CHIPS Act in 2022. This law allocated $52.7 billion for American semiconductor "research and development, science and technology, and the workforce of the future to keep the United States the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence."
This includes $39 million in chipmaking incentives in the U.S., which comes with the caveat that companies taking advantage of these subsidies are restricted from doing any significant transactions with China or "any other foreign country of concern" for 10 years.
The act, however, does not address the need for semiconductor raw materials like gallium and germanium. Commodities analysts and foreign policy experts see China's export limitations on this pair of metals as a counter to a U.S. technology gambit that includes the CHIPS Act and some Washington lawmakers calculating a move toward further computer chip export restrictions to China.
"Gallium and germanium are chess pieces in a geopolitical game of enormous proportions," Christopher Ecclestone, a mining strategist at the consulting firm Hallgarten & Company, told Washington, DC-based Foreign Policy.
What makes these tech metal pawns so powerful for China is the U.S. currently relies on imports for 100% of its supply of gallium and more than 50% of its germanium.
According to the U.S. Geological Survey, China produced 98% of the world's gallium during 2022 – Russia came in second at around 1%. When it comes to germanium, 54% of America's imports also came from China.
Reuters recently reported that the U.S. does not currently have any government stockpiles of gallium to fall back on, which makes the situation more troubling for high-tech manufacturers.
"Gallium and germanium are just a couple of the minor metals that are so important for the range of tech products and China is the dominant producer of most of these metals," said Arkell. "It is a fantasy to suggest that another country can replace China in the short or even medium term."
Given gallium and germanium's outsized impacts on the tech sector and, by extension, the global economy, the mining sector and Western governments are scrambling to diversify the supply of these semiconductor metals away from China.
This anticipated push to break into small markets dominated by a country that has direct control over the spigot, however, is wrought with challenges.
A look back at China's 2010 rare earths playbook offers some insight into the difficulties associated with trying to break into the markets for Sino-controlled critical minerals.
When China turned off the rare earth spigot in 2010, the prices for this suite of 15 tech elements skyrocketed. For example, the price for a kilogram of the rare earth europium rose from US$475 per kilogram in 2008 to a peak of US$3,800 in 2011.
This rise in rare earth prices made the economics of mining rare earths outside of China compelling, and companies around the globe quickly began advancing REE projects.
A couple of years later, however, China dumped large quantities of rare earths onto global markets, which sent prices for this suite of tech metals tumbling below 2009 levels, a devastating blow to many upstart rare earths projects and companies.
Molycorp, an American company that set out to reopen the Mountain Pass rare earths mine in California's Mojave Desert, was among the victims of the price fluctuations caused by the ebb and flow of China exports.
The ups and downs at Mountain Pass have long been tied to China's rare earth sector. This Southern California mine rose as the dominant supplier of rare earths in the 1960s, a position the mine held until China decided to control the sector. Unable to compete with a country with lower labor costs and environmental standards, Mountain Pass was shuttered in 2002.
Championed as the company that would reopen Mountain Pass and provide America with a domestic alternative to China for rare earths, Molycorp stock rocketed from around US$10 per share in 2009 to US$74 a share one year later. By 2015, however, the American rare earth miner's stock had plummeted to less than US10 cents per share, and the company was forced to file for Chapter 11 Bankruptcy.
The rise and fall of Molycorp was a common theme for REE-focused companies around the globe. Whether by providence or design, this provided China with an opportunity to acquire distressed rare earth assets outside of its borders.
A state-owned Chinese mining company even made a bid to buy a controlling interest in Lynas Corp., which mines rare earths in Australia and operates one of the only REE processing facilities outside of China. Australia's Foreign Investment Review Board, however, stepped in and stopped the deal, citing concerns that the purchase could result in restricted supplies to non-Chinese buyers.
China-based Shenghe Resources Holding Co. did manage to nab a minority holding in MP Materials, a company that arose from the ashes of Molycorp and reopened the Mountain Pass mine in 2017.
While the 2010 rare earths strategy is likely not the only play in China's book, it was effective and could prove to be tough to defend when it comes to establishing gallium and germanium supply chains outside of the Middle Kingdom.
What makes gallium and germanium powerful pawns in China's technology chess match with the U.S.? The answer lies in the technologies this pair of superior semiconductor metals enable.
Gallium, for example, is the primary ingredient in gallium arsenide and gallium nitride semiconductors vital to the digital age.
"The development of gallium arsenide as a direct band-gap semiconductor in the 1960s led to what are now some of the most well-known uses of gallium – in feature-rich, application-intensive, third- and fourth-generation smartphones and in data-centric networks," USGS penned in a report on critical minerals and metals.
As a superior semiconductor, Gallium nitride is increasingly being used for the integrated circuits going into faster and more reliable telecommunications devices, servers, laptop adapters, and even onboard chargers for electric vehicles.
"GaN offers higher power density, more reliable operation and improved efficiency over traditional silicon-only based solutions," Texas Instruments wrote about its portfolio of integrated circuits using gallium nitride power transistor technology.
The advent of 5G-capable telecommunication networks is pushing demand for this silvery tech metal that liquefies in the palm of your hand even higher.
"Owing to their large power-handling capabilities, high-switching frequencies, and higher voltage capabilities, GaN-based products, which historically have been used in defense applications, are used in fifth-generation (5G) networks, cable television transmission, commercial wireless infrastructure, power electronics, and satellite markets," USGS wrote.
While germanium has powerful semiconductor properties similar to gallium, this critical metal's superior optical qualities – transparency to the infrared electromagnetic spectrum, ability to be formed into glass, exceptionally high refractive index, and low chromatic dispersion – are what drive the highest demand for this metalloid.
"The major use of germanium worldwide is for fiber-optic systems, whereby germanium is added to the pure silica glass core of fiber-optic cables to increase their refractive index, minimizing signal loss over long distances," USGS inked in a germanium fact sheet.
The International Energy Agency estimates that 5 billion people will be using the Internet by 2025, a roughly 40% increase over the 3.6 billion in 2018. This increase of people streaming movies, games, and other large data files at lightning-fast speeds continues to drive the demand for more fiber-optic cables and the germanium that goes in them.
Infrared imaging devices used by the military, law enforcement agencies, and increasingly in the private sector are another major driver of demand for the optical qualities offered by germanium.
With China's hand on the gallium and germanium spigot, American tech manufacturers and the Pentagon are looking for alternatives.
Following China's July announcement, a Pentagon spokesperson said, "The (Defense) Department is proactively taking steps using Defense Production Act Title III authorities to increase domestic mining and processing of critical materials for the microelectronics and space supply chain, including gallium and germanium."
Germanium, which is already produced in the U.S. and Canada, will be the easiest to replace.
Like many of the minerals and metals deemed critical to the U.S., germanium is not mined as a primary commodity. Instead, the metalloid is recovered as a byproduct from mining zinc and other base metals.
"As a byproduct metal, the supply of germanium is heavily reliant on zinc production," according to the USGS.
Teck Resources Ltd.'s Red Dog Mine in Alaska, the second-largest producer of zinc on Earth, is also a globally significant source of germanium.
In the U.S., germanium was also recovered as a byproduct of zinc mining and refining in Tennessee, as well as recycled from industry-generated scrap at a refinery in Oklahoma.
"Based on an analysis of zinc concentrates, U.S. reserves of zinc may contain as much as 2,500 tons of germanium," USGS inked in its 2023 Mineral Commodity Summaries.
As operator of both Red Dog and Trail Operations – a refinery in southern British Columbia that processes the concentrates from Red Dog and other zinc mines – Teck is the largest germanium producer in North America.
The high-quality germanium products produced at Trail are used in fiber optic cables, high-speed computer chips, quantum computer transistors, solar cells, light-emitting diodes (LEDs), and night vision goggles, to name a few.
Nyrstar, which is owner and operator of the zinc refinery in Tennessee, announced in mid-2022 that it is investing $90 million into adding gallium and germanium recovery circuits to the operation. According to the company, the new circuits could recover as much as 40 metric tons of germanium and 30 metric tons of gallium per year.
"Nyrstar is engaging with state and federal government to secure support for the project, which would enable germanium and gallium to be produced domestically for the first time, helping to secure the US supply chain for these critical minerals for the defense, electronics and energy sectors," Nyrstar spokesperson Gytha Steenvoorden told local news outlet Clarksville Now.
Whether China's advancement of its gallium and germanium pawns is part of a full-on gambit that includes other critical mineral chess pieces that it dominates – graphite, indium, and niobium, to name a few – or is tempting the West into a trap, the move requires a response.
Kevin Klyman, a U.S.-China research analyst at Harvard's Belfer Center, believes Washington lawmakers see the move as an opening for a counter-offensive to break America's dependence on China for critical minerals.
"My read is that the US government is happy about this move," he said. "This forces suppliers to diversify their supply of gallium, germanium, and other critical minerals, and it will cause markets to reinterpret the value of mining in North America and other regions."
Tech metals dealers in Europe and the U.S. say they have plenty of stores to fill any short-term gaps in supply and the ability to produce more outside of China.
TRADIUM, a specialty metals trader based in Germany, says it "has healthy inventories of technology metals and rare earth elements stockpiled in its high-security warehouse in Frankfurt."
Gallium, germanium, indium, and platinum group elements are among the tech metals the company has in its inventory.
In the U.S., American Elements not only has healthy stores of gallium and germanium but informed the tech industry that it has the capacity to increase production of both semiconductor metals essential to missile systems, computer chips, and solar panels at its plant in Salt Lake City, Utah.
A quick web search shows that the Los Angeles-headquartered specialty metals dealer sells more than 100 different forms of both gallium and germanium alloys, nanomaterials, semiconductors, and other products.
Following China's announcement that it would be restricting exports of this pair of specialty metals, American Elements said it will "significantly expand production of gallium and germanium from its Salt Lake City plant" to ensure that it can continue to supply customers with this pair of critical metals.
Given American Elements' apparent ability to meet shortfalls, the company's CEO, Michael Silver, believes China's gallium and germanium move to be a blunder.
"U.S. domestic supply will not be impacted by this short-sighted decision of China," he said.
The Los Angeles-based dealer and manufacturer of critical mineral products says it will continue to supply its Chinese customers from its manufacturing facilities in Asia.
CORRECTION 09-14-2023: This article has been updated to correctly state 2017 as the restart for the Mountain Pass mine.