Growth Dragons Weekly - Jul 2023 #1
In Growth Dragons this week:
China’s Retaliation: Restrict Gallium and Germanium Exports
Gallium and Germanium Stocks Worth Investing?
IPOs Went to Mainland China
EV Makers Pledged to End Price War
China’s Retaliation: Restrict Gallium and Germanium Exports
The minerals—gallium and germanium—and more than three dozen related metals and other materials will be subjected to export controls starting Aug. 1. To proceed with exporting these items, individuals or companies will be required to obtain approval from the government’s top body, the State Council.
This measure is regarded as a response to the United States' prohibition on exporting advanced semiconductor chips and equipment to China. As gallium and germanium are vital components in the manufacturing of specific types of chips, China aims to restrict their availability, potentially causing a negative impact on the United States' chip production that relies on these materials.
Gallium plays a crucial role in the production of semiconductors utilized in various devices such as phone chargers and electric vehicles. Specifically, gallium arsenide, a compound that includes arsenic, is highly preferred for its exceptional performance in high-performance chips. It surpasses silicon in terms of heat and moisture resistance, as well as conductivity. According to the 2023 U.S. Geological Survey on gallium, there are currently no viable alternatives available for gallium arsenide in these applications. Additionally, the U.S. military heavily relies on gallium nitride for advanced radar systems and the Patriot missile-defense system.
Germanium finds its application in the manufacturing of fiber-optic systems and solar cells.
Gallium and germanium are among the 50 minerals classified as "critical" by the U.S. Geological Survey. This classification signifies their vital importance to the economic and national security of the United States, while also acknowledging their susceptibility to supply chain disruptions.
According to the South China Morning Post, China holds the position of the largest producer of gallium and germanium globally. China's production accounts for over 95% of the world's gallium output and more than 67% of the world's germanium output.
Between 2018 and 2021, approximately 53% of the gallium imported by the United States was sourced from China.
Finding alternative supply sources for gallium and germanium is possible for the US, but it would likely result in higher costs. Additionally, the challenge lies in obtaining an adequate volume of these minerals from other locations.
The difficulty stems from the fact that gallium and germanium cannot be directly mined. Approximately 90% of gallium is produced as a byproduct of aluminum manufacturing, while germanium is a byproduct of zinc ore processing.
To illustrate, it is estimated that around 100,000 tons of aluminum production is necessary to obtain just one ton of gallium. This implies that the United States would need to construct significant aluminum and zinc processing facilities to acquire sufficient quantities of gallium and germanium. Goldman Sachs has estimated that competing with China's rare earth supply may require an investment exceeding $25 billion by Western nations.
Therefore, while alternative supply sources exist, meeting the demand for gallium and germanium would involve significant financial investments and the establishment of extensive processing plants. It is evident that China's actions are a clear tit-for-tat strategy in response to the US ban on high-end semiconductor chips and equipment.