China Restricts Exports on Two Chip Metals, Raising Supply Chain Concerns

The New Trade Controls Will Likely Prompt Companies to Identify Alternative Sourcing Methods

China’s move to restrict exports of two metals used in chipmaking and other goods poses a new threat to global supply chains, and makers of consumer electronics, solar cells, and semiconductors could see disruptions soon.

The metals — gallium and germanium — will be subject to unspecified export controls beginning August 1, China announced on July 3. The move came days before U.S. Treasury Secretary Janet Yellen’s visit to Beijing and is widely seen as an escalation in trade tensions between China and the United States.

[Read the full client alert: China announces export restrictions on two essential metals]

Aside from the making of semiconductors, gallium and germanium are key for various military applications, from night vision goggles to highly advanced communications and sensor equipment in aerospace and space platforms.

Currently, global production of the two metals is dominated by China, which is responsible for 95% of the world’s supply of gallium and home to the largest producer of germanium, Yunnan Germanium, with a 25% market share.

In the U.S., gallium is nearly 100% sourced from imports. And about half of the U.S. supply of both metals comes directly from China.

Alternate sources are possible, but challenges remain

Some organizations had already been taking steps to avoid supply chain disruption. The U.S. Defense Logistics Agency, for example, has stockpiled germanium and undertaken recycling initiatives to minimize negative impacts. It’s probable that, in the near term, expansion of recycling programs would be able to supply the consumption of germanium for at least U.S. military, if not also commercial, use.

Germanium is primarily acquired as a byproduct of zinc processing, and the U.S. has substantial zinc deposits in Alaska, Tennessee, and Washington. With existing domestic deposits and expanding processing capacity, Exiger’s research and analysis suggests that the U.S. is capable of achieving full domestic production over the long term.

Acquiring gallium from other sources will be more challenging. The restrictions from China may trigger former producers in Germany and Kazakhstan to restart commercial production, which could provide the U.S. with an estimated 15,000 tons of the metal. Gallium can also be obtained from bauxite, an ore that is the world’s main source of aluminium. Bauxite is mined in quantities matching Chinese output by countries like Australia and Guinea.

Restarting mining of gallium, or retooling and expanding capacity to produce gallium from bauxite, would each take significant time and may pose long-term supply chain challenges. China’s trade restrictions are thus likely to have a more significant impact on the global supply of gallium than germanium.

“China could be telegraphing its intent to slap export controls on additional critical minerals and raw materials,” said Tim Stone, Vice President of Exiger Government Solutions. “Given the country’s dominance in the mining and processing of critical minerals, including rare-earth elements — which are integral to electric vehicle batteries, cutting-edge weaponry, and all forms of modern consumer technology — China could throw a much bigger wrench into the global economy, depending on how the U.S. and West respond to this provocative overture.”

[See also: Expect Supply Chain Impacts from China’s Antimony Export Restrictions]

Export controls highlight need for supply chain resilience

The current tension with China underscores the need to build supply chain resilience so that your enterprise is not relying too heavily on one provider. Having access to a diversity of suppliers is a key supply chain risk management lever today, as trade wars and other geopolitical tensions cause disruptions that are increasing in severity and complexity.

This need for resilience holds true for more than just makers of semiconductors and night-vision goggles. China’s restriction on the metals adds to other trade issues with China that pose risks to many supply chains now. This includes the U.S. Uyghur Forced Labor Prevention Act (UFLPA) and Section 889 of the 2019 National Defense Authorization Act, the latter of which blocks procurement in federal contracts of telecom and surveillance equipment from five Chinese companies (or even federal contractors’ use of that equipment in certain situations).

Stone said businesses should identify where their mission-critical raw materials are sourced and formulate a contingency plan — in coordination with Tier 1 direct suppliers and sometimes vendors further upstream — for alternative sourcing in the event that geopolitics or some other factor disrupts procurement.

“Approach supply chain mapping and risk management with a COVID 19-era mentality,” he added.

He also recommended using Exiger’s Part Attribute Characterization (PAC) to identify item-level parts and materials that go into your organization’s physical products, and then DDIQ to illuminate the risks posed by suppliers of those parts and materials.

Exiger’s supply chain risk management solution helps mitigate regulatory, criminal, and reputational risk in your vendor population, reduces operational friction and cost in onboarding and refreshing vendors, and predicts operational disruption to creates a more resilient vendor ecosystem.

Contact us today to discuss how Exiger can support your organization.

This client alert was compiled by Adam Wren of Exiger Government Solutions.