Germanium and gallium are two rare industrial metals now closely tied with the global fight for leadership in green tech and semiconductors, China-U.S. relations, industrial policy, and pricing.  At issue are new export controls now in place. 

Export license requirements in China are not expected to immediately hit global output of semiconductors and related products because overly restrictive policy would also hurt the Chinese tech sector.  That said, the United States’ reaction to ongoing industrial policy can spook short-term prices and cast a shadow on long-term growth estimates. Gallium prices spiked in 2021-2022, but have reverted to the mean in 2023, with levels holding, albeit with increased volatility. The market is well supplied. Buyers have been locking in shipments, given typically lean inventory stocks and small production volumes. 

Action and Reaction

Effective August 1, companies outside of China require an export license from the Chinese Ministry of Commerce to secure supplies of germanium and gallium. Chinese authorities cite national security interests. In a broader context, this represents a single shot over the bow in a global rivalry for dominance in future-tech including AI, semiconductors, electrification, and green energy. 

China is critical to global supply chains for these raw materials. The U.S. is dependent on China for green-transition industries, solar panels, electric vehicles, wind turbines, and similar consumer and industrial technologies. These materials are produced elsewhere; however, China has aggressively invested over decades in mining and processing a broad spectrum of industrial materials including rare earth elements. China produces 60% of the world’s germanium and 80% of the world’s gallium. New supplies in the U.S. are unlikely to come online soon, as government policy is not currently supportive of new mining and processing leases and permits.

Strategic Pricing Issues

Speed and agility around rapidly changing cost environments and governmental policy (e.g., tariffs and similar) have an outsized impact on cost, price, and margin. Three key strategies should be top of mind as C-suite executives look to navigate the next two to three years.

Mitigate Commodity Price Risk 

During the post-COVID inflationary period, companies increased price changes from one or two per year to quarterly, monthly, or even more frequently. Not all industry sectors can support real-time pricing. Regardless, manufacturers need to increase speed, agility, and flexibility when it comes to predicting, allocating, and effectively executing price and cost changes per customer or sales channel.

Optimize Inventories and De-Risk

Moving from a just-in-time inventory model to one that is more optimized for the twists and turns of geopolitics takes work. Companies can no longer just rely on historical data. Optimization models need to take into account other key attributes, and factor in business rules in the same process. Additional de-risking steps should occur in order to remove the margin impact of volatility, by accounting for commodity market strategies that lock in baseline margin expectations and transfer or at minimum share risk.

Prioritize Supply Certainty and Diversification

Contracts can fail when force majeure events occur due to weather, war, or politics. Companies should put a priority on being at the top of the list in cases when supplies are no longer adequate. At the same time, product engineering and procurement should work in collaboration to diversify suppliers, and establish alternate paths to production, including alternative engineering specifications to minimize risk.

The Larger Picture

The larger story here is around supply chain disruption and trade policy. The U.S. does not want to ship certain semiconductors to China, and is prohibiting the sale of machines that can produce the high-powered chips that are needed for AI-computing and other next generation applications. China has long established a policy of investing in material production to become the primary player globally for materials and components in strategic technologies.

Short-term, this could help manufacturers in India and other locations outside the U.S. The main impact is likely to encourage the U.S. and other western countries and companies to re-shore critical manufacturing to the U.S. or more friendly countries. It will also encourage new exploration and mining for materials. 

The world is likely to become, or is already now, multi-polar. This means different spheres of influence will compete on trade and industrial policy as well as national security. There will be a good deal of volatility created, which is likely to have major implications for high-tech manufacturers and strategic pricing policies.

Companies need to prepare for the fact that uncertainty combined with high demand will result in volatility in the short run and beyond.

Take Action to Mitigate Risk of Margin Compression

• Mitigate commodity price risk by putting into place tools and processes that can support more agility and flexibility around frequency and allocation of price increases.
• Optimize inventories and consider pricing strategies that de-risk commodity impacts to margin.
• Prioritize certainty of supply in pricing policies and actively investigate alternative sources and alternative product configurations that limit single-thread exposure to margin compression.

The bottom line is that companies need to limit single-thread exposure to margin compression. Increased speed, ability, and flexibility are baseline requirements. Advanced strategies around procurement, engineering, and optimized pricing together form the core elements capable of weathering this and the next geopolitical storm.

Garth Hoff is director, industry strategy at Pricefx