Gallium

A lot can be done and should be - quickly

Why It Matters

Gallium is used in three main applications: Gallium Arsenide for solar panels especially space based installations, Gallium Nitride (GAN) for electronics including power electronics and Gallium Oxide for light emitting diodes (LEDs). As noted in this excellent work by CSIS, the primary military and security concern today is GAN as it pertains to power electronics. For any applications that require high current, high temperature, high voltage or all three Silicon Carbide and GAN have become the preferred technologies from EV chargers to solar inverters to radar. A good background video is here, and a very deep dive into power device comparable topology can be found here. These III-IV group¹ wide bandgap materials have largely displaced pure silicon in these applications.

While Gallium may have supply issues today using these materials can allow much more latitude in design and counterintuitively creates less pressure in other supply chains including rare earths. For example, in EVs switched reluctance motors can replace a permanent magnet motor which uses more GAN or Silicon Carbide power electronics replacing rare earth magnets containing Neodymium and Dysprosium. Companies like Conifer are already offering these motors for 1-25 horsepower applications. An insight here is that critical minerals very seldom have good substitutes in a narrow sense² but can offset one another for “jobs to be done” in the Clayton Christensen sense: you might not have a near substitute for a particular atom or molecule but another topology or design of the product can substitute out those materials for modest trade-offs. This is not always an option, and it is very much not an option in power electronics.

The most pressing and acute issue with Gallium supply right now related to radars and electronic warfare that use power electronics. Here high current and voltage capacity in GAN combined with high switching speed allows the generation of high frequencies at the high power necessary for a radar array. Silicon Carbide has its merits, but it cannot switch fast enough to generate these high frequencies for antenna arrays. Reports from credible sources like DefenseOne indicate high GAN electronics are behind recent success against UAVs by Pakistan using Chinese anti drone equipment and somewhat less credible reports note the importance of active GAN radar in China’s PL15 missile which the Pakistan military now uses. With intact missiles being recovered in India some interesting reverse engineering and analysis is no doubt going on right now. Taiwan in particular has paid attention to these developments according to an article in The Guardian.

Having China control 98% of the supply of Gallium is clearly a problem. It is acutely so now that China has restricted exports of this material putting at risk defence, semiconductor and decarbonization supply chains all at once.

How did we get here? How did the United States and its allies in particular sleepwalk into giving China a supply chain blocking stake on their most advanced weapons?

How Markets Have Failed

There are two elements to this failure: how China achieved a controlling position and why that position was not contested earlier. The most lucid explanation I found of how China came to dominate this market came from a 2014 paper by A.V. Naumov in the Russian Journal of Non-Ferrous Metals where he succinctly described China’s upstream “land and expand” strategy:

The technical and economical strategy of China, which considerably increases the production capacities for gallium despite the occurring excessive demand, deserves consideration. It seems likely that this is the partial case of manifestation of the total trade and economical politics of the government of China, which invests up to $1.5 billion into the development of branches of industry associated with high technologies, notably, alternative power engineering, the production of high-tech equipment, and power-saving and environmentally safe technologies in the period of the 12th five-year plan (2011-2015).

We can distinguish three stages in the strategic commercial politics of China. The first is support for domestic producers of raw materials through a favorable political and economic situation. The second stage is that, as the country occupies the main part of the global world production of one or another raw material, the Ministry of Trade of China starts to limit its export, decreasing the return of the value-added tax (VAT) for export, increasing the export duty, and introducing the export quotes. Finally, at the third stage, the number of export quotes starts to decrease and the tax pressure on the export of raw materials starts to increase. This will support the Chinese producers of the final product and will force other producers throughout the world to carry the production into China in order to guarantee the stable supply and sale. It seems likely that the measures taken in the gallium industry in China in recent years should be considered a preparation for the third stage.

The process can be characterized as dominating upstream supply, crushing pricing to remove competition and then using that locational nexus of supply and assorted tax and trade restrictions to wedge downstream higher value-added activities into China. China had a walking start in this as Gallium is normally recovered from Bayer Liquor from alumina refining and was an easy adjacency for China to move into having rapidly expanded its aluminium sector. Driving pricing down to ~$140 per kg from 2015 to 2019 halted or shuttered any output outside China and left China with the market and dominance in its first large scale application - blue LEDs which combined with Phosphor LEDs allowed LEDs to produce white or warmer tones of light that you can now find in hardware stores.

There was little noise around strategic problems created by LEDs because there were none. Nobody gave much thought to dominance in energy efficient lighting. In 2014 with an approximately 200 tonne global market priced at $120,000 per tonne a market of size $24mm was beneath every market analyst and policy maker as too small, too weird and not of any particular concern. Plants to recover Gallium from waste streams in Australia were shut and nobody cared.

A more persistent issue is the inherent problem of separation of function between governments and companies: companies do not care about a market of this size even if it has profound concentration and inelasticity because they are generally not in the business of geopolitics or handicapping trade shock risks. Sovereign nations that are in the business of geopolitics and that have intelligence agencies can form views on this but do not have mechanisms to intervene in most countries. Notable exceptions are Leninist systems like China or corporatist Japan which has unique resource security infrastructure between JOGMEC and explicit ministries and processes around mineral and material security. Japan’s institutional memory and history of trading houses working hand in glove with the state goes back to Japan’s efforts to secure itself economically prior to World War II about which Michael Barnhart wrote an authoritative account “Japan Prepares for Total War”. Korea has some similar features institutionally and politically.

In the interim, users of Gallium got cheap material and did not ask many questions about concentration risk because of the perceived small monetary amounts involved. That is dangerous and illusory because these materials have highly specific and almost completely inelastic demand. What is the marginal price of a material necessary to avoid $100mm fighter jets getting shot down in a conflict with the main supplier of that material? For Yttrium in thermal barriers $400 of material can block the production of a 200-300MW CCGT that costs $200-300mm. For the company making a 15% margin on that turbine you could argue the value of that material goes from $400 to several million at least when it is a binding constraint on production. The simplistic marginal analysis of the like made by Javier Blas in a recent Oddlots that these markets are small and that we should not care is facile and dangerous. These markets are small right up until they blow up and take out substantial value add downstream. If they can be kept small through supply side policy actions that are similarly low cost and manageable they should be.

What Can and Should Be Done

To solve these issues there are two problems: one physical, one financial. Firstly, economic deposits or sources of material need to be found in secure places or in a portfolio of secure-enough places so that a degree of supply security can be restored. In periods of oversupply material can be stockpiled as outlined in my previous work with Employ America and the Roosevelt Institute but we absolutely do not have that luxury today. The second problem is financial: how can governments incentivize production through cycle even when mining companies with activist shareholders would long shuttered plants? Even Japanese corporates are not immune to the likes of Elliott or other shareholder activists that look to squeeze every dollar of cash flow out of businesses, long term strategic impacts be damned.

The solution to the financial problem I have covered elsewhere as has former Deputy National Security Advisor Daleep Singh and Arnab Datta at Employ America. A strategic reserve that can write caps and floors can ensure passable worst-case economics for production of materials and stockpile excesses in “good” times of Chinese or other dumping. In bad times those reserves can be released, and the baseline level of capacity can be kept running to ensure longer term resilience. How to weigh up stockpiling versus subsidization is an interesting problem and one which I am working on but at this juncture much like a sedentary person seeking to improve their health getting moving would be a good start. The US currently has no legislative authorities or capacity to do this, but the Australian Government does plan to introduce such authorities following the Australian Labour Party’s generational election victory with plans for a strategic reserve which has been received well by domestic security thinktanks.

The physical problem of finding supply that can be brought online quickly is an easy one for Gallium. Australia is the second largest alumina producer in the world and the waste Bayer Liquor from alumina refining is a rich source of Gallium. Rio Tinto has already demonstrated a flowsheet that can do this in Canada that can be copied across to Australia in short order. Australia historically produced Gallium in the 1990s in a small facility setup by Rhone Poulenc, now part of Solvay. Securing 100 tonnes of Gallium at $250 per kg would cost $25mm per annum if it was stockpiled but more likely in the current market context it could be sold at a profit - the problem is that companies’ shareholders do not have the wherewithal to do small projects that might be dumped on by China again. A floor price would have to be offered and the government should also take a cap price to ensure the taxpayers get a return in a supply shock. This would at worst cost single digit to low double-digit millions per year - a pittance in the defence industry and should “through cycle” lead to a neutral fiscal cost or the end of Chinese adversarial dumping. Either represent a great outcome and worth the expense.

This represents an urgent need but would also likely be a source of goodwill with the United States for Australia. As trade negotiations continue and US efforts to stand up such legislation get caught behind various other initiatives on trade and a tax bill Australia can step into the breach. This would give Australia negotiating leverage on trade and particularly steel and aluminium exports. Further extracting other materials and in particular rare earths from these waste streams has an extensive literature but is yet to be seen outside China but may represent good “bolt on” efforts to initial moves in Gallium. There is no time to waste and a significant opportunity for Australia to be a good citizen in trade anti-coercion efforts along with demonstrating value to a United States whose central tenet of its foreign policy today is “what have you done for me lately?”

1. On the periodic table

2. The intractable problem of Yttrium supply for thermal barriers for turbine blades is a wicked one outlined in Thunder Said Energy here.