Now that we understand the importance of the relationship between primary metal production and the extraction of minor metal by-products, we can discuss some of the effects that this relationship has on the supply of gallium.
Driven by demand for electronics, particularly flat panel displays (FPDs) and smart phones, consumption of gallium has grown by an estimated 5 to 10 percent per annum over the past ten years. Yet, over the same period, the market price for 99.99% gallium has fallen roughly 30 percent (based on current market price of USD 290/kg for 4N gallium metal).
Gallium forecasts still predict substantial demand growth over the following three to five years, as the market for FPDs continues to expand. FPDs, such as those found in smart phones and tablet computers,
While gallium use in integrated circuits has driven demand for the metal since the 1990s, it is the LED market that has spurred growing demand in recent years. Besides the use of LED technology in computers and hand-held electronics, LED lighting is also quickly replacing less energy efficient lighting options. And it is this seemingly endless appetite for smart phones and tablets, as well as fast-growing energy efficient lighting and emergent photovoltaic technologies sectors that lead many to be optimistic about future gallium demand.
As SM Report has highlighted numerous times over the past year, the drop in gallium prices during 2012 was less a result of decreased demand as it was a response to large increases in production capacity. In China, factory expansions have increased production capacity from about 150 metric tonnes (MT) to an estimated 250MT over the past two years, representing approximately a 35 percent increase in worldwide gallium production capacity.
Due to the naturally limited availability of most minor metals, rarely do we see such a significant increase in production capacity over such a short period of time.
So what allowed for this increase? And with this flood in gallium available, should consumers still be concerned with availability and supply disruptions?To answer these questions, we must turn back to aluminum.
In a recent assessment of 21 commodity investment opportunities, Morgan Stanley ranked aluminum last, citing continuing output growth at a time of high inventories and low prices.
The lack of response to market signals that normally cause a decrease in production has been largely the result of efforts by the Chinese government (China is the world's largest aluminum refiner, accounting for about 40 percent of all aluminum smelted in 2011) to keep smelters running and workers employed despite cash prices being well below marginal production cost.
Power and other subsidies have kept inefficient capacity productive and, in fact, led to output increases in 2012, adding to cumulative global aluminum inventory surpluses that have exceeded 10 million tons since 2006.
The stubborn and continued growth of aluminum production in China has also resulted in a steady supply of raw materials being made available for domestic gallium refiners. And it is this reliable supply of material that has allowed the same companies to safely invest in capacity expansions, which have increased global capacity by some 30 percent since 2009. Although gallium prices have fallen to their lowest levels since 2006, and inventories have been building since mid-2012, recent changes to the production and supply of gallium may have actually increased the possibility of supply-related issues affecting gallium prices and availability.
Three issues that gallium consumers should be consciously aware of are:
1. Increases to the geographic concentration of gallium production: As mentioned, China now produces roughly 70 percent of the world's gallium (up from about 30 percent in 2001). If we discount recycled sources, which are ultimately dependent on primary production, the level of global dependency is even greater.
Most observers would be quick to suggest that the greatest threat of supply disruptions as a result of this dependency comes from China's proclivity towards resource protectionism. But I believe non-policy induced disruptions, stemming from the geographic concentration of production, should be of equal or greater concern. Severe weather and natural disasters are just two examples of this type of threat.
Just as the 2011 Fukushima tsunami caused reverberations through the global uranium market that are still being felt, any event affecting Chalco's aluminum refining operations in Shaanxi province or Zhuhai Fangyuan's smelter in Guangdong would have a massive impact on the international gallium market.
2. Changes to primary metal production: As a result of the dependence of gallium raw materials on alumina refining, any significant changes to alumina refining will also directly impact gallium producers. At present, aluminum production is expanding, but as our brief review of the present aluminum market suggests there are many economic reasons to believe that this may change.
Although it seems unlikely that China will directly act to restrict its aluminum refining any time soon, indirect policy changes could have a similar effect. Energy policies, in particular, come to mind, as aluminum refining is an extremely energy intensive exercise and under close supervision by China's National Development and Reform Commission (NDRC). So far energy policy changes have been focused on substituting more renewable energy technology for coal, but the results in reducing pollution have been limited, as evidenced by recent spikes in pollution affecting both Beijing and Shanghai. If the central government decides, or is forced, to take more immediate action to address this issue, there will inevitably be knock on effects on energy-intensive industries.
3. Market concentration: For many years, China's industrial policies - including, but not exclusive to natural resources - have supported greater consolidation. The theory behind the government directed mergers that directly impacted the bismuth market in 2005 and the antimony and rare earth markets between 2008 and 2010, was that excessive competition amongst Chinese producers was resulting in market prices not reflective of the actual value of these metals.
In the case of gallium, the relative size of the market and limited number of producers has not warranted such direct government involvement. Yet, the government has not been completely hands-off, offering various subsidies to large gallium consumers, including LED and photovoltaic cell manufacturers; one reason why Chinese gallium consumption has grown from virtually nothing in 2000 to an estimated 30MT in 2012.
Perhaps a larger concern to consumers, however, is the threat of price collusion that exists in a more concentrated market. Although the gallium market has not exhibited any symptoms of collusion recently, price manipulation is not unknown to minor metals. With a limited number of large producers accounting for a large share of global production, and close relationships between these producers - not only between Chinese companies, but also between Chinese and non-Chinese producers - this issue should be of some concern to major consumers.
The aluminum-gallium relationship highlights the importance of the inherent dependency of by-product metals on their source metals, and how this dynamic shapes supply and availability of most minor metals. Without a strong understanding of this relationship, the predictive power of forward-looking analysis, whether looking at potential threats to supply or market prices, is severely limited.
Chart courtesy: Metal-pages.com