Following the rebound in germanium prices that began in mid-2012, there has been much discussion - and some confusion - over what has been supporting recent price levels.
At the time, raw material shortages were blamed for germanium's sudden upward tear, which moved prices for 5N metal from around USD1250 per kilogram at the start of the year to nearly USD1700 per kilogram by October.
Strategic stockpiling purchases by China's State Reserve Bureau helped raise the price bar, but in the face of falling demand from germanium metal's most reliable consumer, the infra-red (IR) optics industry, many consumers have been increasingly puzzled with each announcement of higher prices.
Manufacturers of IR and thermal imaging systems, an industry that is both highly dependent on military procurement contracts and highly exposed to germanium price volatility, have been feeling the squeeze of government spending cuts and high material costs. And, not surprisingly, this sector has been the most vocal in their frustration over high prices, leading many to lobby producers for lower prices while attempting to substitute germanium from certain lens structures.
In order to understand the confusion over germanium's recent price gains, we must first examine the relationship between the metal, the IR industry and military procurement.
In Part Two, we will look at changes in the consumption of germanium that have been re-shaping the market in order to explain the recent strength of germanium prices. First, though, let's take a brief look at the key driving forces behind the international germanium market.
Since 2008, global germanium production has grown from about 100 metric tonnes (MT) per year to roughly 120MT.
Most of this material is initially sold as germanium dioxide (GeO2), a pre-cursor to the zone-refined metal, which can be used as a catalyst in the production of polyethylene terephthalate (PET) plastic or converted to germane gas (GeH4) for the semiconductor industry. Germanium dioxide can also be converted to germanium tetrachloride (GeCl4) for use in the manufacture of fiber optic wire coatings as well as in the production of phosphors, glass colorants and other electronic compounds.
Germanium metal most often leaves refining facilities as polycrystalline ingots. The IR optics industry specializes in converting these ingots into mono-crystal germanium lenses suitable for the optical and thermal imaging systems, which 
can be found in weapon and vehicle-mounted targeting systems, thermal detectors, and other navigation and surveillance equipment.
Mono-crystal germanium also forms a substrate critical to concentrated photo-voltaic cells (CPV), which are widely used in satellite power cells, but have also gained some traction in tertiary solar energy systems.
Teck Resources (Canada) has historically been one of the largest sources of primary germanium, however, the company's output has declined in recent years. Chinese refiners now account for roughly two-thirds of total global primary production. Belgium and the USA are also sources of high purity germanium, although much of this is from recycled materials, which account for about 30 percent of all germanium produced.
The main germanium consuming industries are listed in Table 1, along with the form of the element most commonly consumed by each.
How Important is the IR Sector to Germanium Prices?
One of the most significant changes to the germanium market over the past 3 years has been the decline in demand from the IR optics industry.
Single crystal germanium is critical to both hand-held and vehicle-mounted IR optical lens and thermal imaging systems because of the element's transparency to near infrared electromagnetic radiation, as well as its high refractive index, low optical dispersion and durability. Substitution of germanium for the much cheaper silicon, meanwhile, faces technical and quality output limitations.
While efforts have been made to incorporate such optical systems into more civilian applications, so far, this has been of limited success. Military-related applications still account for roughly 90 percent of the demand for IR optics and, so, military procurement trends can provide a glimpse into demand for IR systems.
Between 2001 and 2009, global military spending rose 49 percent. Much of this was related to NATO operations in Afghanistan and the US-led invasion of Iraq. US military spending, alone, accounted for roughly 40 percent of global military spending and as much as 12 percent of the total growth in global military spending over the period.1
Because real demand and consumption of military technology, such as IR systems, is driven by active military operations, it is just a small part of total defense spending. Consequently, 
we should examine spending on active military operations in order to get an effective proxy measure of consumption trends of the IR optics and thermal imaging industry.
Given that US military spending has accounted for such a large proportion of global spending and has had the largest procurement-related budget associated with active conflict zones since 2001, and that consumption of IR systems is indelibly linked with active military procurement, then US spending on wars in Afghanistan and Iraq should reflect trends in global the IR and thermal imaging market.
Chart 1 compares US Defense Appropriations and Discretionary Spending, which is where most of the cost of these wars accumulated, with germanium prices over the period from 2001 to 2012.
While rising steadily between 2001 and 2008, procurement spending froze with the global economy and the start of US troops withdrawing from Iraq in 2009. Spending rose briefly again in 2010, followed by a rise in germanium spot prices during the second half of the year, but has been declining since. The trend down will continue in 2013.
Chart 1 shows a strong correlation between germanium prices and US spending on operations in Afghanistan and Iraq, suggesting that demand for IR optics was likely a key driver of germanium prices between 2001 and 2010.
Within the last two years, however, this correlation has broken down. It should not be surprising, then, that many related to the IR industry have been confused over the rebound in germanium prices in 2012.
For nearly a decade germanium prices rose in-line with military spending and a growing IR sector. Yet, now, in an era of sequestration and decreased military spending, prices should be falling, shouldn't they?
Continue reading: Evaluating the Influence of Military Spending on Germanium Prices - Part II
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Notes:
1. Military spending statistics from SIPRI Military Expenditure Database (2013).
Source: http://www.sipri.org/
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