The people over at the State Department should have seen this coming.
After months of U.S. export restrictions on China's tech industry, China decided it was time to fire back...
The day before Independence Day, Beijing imposed export restrictions on two key products – gallium and germanium.
Most of us never think about these two metals. But they're essential to chipmaking, telecommunications, and electric vehicles. They're also important to a host of military applications, from radars to high-powered lasers.
Beijing says it will only issue export licenses for companies that report the details of their buyers and intended application of the metals. It claims its goal is to protect "national security."
This move has sent the global tech industry into a tizzy... And it's a worrying sign for the U.S. tech rally. But it's also setting up an opportunity in one overlooked part of the market.
Let me explain...
Although gallium and germanium don't occur naturally, they aren't hard to find. They can be derived from common natural elements such as zinc and coal.
The problem is that much of the world's extraction and production of both metals is dominated by one country – China.
Last year alone, China accounted for 98% of global gallium output and 68% of germanium production.
How could this be? Well, the simple explanation is that this market is too small for most companies to care about...
The gallium ore market was worth just $280 million last year, while the market for germanium was similar at just $290 million. Combined, that's hardly half a day's worth of sales for Apple (AAPL).
But China saw an opportunity to capture this small but essential niche in the global tech-manufacturing industry... a niche that nobody in the West wanted to waste time dealing with.
As a result, the U.S. imported $203 million worth of gallium wafers alone from China last year.
By cutting off access to Chinese exports of gallium and germanium, Beijing could bring production of many key tech products – including semiconductors, light-emitting diodes ("LEDs"), and infrared circuits – to a screeching halt. There's just no easy substitute or effective replacement for these two metals.
The day after Beijing announced these countermeasures, the Dutch government filed a protest with the European Union, asking that it respond to China's export controls of the two metals.
Then, the same day, news came out that the Biden administration was planning to limit Chinese companies' access to cloud-computing services provided by firms like Amazon (AMZN) and Microsoft (MSFT).
Whether this idea was already in the works or crafted at the last minute to respond to Beijing's move, it doesn't matter. The gloves are clearly coming off in the tech war between China and the U.S.
China's former Vice Minister of Commerce Wei Jianguo recently warned that these metal restrictions are only the beginning of Beijing's countermeasures. We should take that warning seriously...
For instance, China also dominates the global market for rare earth elements, which are used in just about every corner of the tech industry today. Back in 2010, China cut its exports of rare earths and prevented them from being shipped to Japan as tensions between the two countries flared.
Beijing has shown that it's willing to use export bans when it sees the need. And it's obviously seeing the need to do so now.
Unless the U.S. and its allies stop trying to contain China technologically and economically, Beijing will likely consider going even further... and restricting other key metal exports in the near future.
That's going to hurt a lot of U.S. companies in the short term – just as tech-export curbs today are hurting Chinese companies that can't get the microchips they need to make smartphones, drones, and supercomputers.
But this story comes with an important kicker...
These moves are also creating an opportunity to make money in well-placed commodity stocks. And that makes commodities an ignored area of the market that we should keep an eye on right now.
P.S. I've covered the kinds of companies set to profit from this setup in our Commodity Supercycles newsletter at Stansberry Research, along with my colleague Bill McGilton. Almost no one out there is paying attention to this trend... But if you position yourself now, the upside potential is huge. You can learn more (and hear another major story in commodities that almost no one is talking about) by clicking here.
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