Tennessee Zinc Smelter Is at the Center of U.S.-China Trade Fight

CLARKSVILLE, Tenn.—An obscure zinc smelter in Tennessee is sitting on two minerals vital to producing chips for smartphones and radar systems, landing it in the middle of a global trade war.

The plant’s Dutch owner and local officials are looking to fund an expansion so the smelter can process the sought-after materials, germanium and gallium, which are supplied to the rest of the world primarily by China.

Beijing recently restricted exports of germanium and gallium to the U.S., setting up a potential shortage that could leave numerous industries in the lurch—and put Clarksville, the fifth-biggest city in the country’s 15th-largest state, at the center of geopolitical tensions.

Backlighting LEDs for smartphone screens and chips that handle Wi-Fi and Bluetooth are made partly of gallium. Germanium is used in critical defense and outer-space applications: NASA’s Spirit and Opportunity rovers were powered by germanium solar cells.

For now, that mineral wealth is packed into enormous burlap bags full of chunky mud glistening with flecks of unrefined metal. The goal is to have the plant’s expansion done in about two years. The effort could help protect jobs at the plant and yield a payoff for Nyrstar, the Dutch company that owns it—though it is also a risky bet that China won’t resume exports and send prices plummeting.

The U.S. is racing to catch up with China, among other countries, on rare-earth minerals and other scant resources, in response to the growing threat of natural-resource protectionism and ever-greater demand for a variety of emerging uses. The U.S. government supports such efforts, including with an Energy Department program that uses data and artificial intelligence to predict unconventional deposits of crucial resources.

Tennessee is currently the only known place in the continental U.S. where gallium and germanium can both be extracted at grades suitable for electronics manufacturing. The plan afoot at the smelter on the banks of the Cumberland River—a tangle of giant hoppers, conveyor belts, pipes and furnaces—is for an expansion upward of $190 million to extract the metals.

“It’s in our backyard and let’s utilize it,” said Jay Reedy, a Tennessee state representative who has championed the project. “Let’s not give it to another city or another country.”

The U.S. efforts over the long run may not fully pan out. The U.S., for example, has struggled to respond to China’s growing dominance in both polysilicon, a material used to make solar cells, and the broader solar-panel supply chain. U.S. polysilicon manufacturer Hemlock Semiconductor decided to scale back after China imposed tariffs on its products, including closing a $1.2 billion facility in Clarksville in 2014. Now the huge campus houses a Google data center.

“Trade wars and tariffs aren’t good for all,” said Mike Evans, a retired industrial-development executive in Clarksville who brought in the Hemlock investment, the largest the region had ever seen. He learned the company was pulling the plug while on vacation. “I couldn’t believe it.”

The latest Clarksville project is expected to add a couple dozen jobs, and new life for the zinc smelting operation. New revenue streams protect against swings in zinc prices that have closed Tennessee mines before—including in October, when Nyrstar paused production at its zinc mines in the middle of the state, after a long-term slump in zinc prices.

During the pause, the company plans to do more drilling for zinc, germanium and gallium in the mines, preparing to increase supplies to the smelter when the zinc market springs back or the germanium and gallium operation is up and running.

“If you look at the price history of zinc, there haven’t been too many times it has been very good,” said Gregory Belland, a mining technology expert at Nyrstar who oversaw the design of the complex chemical process to extract the metals. “Germanium and gallium follow a different price cycle.”

As Washington engages in an intensifying exchange of economic blows with Beijing, each side is leveraging their technical and natural resources.

China’s restriction on exports of the metals started in August. That was preceded by U.S. bans on exports to major Chinese technology companies, alongside curbs on China’s access to artificial-intelligence chips and advanced semiconductor-manufacturing equipment.

Such pressures are pushing forward a return of long-neglected industries to the American heartland, driven both by geopolitics and market forces.

Intel, Samsung and Taiwan Semiconductor Manufacturing Co. are building new chip plants in Ohio, Texas and Arizona after a decadeslong shift toward Asia. Other companies are expanding mining of lithium, critical for electric-vehicle batteries and dominated by China, in North Carolina, Arkansas and Nevada. And in Texas and Wyoming, companies are pursuing mining of rare-earth elements used in batteries and magnets.

Exxon Mobil recently started drilling for lithium in Arkansas and aims to become a major U.S. supplier for makers of EV batteries by 2030. Exxon purchased drilling rights on 120,000 acres in southwest Arkansas earlier this year as it positions itself for an expected increase in electric vehicles.

Elsewhere in Tennessee, a company called IperionX wants to mine titanium to supply the U.S. defense industry, which today largely gets the metal from Japan. Those reserves, built up on the foothills of the Appalachians, are some of the largest in North America and are completely untapped.

“It’s the Saudi Arabia of titanium out there in west Tennessee,” says IperionX’s Chief Executive Taso Arima, an Australian who wears an American-flag patch on the sleeve of his polo shirt and has written a children’s book about titanium called “From Tennessee to Mars.”

At the zinc smelter, Nyrstar, a subsidiary of commodities giant Trafigura, hopes to make about 40 tons of gallium and 30 tons of germanium a year, which it reckons could fill as much as 80% of the U.S.’s needs. Today, those metals come almost entirely from China, according to the U.S. Geological Survey, a result of that country’s efforts to dominate the supply chain in recent decades that went largely unnoticed by U.S. officials.

Efforts by the U.S. government to support such projects have been brewing for years. The pandemic heightened an existing sense among many American policy makers that a hands-off, free-market strategy in the U.S. gave the upper hand to China, where government investments built up domestic industries and pushed out foreign competition with lower prices.

Three years ago, the White House singled out gallium and germanium—among other critical minerals—as vulnerabilities China might one day exploit. The Biden administration conducted its own review that reinforced the earlier conclusion, but none of the minerals highlighted had been a target of Beijing until recently.

“We could see this coming a mile away,” says Keith Krach, a former Trump administration official who helped draft the executive order. “The big thing is that a lot of these rare-earth minerals are not so rare, it’s just that China has all the processing plants and the key thing is we’ve got to build it in our country.”

Nyrstar is still looking to secure funding for its gallium and germanium project, and is asking for help from the Energy, Commerce and Defense departments, all of which have financing mechanisms for national-security critical projects.

State support is possible, too. The company pushed for funding or tax breaks last year and could only secure a resolution of support from the state legislature. But that was before China put in its restrictions.

“We didn’t get too far, but I would imagine this time around it will be a bit easier,” said Tennessee Sen. Bill Powers, who represents Clarksville in the state legislature.

Write to Asa Fitch at asa.fitch@wsj.com