© Reuters. FILE PHOTO: The flags of China and the United States are displayed on a circuit board printed with semiconductor chips, in this illustration photo taken February 17, 2023. REUTERS/Florence Lu/Illustration/File Photo
Written by Amy Love and Brenda Goh
BEIJING/SHANGHAI (Reuters) – Companies affected by China’s decision to restrict exports of two metals widely used in semiconductors and electric cars were scrambling to secure supplies on Tuesday, with some industry suppliers worried about possible restrictions on exports of rare earths.
Monday’s surprise announcement of restrictions on exports of certain gallium and germanium products, effective Aug. 1, has escalated the trade war with the United States and could cause further disruption to global supply chains.
Analysts saw that this step, which the Chinese Ministry of Commerce said was aimed at protecting national security, was a response to Washington’s escalating efforts to curb China’s technological progress. This came on the eve of US Independence Day and before US Treasury Secretary Janet Yellen’s visit to Beijing.
“China has hit US trade restrictions where they have taken a hit,” said Peter Arkell, China President of the World Mining Association.
The European Commission expressed concern, while German Economics Minister Robert Habeck said any expansion of controls over substances such as lithium would be “problematic”.
The Dutch government said the impact of the new rules would depend on how they were implemented.
A US semiconductor chip maker said on Tuesday it was applying for export permits, while a Germanium producer in China said buyers’ inquiries came as prices rose.
The aforementioned gallium eight and germanium six products are also used in other high-tech industries.
Some in the metals industry said they fear China could pursue new restrictions on rare earth exports, after curbing shipments 12 years ago in a dispute with Japan. China is the world’s largest producer of rare earths, a group of minerals used in electric vehicles and military equipment.
“Gallium and germanium are just two of the secondary metals that are very important to the technology product portfolio and China is the dominant producer of most of these metals,” Arkell said. “It is an illusion to suggest that another country can replace China in the short or even the medium term.”
China produces most of the world’s gallium and germanium.
Caixin news website, citing customs data, said that in 2022, Japan, Germany and the Netherlands were the largest importers of Chinese gallium products. She added that the largest importers of germanium products are Japan, France, Germany and the United States.
Four people familiar with the matter told Reuters that the Commerce Department will meet with major metals producers on Thursday to discuss export restrictions.
Noting the possibility of new production outside of China, Nearstar said it would look at germanium and gallium projects in Australia, Europe and the United States.
Shares in Teck Resources (NYSE: ), the largest germanium producer in North America, briefly jumped more than 1% in early trade. It was up 0.09% at 1937 GMT.
Shares in 5N Plus Inc, a Canada-based company that produces specialty semiconductors and performance materials, rose 8.9%, while Neo Performance Materials, a gallium recycler and manufacturer of gallium trichloride, rose 5.73%.
Constantine Karianopoulos, chief executive of New Performance, told Reuters it would be difficult to meet market demand without Chinese gallium supply, although alternative solutions may be possible with “appropriate industrial policy incentives”.
“This is probably the least important measure[that China could take]because it doesn’t hurt as much as other options can,” Karianopoulos said. “On the other hand, it could give a very big impetus to the governments of North America and Europe – along with high-purity gallium producers and consumers outside of China – to look more seriously at what it takes to create the discretionary supply chain.”
Export permits, worrying about unrest
U.S. wafer maker AXT (NASDAQ: Inc) said Monday that Chinese manufacturer Tongmei will seek permits to continue exporting gallium and germanium substrate products.
An Intel (NASDAQ:) spokesperson said the company is evaluating the ministry’s statement, adding, “Our strategy of having a diversified global supply chain reduces our risk for local variability and outages.”
Most of the supplies are coming from outside of China, a source at Infineon (OTC:) said. The German chipmaker produces gallium nitride semiconductors in Villach, Austria, and will soon make them at its factory in Kulim, Malaysia.
German industry group BDI said China’s move strengthens the argument for greater raw material independence.
Bernstein analysts said that while the new rules do not target specific countries, exports will be more difficult and China may refuse licenses for some sites.
They added that any rise in the prices of gallium- and germanium-based materials due to supply shortages may lead semiconductor companies to search for alternative materials.
A manager at a China-based germanium producer said he had received inquiries from buyers in Europe, Japan and the United States hoping to build stocks before Aug. 1 and expected it would take up to two months to obtain export permits.
He said domestic bids rose 2% to 10,000 yuan ($1,380) per kilogram on Tuesday, with export prices up 7% to $1,500 per kilogram.
The director, who asked not to be named citing the sensitivity of the matter, said the industry expected some export controls on these minerals, but the timing surprised.
He said that some downstream users who have long-term sales contracts “are resentful of a possible jump in raw material prices, as it raises production costs and may cause them losses.”
Taiwan and South Korea have played down the disruption caused by the restrictions.
Shares rose in some metals producers on Tuesday. Yunnan Linkang Xinyuan Germanium Industry Co. jumped 10% from the daily limit while Yunnan Zhihong Zinc Germanium Co. climbed 7%.
Australian rare earth producers also rose as investors bet more restrictions could be imposed. Shares in Lynas Rare Earths, the world’s largest producer outside of China, rose 4%.
Escalation risks
The China controls come as Washington considers new restrictions on the shipment of high-tech microchips to China, after a series of restrictions in recent years.
The United States and the Netherlands are also expected to impose further restrictions on sales of chipmaking equipment to China, as part of efforts to prevent the Chinese military from using their technology.
The last time Beijing took a retaliatory step was in May, when it banned some domestic segments from buying products from the American memory chip maker Micron (NASDAQ :).
Jefferies analysts said they see the export controls as the second biggest countermeasure to China, after the Micron ban.
“The risk of a rapid escalation of tensions between the United States and China is not insignificant,” they said.
“If this measure does not change the dynamics of the United States and China, more rare earth export controls should be expected.”
($1 = 7.2326 yuan)
