China raises the stake for chips in trade war with US

China’s restriction on exports of some metals used in semiconductors, electric vehicles (EVs) and hi-tech industries has stepped up a trade war with the US and could cause more disruption to global supply chains.

China’s commerce ministry said on Monday it would control exports of eight gallium products and six germanium products from August 1 to protect national security, a move analysts regard as a response to escalating efforts by the US to curb China’s technological advances.

Companies caught out by the abrupt news acted to secure supplies. One US semiconductor wafer manufacturer said it was applying for export permits to assure investors, and a China-based germanium producer said inquiries from buyers came in overnight as prices surged.

“China has hit the American trade restrictions where it hurts,” said Peter Arkell, chair of the Global Mining Association of China.

Jeffries analysts said the timing of the measure raised questions about it being possibly directed at this week’s visit to Beijing by Treasury Secretary Janet Yellen and whether Washington would cancel the trip.

Some people in the industry said they feared China could follow up with new restrictions on rare-earth exports, after curbing shipments 12 years ago in a dispute with Japan. China is by far the world’s biggest producer of the group of metals used in EVs and military equipment.

“Gallium and germanium are just a couple of the minor metals that are so important for the range of tech products and China is the dominant producer of most of these metals. It is a fantasy to suggest that another country can replace China in the short or even medium term,” Arkell said.

In 2022, top importers of China’s gallium products were Japan, Germany and the Netherlands, news website Caixin reported, citing customs data. Top importers of germanium products were Japan, France, Germany and the US, it said.

Disruption fears

US semiconductor wafer maker AXT, which has manufacturing facilities in China, said on Monday its Chinese subsidiary Tongmei would apply for permits to keep exporting gallium and germanium substrate products from China.

“We are pursuing the necessary permits and are working to minimise any potential disruption to our customers,” AXT CEO Morris Young said.

A manager at a China-based germanium producer said his company had received several queries from buyers in Europe, Japan and the US hoping to stockpile product before the export controls take effect. The buyers were anticipating it could take as long as two months to obtain export permits.

“Offer prices in the domestic market and the export market have increased to 10,000 yuan ($1,400) a kilogram and more than $1,500/kg,” he said.

While the industry had expected to see some export controls for these metals, the timing had caught it by surprise, he added.

Some downstream users with long-term sales contracts “are vexed about a possible jump in raw material prices, as it raises their production costs and may cause them losses”, he said, declining to be identified, citing the sensitivity of the matter.

Government officials in Taiwan and South Korea, however, played down any disruption from the curbs.

Taiwan economy minister Wang Mei-hua said the short-term impact would not be large, though they would be keeping a close on the situation.

South Korea’s industry ministry said in a statement the country had sufficient stockpiles of gallium, and there were other sources of germanium.

Shares in some metal producers rose on Tuesday, with Yunnan Lincang Xinyuan Germanium Industry jumping 10% — the daily upper limit — and Yunnan Chihong Zinc & Germanium climbing 7%.

Shares of Australian rare earths producers also rallied as investors placed bets that more curbs could be imposed. Shares in Lynas Rare Earths, the world’s largest producer of rare earths outside China, rose 4%.

Escalation risk

China’s controls come as Washington considers new restrictions on the shipment of hi-tech microchips to China after a series of curbs in recent years.

The US and the Netherlands are also expected to further restrict sales of chipmaking equipment to China’s chipmakers this summer, part of efforts to prevent their technology from being used by that country’s military.

Beijing last made a retaliatory move against US pressure on chips in May, when it banned some domestic sectors from buying products from US memory chipmaker Micron.

Jefferies analysts said they regard the export controls as China’s second and bigger countermeasure after the Micron ban.

“The risk of a rapid escalation of US-China tension is not small,” they said. “If this action doesn’t change the US-China dynamics, more rare earth export controls should be expected.”

Reuters