© Reuters. FILE PHOTO: Flags of China and U.S. are displayed on a printed circuit board with semiconductor chips, in this illustration picture taken February 17, 2023. REUTERS/Florence Lo/Illustration/File Photo
By Amy Lv and Brenda Goh
BEIJING/SHANGHAI (Reuters) -Companies caught out by China’s decision to restrict exports of some metals widely used in semiconductors and electric vehicles were racing to secure supplies on Tuesday as some industry suppliers worried that curbs on rare earth exports could follow.
Monday’s abrupt announcement of controls from Aug. 1 on exports of some gallium and germanium products has ramped up a trade war with the United States and could potentially cause more disruption to global supply chains.
Analysts saw the move, which the Chinese commerce ministry said was to protect national security, as a response to escalating efforts by Washington to curb China’s technological advances. It came on the eve of U.S. Independence Day and just ahead of a planned visit to Beijing by U.S. Secretary of Treasury Janet Yellen.
“China has hit the American trade restrictions where it hurts,” said Peter Arkell, chairman of the Global Mining Association of China.
The European Commission expressed concern over the move.
One U.S. semiconductor wafer manufacturer said on Tuesday it was applying for export permits to assure investors, while a China-based germanium producer said enquiries from buyers had come in overnight as prices surged.
The eight gallium and six germanium products cited are also used in other high-tech industries.
Some in the metals industry said they feared China could follow with new restrictions on rare earth exports, after curbing shipments 12 years ago in a dispute with Japan. Rare earths are a group of metals used in EVs and military equipment and China is by far the world’s biggest producer.
“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.
China produces most of the world’s gallium and germanium.
In 2022, top importers of China’s gallium products were Japan, Germany and the Netherlands, news website Caixin said, citing customs data. Top importers of germanium products were Japan, France, Germany and the United States, it said.
The commerce ministry will meet with major producers of the metals on Thursday to discuss the export restrictions, four people familiar with the matter told Reuters.
EXPORT PERMITS, DISRUPTION WORRIES
U.S. semiconductor wafer maker AXT (NASDAQ:) Inc, 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.
“We are actively pursuing the necessary permits and are working to minimize any potential disruption to our customers,” said AXT CEO Morris Young.
An Intel (NASDAQ:) spokesman said the company was still assessing the ministry’s statement.
“Our strategy of having a diverse, global supply chain minimizes our risk to local changes and interruptions,” he said.
A source at German chipmaker Infineon (OTC:) said most supplies come from outside of China. The company produces gallium nitride semiconductors in Villach, Austria and will soon make them at its factory in Kulim, Malaysia.
Germany’s BDI industry group said China’s move strengthens the argument for greater raw materials independence.
While the new rules do not target specific countries, it does make export more difficult and China could deny licenses to some locations, said Bernstein analysts.
However any rise in price of gallium- and germanium-based materials due to a lack of supply may result in semiconductor companies looking at alternative materials, they added.
A manager at a China-based germanium producer said his company had received several queries from buyers in Europe, Japan and the United States 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.
Domestic offers rose 2% to 10,000 yuan ($1,380) per kg on Tuesday, he said, with export prices up 7% to $1,500 per kg.
The industry had expected some export controls on these metals, but the timing had surprised, said the manager, who declined to be named citing the sensitivity of the matter.
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.
Taiwan and South Korea downplayed any disruption from the curbs.
Shares in some metal producers rose on Tuesday. Yunnan Lincang Xinyuan Germanium Industry Co jumped 10% by the daily upper limit while Yunnan Chihong Zinc & Germanium Co climbed 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 of China, rose 4%.
ESCALATION RISK
China’s controls come as Washington mulls new restrictions on the shipment of high-tech microchips to China, following a series of curbs in recent years.
The United States and the Netherlands are also expected to further restrict sales of chipmaking equipment to China this summer, part of efforts to prevent their technology from being used by China’s military.
Beijing last made a retaliatory move against U.S. pressure on chips in May, when it banned some domestic sectors from purchasing products from U.S. memory chipmaker Micron (NASDAQ:).
Jefferies analysts said they saw the export controls as China’s second and bigger countermeasure after the Micron ban.
“The risk of a rapid escalation of U.S.-China tension is not small,” they said.
“If this action doesn’t change the U.S.-China dynamics, more rare earth export controls should be expected.”
($1 = 7.2326 yuan)