Global Chip Manufacturers in Crisis as China Tightens Grip on Vital Mineral Exports

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In August, China's export of two crucial minerals necessary for semiconductor manufacturing dropped to zero. This decline followed Beijing's restriction on overseas sales, citing reasons of national security.

China, responsible for approximately 80% of global gallium production and 60% of germanium production, did not make any international sales of these elements in the previous month, as per Chinese customs data released on Wednesday. In July, the country exported 5.15 metric tons of fabricated gallium products and 8.1 metric tons of fabricated germanium products. In response to inquiries regarding this lack of exports, He Yadong, a spokesperson for the Chinese commerce ministry, stated during a press briefing on Thursday that the department had received export applications for these materials. He mentioned that some applications had been approved but provided no further details.

China's curbs reflect their clear readiness to retaliate against US export controls, disregarding concerns over economic growth in the midst of an ongoing tech war. With a simmering conflict in the technology sector, the second-largest global economy is already facing challenges related to low domestic demand and a housing crisis. In the previous month, China experienced its largest decline in exports in over three years, further exacerbating its struggling recovery.

Restricting exports is a risky strategy that could harm the Chinese economy and hasten the relocation of supply chains from the country, according to analysts.

Although China dominates the industry in producing these two elements, there are other producers and viable substitutes for both materials, as highlighted in a July research report by analysts from Eurasia Group.

A researcher at China's Zhejiang University Hangzhou International Science and Innovation Center looks at gallium oxide wafers on May 30, 2022.

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The impact of the collapse in exports is already being felt at home. Prices for gallium have fallen in China, as export controls caused inventories to pile up.

According to the Shanghai Metal Market, the spot price of gallium experienced a significant decrease of almost 20% since early July, currently standing at 1,900 yuan ($260) per metric ton. In contrast, the spot price of germanium has slightly risen due to limited supply, reaching 10,050 yuan ($1,376) per metric ton on Thursday.

Permission needed

Beijing announced in July that export controls would be imposed on the two elements. These elements are crucial components in numerous products such as computer chips and solar panels. The purpose of these controls is to safeguard the national security and interests of the country.

Beginning August 1st, exporters must obtain special permission to transport them abroad, fueling a technological conflict with the United States regarding access to crucial chip manufacturing expertise. This development impacts various industries, such as smartphones, self-driving vehicles, and weapons production.

Employees operate machines at a dust-free workshop of a semiconductor factory on March 1, 2023 in Siyang County, Suqian City, Jiangsu Province of China.

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China just played a trump card in the chip war. Are more export curbs coming?

In October of last year, the Biden administration introduced export controls that prohibited Chinese companies from purchasing advanced chips and chip-making equipment unless they obtained a license. However, in order for the campaign led by Washington to achieve its objectives, the involvement of other countries was necessary. Earlier this year, Japan and the Netherlands joined forces in this endeavor, resulting in additional restrictions on chipmaking exports to China.

Beijing retaliated in April by initiating a cybersecurity investigation into Micron, a US chipmaker, which was subsequently prohibited from selling to Chinese companies involved in crucial infrastructure projects. Following the recent release of Huawei's Mate 60 Pro smartphone, the tech industry was taken aback, potentially resulting in further restrictions on chips by Washington.

Despite US sanctions aimed at cutting the Chinese tech giant off from advanced chip technology, the model is equipped with a powerful chip. The launch of the Mate 60 Pro has increased political pressure on the United States to further sanction Huawei and Semiconductor Manufacturing International Corp. (SMIC), the Chinese chipmaker suspected to be responsible for producing the semiconductor, as mentioned in a research note by Jefferies analysts on Monday.

"We expect Biden to focus on tightening the [chips] ban against China in the fourth quarter," they added.