China squeezes key metal supplies in chip war escalation

In a chip war twist, China will restrict exports of the niche metals gallium and germanium and certain of their compounds in retaliation against US and Japan export bans on sending advanced chips and chip-making equipment to China.

Beginning August 1, Chinese chemical suppliers must apply for government licenses to export 38 products including gallium nitride (GaN) and germanium dioxide (GeO2), China’s Ministry of Commerce said in a statement on July 3.

The metals are used in chipmaking, communications equipment and various defense items. Gallium is used in compound semiconductors, which when combined with various other elements are often used to improve transmission speed and efficiency in mobile phone screens, solar panels and radars.

Germanium is used in fiberoptic communication cables, night-vision goggles and the solar cells that are used to power many satellites. US imports of gallium metal and gallium arsenide wafers in 2022 were valued at only about US$225 million, according to US trade data.

China is by far the world’s top source of both metals, accounting for 94% of gallium supply and 83% of germanium, according to a European Union study released this year.

Some analysts have already estimated the impact of China’s bans will be limited as the US and Japan can import the materials from other countries or produce them domestically, although at considerably higher costs.

Chinese commentators said China’s export controls aim at slowing the pace of development of US and Japanese chipmakers, a bid to create the time and space for Chinese players to catch up in the critical race to forge ever smaller chip sizes.

“China is always committed to keeping the global industrial and supply chains secure and stable, and has always implemented fair, reasonable and non-discriminatory export control measures,” Chinese Foreign Ministry spokesperson Mao Ning said in a media briefing on Tuesday.

“The Chinese government’s export control on relevant items in accordance with law is a common international practice, and it does not target any specific country,” she said.

As germanium prices are expected to rise, shares of Yunnan Lincang Xinyuan, a Chinese supplier of the chemical, surged 10% and triggered a suspension of trading on July 4. Shares of Chihong Zinc and Germanium increased 6.1%.

Tech war tit-for-tat

China’s metal ban came after the Dutch government said on June 30 that it will require ASML, the world’s largest chip-making equipment producer, to apply for export licenses for shipments of its DUV lithography systems, including the Twinscan NXT:2000i and subsequent immersion systems.

The requirement will commence on September 1. Twinscan NXT:2000i can make 38-nanometer chips in a single exposure. Prior to the Dutch ban, the Japanese government said in May that it will restrict the export of 23 types of chip-making equipment from July 23.

A silicon wafer is seen through a scaled lens element. Credit: ASML

US media reported last week that Washington will ban Nvidia from exporting its artificial intelligence (AI) chips, namely the A800 and H800, to China. At the end of July, Biden will sign an executive order banning US funds from investing in China’s high-tech sectors, the media reports said.

Chinese commentators are cheering the tit-for-tat move. “It is necessary for China to take effective measures to form an effective countermeasure against the US chip hegemony,” a Tianjin-based columnist wrote in a July 4 article.

He says the new export license system will allow China to identify the ultimate users and uses of its metal products in order to safeguard its national security and interests.

The columnist also opines that by manipulating the supplies and prices of these key metals, China can exert influence on the costs and profits of US and Japanese chipmakers, thus reducing their competitiveness.

He says the new export controls will also ensure a stable supply of gallium and germanium for Chinese chipmakers.

Global reserves

Among the restricted chemicals, GaN is a raw material used in the production of third-generation semiconductors used mainly in power grids, electric vehicles and telecom base stations.

GaN microwave radio-frequency chips are used in missiles, radars and electronic countermeasures designed to dupe radars through their ability to operate in high temperature and frequency environments.

In 2021, China accounted for 84% of the world’s production capacity of primary low-purity gallium, a byproduct of processing bauxite and zinc ores, the US Geological Survey (USGS) said in a research report last year.

China’s market dominance was established after Japan, South Korea and Russia cut their output after a large surplus of primary gallium flooded markets in 2012. Germany and Kazakhstan ceased primary production in 2016 and 2013, respectively, due to the high supply.

Between 2017 and 2021, the US imported 53% of its gallium from China, 11% from the United Kingdom, 9% from Germany and 7% from Ukraine, according to the USGS report. Since the US raised tariffs on Chinese goods including gallium products in 2019, it started diversifying its import sources to Canada, Japan and Singapore.

The USGS also said there are large reserves of zinc concentrates containing germanium in mines in the US states of Alaska, Tennessee and Washington. Between 2015 and 2018, the US imported 59% of its germanium from China, 22% from Belgium and 9% from Germany. Both gallium and germanium can also be recycled from scrap metal.

A gallium oxide wafer. Photo: Novel Crystal

Wang Xinxi, a Guangdong-based technology writer, said in a recent article that China’s export controls cannot completely stop targeted countries from obtaining the two chemical compounds, though it will definitely push up their prices.

He says China can produce gallium at a low cost as it has the world’s largest production capacity of aluminum oxides and gallium extraction know-how. He claims it will be very expensive for Japan and the US to follow suit.  

“In the short run, gallium and germanium prices will increase while Chinese suppliers will benefit from this trend,” Wang says. “But this is not our goal. What we want is to increase the costs and slow the development pace of the Japanese and US chip sectors.”

He said that China could next expand its export controls to include indium compounds, which are also used in semiconductor production.  

The Eurasia Group, a New York-based consulting firm, said in a research note that China’s export controls will only have a limited impact on global supplies given the targeted scope of the bans.

The report said China only wants to remind the US, Japan and the Netherlands that it has retaliatory options if they move to impose further restrictions.

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