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Beijing strikes in US-China tech spat with chip material export limits

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In this illustrative photo that was shot on February 17, 2023, the flags of both China and the United States are shown on a printed circuit board that also contains semiconductor chips. REUTERS/Florence Lo/Illustration/File Photo

In this illustrative photo that was shot on February 17, 2023, the flags of both China and the United States are shown on a printed circuit board that also contains semiconductor chips. REUTERS/Florence Lo/Illustration/File Photo

(Reuters) - BEIJING and SHANGHAI on July 4: A trade war between China and the United States has been escalated as a result of China's decision to ban the export of certain metals that are extensively used in semiconductors, electric cars, and other high-tech sectors. This decision may also create more disruption to global supply chains.

The Chinese Ministry of Commerce said on Monday that starting August 1, it will limit the exports of eight items containing gallium and six products containing germanium in order to defend national security. This action was seen by observers as a response to the intensifying attempts by the United States to slow down China's technical advancements.

Companies who were taken off guard by the sudden announcement took steps to secure supply. For example, a semiconductor wafer maker in the United States said that it was filing for export permissions in order to reassure investors, while a germanium producer headquartered in China stated that queries from customers poured in overnight as prices increased.

"China has hit the American trade restrictions where it hurts," said Peter Arkell, head of the Global Mining Association of China. "China has hit the American trade restrictions where it hurts."

Analysts from Jeffries said that the timing of the action prompted doubts about whether or not the trip that U.S. Secretary of the Treasury Janet Yellen is scheduled to take to Beijing this week would be canceled and whether or not the measure was likely geared at that trip.

After putting a halt to rare earth shipments in response to a disagreement with Japan more than a decade ago, several members of the sector have expressed their concern that China may now impose more limitations on the export of rare earths. Rare earths are a set of metals that are used in electric vehicles as well as in military equipment, and China is the leading producer of rare earths in the world.

"Gallium and germanium are just two examples of the numerous minor metals that play an essential role in the production of a wide variety of technological goods, and China is the leading producer of the majority of these metals." Arkell said that it is a pipe dream to believe that another nation could take China's position in either the short or the medium term.

The majority of the world's gallium and germanium are produced in China. According to the news website Caixin, which cited customs statistics, the top three countries that imported gallium items from China in 2022 were Japan, Germany, and the Netherlands. According to the report, the top countries that imported germanium goods were Japan, France, Germany, and the United States.

EXPORT PERMITS, DISRUPTION WORRIES

AXT Inc (AXTI.O), a manufacturer of semiconductor wafers in the United States, said on Monday that its Chinese subsidiary Tongmei will seek for permission to continue exporting gallium and germanium substrate goods from China. AXT Inc maintains production facilities in China.

"We are actively pursuing the necessary permits and are working to minimize any potential disruption to our customers," said Morris Young, chief executive officer of AXT.

A manager working for a firm in China that produces germanium said that his company had been contacted by many purchasers in Europe, Japan, and the United States who were interested in stockpiling goods before the export bans went into force. The purchasers were preparing themselves for the possibility that obtaining export permissions may take up to two months.

"Offer prices in the domestic market and the export market have increased to 10,000 yuan ($1,380) per kg and over $1,500 per kg, respectively," he said.

According to him, even though the sector had anticipated seeing some export limitations for certain metals, it was taken aback by the timing of the announcement.

"Some downstream users with long-term sales contracts are vexed about a possible jump in raw material prices," he said, "as it raises their production costs and may cause them losses." He declined to be identified noting the delicacy of the topic. "Some downstream users are vexed about a possible jump in raw material prices," he said. "It raises their production costs and may cause them losses."

However, officials from the governments of Taiwan and South Korea minimized any inconvenience that may be caused by the limits.

According to the Minister of the Economy of Taiwan, Wang Mei-hua, the effect in the near term will not be significant, but the government will pay attention to how the situation may develop in the long run.

The Ministry of Industry of South Korea issued a statement indicating that the government has enough stocks of gallium and that there were additional sources of germanium.

On Tuesday, shares of companies that manufacture metal increased in price, with Yunnan Chihong Zinc & Germanium Co (600497.SS) growing 7% and Yunnan Lincang Xinyuan Germanium Industry Co (002428.SZ) increasing by 10% by the daily upper limit.

As investors put wagers that more limits may be imposed, the share prices of Australian companies that manufacture rare earths rose as well. There was a 4% increase in the price of shares of Lynas Rare Earths (LYC.AX), which is the biggest producer of rare earths outside of China in the world.

ESCALATION RISK

These regulations are being implemented by China at the same time as the United States government is considering imposing more limitations on the export of high-tech microchips to China. These limitations would be in addition to those that have already been implemented during the past few years.

As part of the measures to stop China's military from making use of their technology, the United States and the Netherlands are planning to implement more restrictions on the sale of chipmaking equipment to China's chipmakers this summer. These new restrictions are scheduled to take effect.

The most recent act of retaliation against U.S. pressure on chips was carried out by Beijing in the month of May, when it prohibited some local industries from acquiring goods from the American memory chipmaker Micron (MU.O).

After the restriction on micron chips, analysts at Jefferies said that they considered the export curbs as China's second and more significant countermeasure.

They said, "The risk of a rapid escalation of tension between the United States and China is not a small one."

Additional restrictions on the export of rare earth elements should be anticipated if this measure does not alter the dynamic between the United States and China.

($1 = 7.2326 yuan)

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