[ANALYSIS] Chinese export controls on key chipmaking material will come into effect on Tuesday 1st August.

Analysis details (07:30)

OVERVIEW:

• On July 3rd, in response to Western sanctions on the Chinese semiconductor sector, Beijing announced export restrictions on gallium and germanium - essential elements for manufacturing semiconductors and other electronics, effective from August 1st.


• China's Commerce Ministry (MOFCOM) stated that these measures were implemented to protect national security and interests. As per the new guidelines, Chinese exporters of these materials will now need to seek the ministry's approval, providing information about the end-users and the intended use of the materials.


• Analysts at Rabobank clarify such export controls do not necessarily mean that China’s exports of the rare metal will be restricted, but the process to obtain gallium could become more cumbersome and would be at greater risk of being disrupted in future, should geopolitical tensions increase further.

BACKGROUND:

• 
  US: In October 2023, the US hit China with sweeping export controls on the tech sector in a bid to limit Chinese companies' access to advanced computer chips and slow their progress in artificial intelligence (AI). There were also reports in late June that the US is mulling fresh curbs on the export of computing chips for AI to China. The US also committed USD 52bln through the 2022 CHIPS and Science Act in an effort to rival China in semiconductor manufacturing. As part of this strategy, the Biden administration has allocated USD 39bln as incentives to encourage companies to establish manufacturing facilities within the US.


• 
  NETHERLANDS: Expected to go into effect on September 1st, the Dutch government at the end of June announced new restrictions on certain semiconductor equipment exports on Friday. The Dutch Trade Minister stated that these measures were undertaken for national security, given the potential military use of such equipment. While China was not specifically mentioned, the Chinese embassy in the Netherlands criticised the move as an abuse of export control measures and a violation of trade norms. The rules require manufacturers of advanced chip-making equipment to obtain a license before exporting it.


• 
  EU: The EU approved a EUR 43bln package to increase chip production and develop more fabs, with the aim to double the EU’s market share in the sector to at least 20% from 10% by 2030, according to the European Commission. Meanwhile, amid China's decision to restrict the export of gallium and germanium, key semiconductor metals, the EU is quickly urging aluminium and zinc companies to explore their production.


• 
  JAPAN: Japan’s curbs on exports of advanced chip-making equipment went into effect on July 23rd 2023. These restrictions, enacted under a modified trade ministry ordinance, encompass 23 goods critical for chip fabrication.

GALLIUM AND GERMANIUM

• 
  Gallium and Germanium are essential to various devices including smartphones, laptops, solar panels, medical equipment, and defence applications.


• 
  Germanium, resistant to cosmic radiation, is used in space technologies and enhances electron flow and thermal conductivity in semiconductors.


• 
  Gallium, predominantly used in gallium arsenide, contributes to high-performing, energy-efficient semiconductors, used in LEDs, microwave devices, and more.


• Both elements are listed as critical elements in the EU and US. In the UK, Gallium is deemed critical to manufacturing, but germanium less so.


• China controls 60% of global germanium supplies, primarily obtained as a by-product of zinc production (75%) and from coal (25%), according to Reuters.


• Roughly 80% of gallium production occurs in China, as per the CRMA, and only a limited number of companies, including one in Europe, several in Japan and China, and Canada's Neo Performance Materials, can produce gallium at the needed purity level.

31 Jul 2023 - 07:30- EquitiesResearch Sheet- Source: Newsquawk