China’s chip metal export curbs are ‘a wake up call’ for countries to diversify their supply chains

China’s metal export curbs on gallium and germanium could spur some countries to diversify their supply chains away from China.

“This could be a wake-up call for some [countries] to gradually build up production elsewhere,” Stewart Randall of Shanghai-based consultancy Intralink told CNBC.

“Whereas if China never did anything, most of the world would be perfectly happy to continue relying on China,” said Randall.

China’s commerce ministry announced last week that it is restricting the exports of two metals — gallium and germanium — key to the manufacturing of semiconductors starting Aug. 1, in what is seen as a warning to Europe and the U.S. in a tech war over advanced chips.

China produces 60% of the world’s germanium and 80% of gallium, based on data from the Critical Raw Materials Alliance, an industry body.

Both the Europe Commission and U.S. expressed concern about China’s planned curbs.

“China stopping the exports of the metals is actually a warning. It reminds the European countries that they need to have their own supply chains,” Brady Wang, associate director of Counterpoint Research, told CNBC.

Luisa Moreno, president of mining company Defense Metals Corp, expects China to further restrict metal exports which could include rare earths.

Rare earths are essential for high-tech consumer products like smartphones and military equipment like radar systems. Rare earths make up a group of 17 elements composed of scandium, yttrium, and the lanthanides.

“We are likely to continue to see [export restrictions] and it will likely affect other materials like rare earths, which again, China controls more than 85% of production,” Moreno said on CNBC’s “Street Signs Asia” on Tuesday.

In 2010, China halted exports of rare earths to Japan following a territorial dispute. China also threatened to stop rare earths exports to the U.S. in 2019.

“[The impact from the metals curbs] is not big in the short term, but if the Chinese imposes [curbs on other critical materials], that will be a longer-term problem,” said Counterpoint’s Wang.

“China also has to be careful because blocking exports could hurt Chinese companies as well as they would lose their foreign customers,” said Intralink’s Randall.

One supplier of the key materials said that factories are gearing up to start production for gallium. The two metals targeted in China’s upcoming curbs are not found naturally, and are instead typically created through the process of refining of other metals.

“We are getting lots of calls from our customers, there’s a lot of activity out there. And we’re engaging with the market to make sure we can secure supply,” Ross Berntson, president and chief operating officer of Indium Corporation, said on CNBC’s “Squawk Box Asia” Wednesday.

Indium supplies key materials such as gallium and germanium to global electronics and chip firms.

“There’s approximately 10 factories that could turn on production for gallium right now … and if we can get those production units turned on, we will have ample gallium in other geographies besides China,” said Berntson.

While China produces the majority of the world’s gallium and germanium, it is not the only producer.

Russia, Ukraine, Japan and South Korea also produce gallium, according to a 2021 study by the Indian government. Canada, Germany, Japan, Slovakia, and the U.S. recycle gallium from new scrap.

Meanwhile, Belgium, Germany and Russia can manufacture germanium, based on data from the U.S. Geological Survey. The U.S. can also recycle new and old scrap for germanium.

“Metals such as gallium and germanium are not unique metals. China is a major supplier of these metals and this helps to keep the price of the metals down,” said John Strand of telecomms consultancy Strand Consult.

“My perspective is that even if they crack down vigorously here, it’s really going to be more of a price impact than an overall supply impact,” Clete Willems, partner at law firm Akin Gump Strauss Hauer & Feld, said on CNBC’s “Squawk Box Asia” on Tuesday.