The Russia-Ukraine conflict may have a more significant impact on the semiconductor business than even the industry itself anticipated. According to a Financial Times study, prices for rare gases critical to the semiconductor manufacturing process — such as neon, xenon, and krypton — are skyrocketing, and available stocks and supply are already insufficient to meet current demand levels.
Crucially, it’s been stated that semiconductor production consumes over 75% of the global neon supply. Although Ukraine’s output is insufficient to meet the industry’s needs, it does contribute a significant percentage of the neon supply. Ukraine’s neon production also accounts for 90% of the noble gas’s imports into the United States.
As the confrontation between Russia and Ukraine exploded last week, we wrote about the probable consequences. Micron, for example, indicated at the time that they didn’t expect much of an impact on their manufacturing operations because they could switch suppliers. However, Ukraine exports about half of the world’s neon supply, and expanding productivity on high-value resources like this is a long and arduous process. Capacity can’t be added easily or fast in the extraction and refining industries. Because neon must have a purity of 99.99 per cent to be used in semiconductor manufacturing, TrendForce researchers warned that product certification might take anywhere from six months to a full calendar year even if alternative sources are found.
According to the industry supply chain, certain neon providers have already had their existing and future capacity booked, rendering them unable to bring in new clients who may already be seeking an alternative source. Tsuneo Date, a spokesman for Daito Medical Gas, a Japanese pressurised gas dealer, told the Financial Times that their reserves have already run out. Suppliers from Japan and China account for the vast majority of the remaining 50% of global neon gas output. They already have contracts with local manufacturers, which they will naturally prefer over new clients. China and its booming chip manufacturing business are particularly vulnerable to neon constraints since Chinese suppliers are unlikely to prioritise US customers.
Despite this, according to the Semiconductor Sector Association (SIA), “the semiconductor industry has a wide collection of essential materials and gases, so we do not believe there are any imminent supply disruption threats associated to Russia and Ukraine.” On the other hand, the long-term forecast may not be so rosy, especially given the upcoming semiconductor manufacturing capacity increases, which are expected to raise global chip output by a third in the next four years. Depending on how long the Russia-Ukraine conflict lasts and how it affects neon production in the long run, European plans to expand local semiconductor manufacturing capabilities could be jeopardised. We’ve emailed SIA about these and other topics discussed in this article, and we’ll update it as soon as we hear back.
Pricing is a crucial factor that may directly affect end-users, in addition to the growing and possibly high-impact supply restrictions. Spot prices for neon gases soared 600 per cent in 2014, when Russia invaded Crimea, emulating history lectures. This occurred during a far more muted fight than the current full-scale invasion, raising the risk of even worse pricing disruptions — which, according to Ke Kuang-hand, a semiconductor expert at consultancy TechNet, have already increased “multiply.” All of this is on top of the ongoing supply difficulties in various areas of semiconductor manufacture, ranging from raw materials to passive components, as a result of the COVID-19 epidemic. It’s one of the reasons why, for example, the Best Graphics Cards are in such short supply.
Globalised supply chains and ecosystems in sectors as complicated as semiconductor production are highly vulnerable. It’s possible that concerns about neon supply won’t result in anything more than increased purchasing orders from corporations looking to build up stockpiles ahead of price hikes and shortages. According to the Financial Times, typical neon stockpiles aim for three to four weeks of leverage in case of needs, according to a Deutsche Bank research note. Even if such were the case, the increased demand’s medium-term impact would still result in higher neon prices, which would almost certainly translate to higher end-product pricing.
The confrontation between Russia and Ukraine will indeed influence the tech industry. As we’ve seen, the disruptions are widespread and affect many sectors. This can be another arrow to the knee for the entire industry. It’s unclear whether this is a devastating shot or only a flesh wound that appears to be more severe than it is.
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