Russia’s invasion of Ukraine adds pressure on chip supply chain

Russia’s invasion of Ukraine threatens to put additional pressure on chip manufacturing, as a squeeze in the supply of noble gases critical to the production process adds to pandemic-related disruptions.

Ukraine supplies about 50% of the world’s neon gas, analysts say, a byproduct of Russia’s steel industry that is purified in the former Soviet republic and is essential for chip production.

Manufacturers have already been reeling from component shortages, delivery delays and rising material costs, with companies that rely on chips, such as automakers, facing production delays as a result.

Many companies, including U.S. manufacturers Applied Materials and Intel, said the constraints will persist through 2023. Demand for raw materials is also expected to grow by more than a third over the next four years as companies such as The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Company is ramping up production, consultancy Techcet said.

“We are in big trouble. We don’t have rare gases to sell,” said Tsuneo Date, who runs Daito Medical Gas, a pressurized gas dealer north of Tokyo.

When Russia invaded Crimea in 2014, neon prices soared by at least 600%. Companies have said they can tap into reserves, but the rush to suppliers not in Eastern Europe is leading to shortages and price hikes, not only of neon but also of other industrial gases such than xenon and krypton.

Forty percent of the world’s krypton supply comes from Ukraine. The price of gas, which is used in the production of semiconductors, has risen from 200 to 300 yen ($1.73 to $2.59) per liter to nearly 1,000 yen ($8.64) per fine liter January, according to Date.

He added that prices had risen before the war due to supply chain disruptions, but said “the Russian invasion of Ukraine is making the situation worse” and that he had recently been forced to refuse new customer orders.

Companies along the supply chain developed new technologies, diversified sources of neon gas and built up reserves after the Crimea crisis, which provided some breathing room. In 2016, multinational industrial gas supplier Linde invested $250 million in a neon production plant in Texas as customers sought to diversify their supplies.

Yoshiki Koizumi, president of trade publication Gas Review, said: “The supply of neon, xenon and krypton is definitely tightening because chipmakers and trading houses are placing more orders on hope than at the moment. ‘future, they won’t be able to get as much as they want’.

Ke Kuang-han, a semiconductor analyst at consultancy Techcet, said the reaction was “immediate”, adding, “I heard that spot prices have gone up several times.”

Neon pricing is agreed under individual long-term contracts with processors and chipmakers and some of the gas is also traded on the spot market. Several chipmakers and major gas companies in Japan declined to comment on current spot prices.

Mitigation efforts have given companies some ability to manage short-term disruptions and they are hopeful the conflict will not drag on, he added.

Deutsche Bank said in a research note that inventory levels in the industry typically last about three to four weeks.

Kim Young-woo, technical analyst at SK Securities in Seoul, said that if South Korean companies such as Samsung and SK Hynix can find substitutes for certain gases, “supply shortages could be severe for krypton and neon”.

Column chart showing South Korean imports in 2021 of gas from Ukraine used for chip manufacturing

Gas mixtures including neon are used to power lasers to etch patterns into semiconductors. Getting away from Ukraine is difficult because it must be refined to 99.99% purity, a complex process that only a few companies in the world can achieve, including some based in the Ukrainian port of Odessa.

Highlighting the challenges, the White House warned semiconductor makers to diversify their supply chains after the Russian invasion. ASML, a Dutch company that makes machines used to make chips, said it was looking for sources of neon outside Ukraine.

Japanese chipmakers Renesas and Rohm said they either found supplies in other markets, such as China, or stockpiled neon.

Samsung and SK Hynix, the world’s two largest memory chip makers, “have factories in China, so they will have no trouble getting the gases needed to produce chips there,” Kim said. The companies said the war’s impact on their chip sales would be minimal in the short term.

But in a note published shortly before the invasion, TrendForce analysts warned that even if alternative sources are secure, “product certification will take several months or even more than six months”, causing a “scarcity”.

They warned that “the automotive industry, which requires large quantities of power management chips and power semiconductors, will face a new wave of material shortages.”

Akira Minamikawa of market research firm Omdia said all products using chips would be affected because only the most advanced semiconductors did not require neon in their production. “It’s not like neon is used in chips for cars but not for smartphones.”

Video: Russia’s Invasion of Ukraine: What’s Next? | FT live

Reporting by Antoni Slodkowski and Eri Sugiura in Tokyo, Song Jung-a and Edward White in Seoul and Eleanor Olcott in London

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