Almost two years of chip shortages have had an unexpected upside for the semiconductor industry (and telecom’s use of those chips): It’s better prepared to manage the turmoil caused by Russia’s invasion of Ukraine. Production of vital raw materials for chip making is concentrated in Russia and Ukraine. The countries are a major source of both neon gas, needed to feed lasers that print minute circuitry onto silicon, and the metal palladium used in later manufacturing stages, reports The Wall Street Journal.
About a quarter to a half of the world’s semiconductor-grade neon comes from Russia and Ukraine, while roughly a third of the world’s palladium is sourced in Russia, analysts and industry consultants estimate. A potential shortage of those materials has sparked concern among some analysts that an industry already struggling to meet hot demand could suffer a blow to production. Those worries might not be realized in the near term, in part because the industry has reset how it operates. It had to pivot after being whipsawed by pandemic-era demand and repeated shocks such as fires at chip plants, drought in Taiwan, other setbacks and global supply-chain disruptions.
Companies have moved to shore up supply chains amid the upheaval, in some cases adding alternative suppliers. They stocked up on neon and other important chip-making materials, and now typically have a six-week to three-month reserve, Mark Thirsk, managing partner of electronic materials consultant Linx Consulting Inc., told The WSJ.
Taiwan Semiconductor Manufacturing Co., the world’s largest chip maker, ensured it had alternate supplies of neon after Russia amassed a force along the Ukrainian border, before it launched the attack, according to a person familiar with TSMC’s strategy. It now doesn’t anticipate supply problems, the person said.
Chips Are Hard to Make
The chip industry broadly says it isn’t expecting much of an impact — yet. “Had this happened maybe 10 years ago, we might have been in a lot more pain than we are today,” said Semiconductor Industry Association VP Global Policy Jimmy Goodrich.
For chip companies, Russia’s annexation in 2014 of Crimea—a part of Ukraine—provided an early lesson in facing regional political uncertainty. Prices of neon rose, and chip makers moved to find gas sources elsewhere. During the coronavirus pandemic, companies moved to shore up critical supplies amid global logistics disruptions. Then, in early February, as Russian President Vladimir Putin amassed troops along Ukraine’s border, the White House warned chip makers that export controls and other actions would follow an invasion, according to two sources. The administration was building on the close ties established with chip companies during the semiconductor supply crisis.
U.S. sanctions on Russia landed soon after the invasion, restricting chip sales and on other technology key to Russia’s strategic industries, Inside Towers reported. While the curbs don’t require chip makers to stop all sales to Russia, many have done so, including market leaders Intel Corp., Nvidia and Advanced Micro Devices.
Russia isn’t a major market for chip-makers, analysts say. While company officials say they are well prepared, that isn’t to say an industry already stretched isn’t at risk, notes The WSJ.
There is enough neon at chip makers’ facilities and within the gas supply chain to last the industry roughly six months, estimates Thirsk. After that, prices are likely to skyrocket, analysts say, much the way they did in 2014, sending a commodity that had been trading at roughly 25 cents a liter to $5 a liter on the spot market. (Note there are 28.317 liters to one U.S. cubic foot.)
IPG Photonics Corp., a U.S.-based company that supplies optical components to industries including semiconductor manufacturing, last week said U.S. sanctions would increase lead times and shipping costs for products that involve its operations in Russia, where it has about 2,000 employees. Even if prices rose 10-fold, neon would represent a tiny fraction of the industry’s cost structure, Bernstein analyst Stacy Rasgon said in a client note. The semiconductor-grade neon industry is estimated to be worth around $100 million a year, compared with global revenues for chips of above $500 billion.
By Leslie Stimson, Inside Towers Washington Bureau Chief
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