The Russia-Ukraine war may be more impactful towards the semiconductor industry than previously thought by even the industry itself. According to a report from the Financial Times, prices for rare gases crucial to the semiconductor manufacturing process — such as neon, xenon, and krypton — are going through the roof, and available stocks and supplies are already proving insufficient for current demand levels.
Crucially, it's reported that around 75% of the worldwide neon supply is consumed by semiconductor manufacturing efforts. The entirety of Ukraine's output wouldn't be enough to cover the industry's needs, but it does provide a substantial portion of the neon supply. Ukraine's neon output also accounts for 90% of US imports of the noble gas.
We initially covered the potential impact of the Russia-Ukraine war last week as the conflict erupted. At the time, industry players such as Micron claimed they didn't expect much of an impact on their manufacturing processes, as they could simply change suppliers. However, Ukraine is responsible for exporting around 50% of the world's neon supply, and increasing output on prime materials such as this is a long, arduous endeavor. Extraction and refining operations can't easily or quickly add capacity. Since neon has to reach 99.99% purity levels to be useable in the semiconductor manufacturing industry, analysts at TrendForce warned that even if alternative sources are secured, product certification could take anywhere from six months to a full calendar year.
The industry supply chain is already indicating that certain neon suppliers have had their current and future capacity completely booked, and are thus incapable of bringing in new clients that may already be looking for an alternative supplier. Tsuneo Date, representative for Japanese pressurized gas dealer Daito Medical Gas, told the Financial Times that their reserves have already dried up. Japanese and Chinese suppliers represent the vast majority of the remaining 50% of worldwide neon gas production, and they have contracts with local manufacturers already, which they will naturally prioritize compared to new clients. Considering the ongoing US-China trade war (and its many chapters), it's unlikely that Chinese suppliers would prioritize US customers, leaving the country and its burgeoning semiconductor manufacturing industry in a particularly vulnerable position to neon bottlenecks.
Despite that, the Semiconductor Industry Association (SIA) has said that “the semiconductor industry has a diverse set of key materials and gases, so we do not believe there are immediate supply disruption risks related to Russia and Ukraine.” The long-term outlook, however, may not be so rosy, especially considering the semiconductor manufacturing capacity expansions being brought online in the next four years, which are estimated to increase global chip output by a third. Depending on the duration of the Russia-Ukraine conflict and its long-term impact on neon production, this could particularly spell trouble to European ambitions of increasing local semiconductor manufacturing capabilities. We have emailed SIA regarding this and other matters covered in this piece, and will update it according to the association's response.
Besides the emerging and potentially high-impact supply constraints, pricing is also an important metric that may directly impact end-users. Taking a page from history lessons, spot prices for neon gases climbed 600% back in 2014, when Russia invaded Crimea (at the time, a part of Ukraine's territory). This happened in a conflict that was much more subdued than the current full-scale invasion, leading to the possibility of even higher price disruptions — which have already increased "several-fold", according to Ke Kuang-han, a semiconductor analyst at consultancy Techcet. All of this comes in addition to the still present supply constraints being felt in many sectors of semiconductor manufacturing, from raw materials to passive components following the COVID-19 pandemic. It's part of why the Best Graphics Cards as an example remain in such short supply.
Globalized supply chains and ecosystems around industries as complex as semiconductor manufacturing are very delicate systems. It could be the case that neon supply fears won't translate to much more than increased buy orders from companies attempting to increase stockpiled materials ahead of upward price action and actual shortages. According to the Financial Times, a Deutsche Bank research note estimated that average neon stockpiles usually aim for three to four weeks of leverage in case of shortages. Even if that is the case, the medium-term impact of the increased demand would still result in increased neon prices, which would then undoubtedly lead to higher final product pricing.
The tendrils of the Russia-Ukraine war will inevitably impact the tech industry. The disruptions, as we've seen, are far-reaching and extend across many sectors of the industry. The potential is there for this to be another arrow to the knee for the entire sector. It remains to be seen if it's a crippling shot, or merely a flesh wound that looks worse than it is.
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