The global semiconductor industry, already stretched, secured needed neon and palladium, but long-term risks remain
Almost two years of chip shortages have had an unexpected upside for the semiconductor industry: It is 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.
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 comes from 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, at least not in the near term, in part because the industry has reset how it operates after being whipsawed by pandemic-era demand and repeated shocks. Those have included fires at chip plants, a freeze in Texas, 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 to gain options. They stocked up on neon and other important chip-making materials, and now typically have a six-week to three-month reserve, said Mark Thirsk, the managing partner of Massachusetts-based Linx Consulting Inc., an electronic materials consultant.
Taiwan Semiconductor Manufacturing Co. TSM -2.45% , the world’s largest contract chip maker, ensured it had alternate supplies of neon after Russia amassed a force along the Ukrainian border, threatening a conflict, according to a person familiar with TSMC’s strategy. It now doesn’t anticipate supply problems, the person said.
Infineon Technologies AG IFNNY -1.12% , a large German chip maker that supplies the auto industry—which has been hit particularly hard by the chip shortage—said it didn’t expect a production impact, saying it had supply options. “Infineon has also increased its inventories of potentially affected raw materials and noble gases,” which include neon, a spokeswoman said.
The chip industry broadly says it isn’t expecting much pain. “Had this happened maybe 10 years ago, we might have been in a lot more pain than we are today,” said Jimmy Goodrich, vice president for global policy at the Semiconductor Industry Association, a Washington, D.C.-based industry body.
For chip companies, Russia’s annexation in 2014 of Crimea—a part of Ukraine—provided an early lesson in dealing with regional political uncertainty. Prices of neon rose, and chip makers moved to find sources of the gas 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 massed troops along Ukraine’s border, the White House warned chip makers that export controls and other actions would follow an invasion, according to two people familiar with the matter. The Biden 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 sales of chips and other technology to Russia’s strategic industries. While the curbs don’t require chip makers to stop all sales to Russia, many have done so, including market leaders Intel Corp. INTC -1.78% , Nvidia Corp. NVDA -2.46% and Advanced Micro Devices Inc. AMD -2.04% 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.
There is enough neon at chip makers’ facilities and within the gas supply chain to last the industry roughly six months, Mr. Thirsk of Linx Consulting estimates. After that, prices are likely to skyrocket, analysts say, much the way they did around the time Russia annexed Crimea in 2014, sending a commodity that had been trading at 25 cents a liter to $5 a liter on the spot market. Consumers of the gas with thinner profit margins—lasers used in eye surgery, for example—might be frozen out before a potential shortage spills into the more-lucrative semiconductor industry.
IPG Photonics Corp. IPGP -1.51% , 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 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.