Why the Russia-Ukraine crisis may lead to a shortage in semiconductors

Supply of semiconductors, which plummeted as a result of Covid-related disruptions but started picking up as manufacturing chains normalised, is now being threatened once again by the Ukraine crisis. This is on account of supply of two key raw materials — neon and palladium — that are at a risk of being constrained.

Why was there a shortage in semiconductors?

The trigger point was the beginning of the Covid-19 pandemic and the subsequent lockdowns across the world that forced chip-making facilities to shut in countries like Japan, South Korea, China and the US. A key feature in a chip shortage is that it almost always causes cascading effects, given that the first one creates pent-up demand that becomes the cause for the follow-up famine.

According to a report by Moody’s Analytics, palladium and neon are two resources that are key to the production of semiconductor chips. Now that Russia supplies over 40 per cent of world’s palladium and Ukraine produces 70 per cent of neon, “we can expect the global chip shortage to worsen should the military conflict persist”. Taking from past events, the report noted that during the 2014-15 Crimea invasion, neon prices went up several times over, serving an indication of the seriousness of the current crisis for the semiconductor industry.

How long will the semiconductor shortage last?

The answer to that question is a function of two variables — the existing stockpiles of these raw materials with chip manufacturers, and the time for which the crisis in Ukraine prevails.

“Granted, technology has improved significantly since 2015 and chip-making companies have stockpiled resources owing to elevated demand during the pandemic, but inventory can only last so long. If a deal is not brokered in the coming months, expect the chip shortage to get worse and for industries highly dependent on them to be similarly affected. This means significant risks are ahead for many automakers, electronic device manufacturers, phone makers, and many other sectors that are increasingly reliant on chips for their products to work,” Moody’s Analytics noted.

According to a Reuters report, even as estimates on how much neon chipmakers have stockpiled varies widely, consensus is on the fact that production could be hit if the conflict goes on. “If stockpiles are depleted by April and chipmakers don’t have orders locked up in other regions of the world, it likely means further constraints for the broader supply chain and inability to manufacture the end-product for many key customers,” CFRA Analyst Angelo Zino was quoted as saying by Reuters.

Why are neon and palladium important for chipmaking?

Neon gas is used in the photolithography process that is the most common method for fabricating integrated circuits. Specifically, the neon gas is used in the laser machines that carve the integrated circuits. But for use of neon gas in the semiconductor industry, the gas has to reach 99.99% purity levels — which makes it a rarity. More than half of semiconductor-grade neon comes from Ukrainian companies Incas and Cryoin.

Palladium is used for multiple purposes in semiconductor and electronic manufacturing. It is used to coat electrodes that help control flow of electricity. It is also used in plating of microprocessors and printed circuit boards — which is an essential process of chip making. Russia accounts for nearly half the global supplies of palladium and the multiple trade sanctions on Moscow threaten to constrain the availability of the element.

Source: The Indian Express