War in Ukraine threatens to worsen semiconductor crisis

By Laura Pérez-Cejuela

Brussels, Jul 8 (EFE).- The Russian invasion of Ukraine threatens the supply of essential materials for the production of semiconductor chips and could aggravate the problems that the sector has experienced as a result of the pandemic, causing prices to rise or forcing delays in fabrication projects.

The tensions are in addition to those experienced over the past two years, which have led to shortages of certain products, disruptions in some industries and pushed Europe to become less dependent on Asia for the manufacturing of components that are essential for any technology.

The Russian invasion of Ukraine will disrupt above all the supply of neon, a gas essential for lithography, a process used to etch chips, and palladium, a metal used for chip packaging and other technological applications, according to several analysts.

Ukraine is responsible for 70 percent of world exports of neon, a gas that is also obtained as a by-product of steel manufacturing in Russia. Moscow accounts for 25 percent of palladium exports, 35 percent of iron and 28 percent of nickel, metals that are widely used in high-tech production and whose markets are already affected by the sanctions on Moscow.

PRICE INCREASES

Although in the short term manufacturers have stocks of these essential materials, the situation is expected to have a “strong impact” on prices and poses new risks for the sector, a Bruegel think tank analysis shows, and that in 2014 the price of neon shot up by 600 percent after Russia annexed Crimea.

In addition, the risk of a new wave of purchases triggered by panic buying due to shortages could raise the price of chips, as happened during the pandemic, although for the time being stockpiling has not occurred.

This is partly because manufacturers have given assurances to their customers that “they have enough reserves of raw materials for 4 to 6 months or even longer,” Kanishka Chauhan, a principal analyst in semiconductors and electronics at the consulting firm Gartner, told Efe.

After the Crimean crisis, “manufacturers did a great job of diversifying their raw material supplies and have maneuvered surprisingly well in this crisis.” Although some integrated manufacturers – those involved in both chip design and production – have been affected by the shortage, “this does not have a major impact on the value chain,” he said.

All in all, the consultancy believes that the start of the recovery of semiconductor supply chains has been delayed and that the situation will not return to normal until mid-2023.

The sectors that will remain affected the longest will be those that are not a priority for semiconductor manufacturers, generally low-volume buyers such as the industrial equipment sector. “If a semiconductor company has to choose between a smartphone manufacturer and an industrial manufacturer, it will choose the former,” Chauhan says.

Cell phone manufacturer Huawei, one of the world’s largest, assures, in this context, that they have no plans to develop chip production lines, but will continue to “accumulate technology through innovation.”

“Huawei is committed to working with our global industrial partners and provide high quality products and experiences to consumers, so we will continue to work on research and development of chipsets and design,” a spokesman for the Chinese multinational told Efe.

PRODUCTION DELAY

The “biggest question” that arises with the war in Ukraine “is whether the shortage of neon will create a delay in production, whether it will mean that factories have to shut down because they need to replace gas or are unable to buy some machines,” Niclas Poitiers, an analyst at Bruegel, said.

One of the risks, he added, is that the deadlines for projects planned by Europe and the United States to increase chip production, such as the construction of fabrication plants on EU territory, will be pushed back, and whether this will force them to lower their ambitions in this sector.

In the EU, these are reflected in the new European Chip Law, which envisages investments of more than 43 billion euros by 2030 to double semiconductor production, which today accounts for barely 10 percent of the world market.

In any case, the situation in Ukraine puts the focus back on the importance of the value chain and increases the pressure on governments and companies to find solutions, giving arguments to those calling for greater public intervention in this market to ensure its resilience, Poitiers told Efe. EFE

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