Russia-Ukraine conflict may worsen global chip shortage

• The Russian-Ukraine war can hit the global supply chains that are already constrained due to the pandemic and the worst impact will be on ongoing chip shortage because the warring nations brutally control supplies of key raw materials that go into making semiconductors.

• Semiconductor chips are the essential building blocks of digital and digitised products. From smartphones and cars, through critical applications and infrastructures for healthcare, energy, communications and industrial automation, chips are central to the modern digital economy. 

• The COVID-19 pandemic exposed a weakness in the ecosystem within both Europe and other regions in the world experiencing significant shortages of chips.

• Recent global semiconductors shortages forced factory closures in a wide range of sectors from cars to healthcare devices. In the car sector, for example, production in some European countries decreased by one-third in 2021. This made more evident the extreme global dependency of the semiconductor value chain on a very limited number of actors in a complex geopolitical context. 

How will the Russia-Ukraine conflict impact chip production?

• According to a report, Russia controls as much as 44 per cent of global palladium supplies, Ukraine produces a significant 70 per cent of the global supply of neon — the two key raw materials that go into making chips.

• During the 2014-15 Russia-Ukraine war, neon prices went up by several times, indicating how serious this can be for the semiconductor industry.

• Ukraine’s two leading suppliers of neon, which produce about half the world’s supply of the key ingredient for making chips, have halted their operations as Russia has sharpened its attack on the country, threatening to raise prices and aggravate the semiconductor shortage.

• A major share of the world’s semiconductor-grade neon, critical for the lasers used to make chips, comes from two Ukrainian companies, Ingas and Cryoin. 

• Global neon consumption for chip production reached about 540 metric tonnes last year, estimates showed.

• The stoppage casts a cloud over the worldwide output of chips, already in short supply after the coronavirus pandemic drove up demand for cellphones, laptops and later cars, forcing some firms to scale back production.

• 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.

• Before the invasion, Ingas produced 15,000 to 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the United States and Germany, with about 75 per cent going to the chip industry. The company is based in Mariupol, which has been under siege by Russian forces. 

• Cryoin, which produced roughly 10,000 to 15,000 cubic meters of neon per month, and is located in Odessa, halted operations on February 24 when the invasion began.

• The economy ministry of Taiwan, home to the world’s largest contract chip maker TSMC, said that Taiwanese firms had already made advanced preparations and had “safety stocks” of neon, so it did not see any supply chain problems in the near term. 

Additional read:

EU outlines €43 billion plan to boost chip manufacturing

The European Commission has proposed a €43 billion plan to become a major microchip producer to try to curb its dependency on Asian markets. The EU move mirrors President Joe Biden’s $52 billion push to invest in a national chip-producing sector to make sure more production occurs in the United States.

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