Chipmakers Need Russian Gas

After dealing with pandemic-related supply constraints, chipmakers now face a new challenge: Russia, one of the world’s largest suppliers of gases used in semiconductor manufacturing, has begun to curtail exports. According to the Russian state news agency TASS, Moscow began banning exports of inert, or “noble” gases such as neon, argon, and helium to “unfriendly” countries at the end of May.

All three gases are essential in the production of the tiny electronic chips found in a wide range of consumer devices, from cellphones, to washing machines, to automobiles, and have been critically scarce for months. It is one of President Vladimir Putin’s newest salvos against countries that have placed a raft of sanctions on Moscow in response to his assault on Ukraine. According to consulting firm Bain & Company, prior to the war, Russia and Ukraine accounted for roughly 30% of the chip industry’s supply of neon gas.

The export restrictions come as the semiconductor sector and its customers are beginning to recover from the worst of the supply crisis. According to LMC Automotive, carmakers constructed 10 million fewer vehicles last year due to a semiconductor shortfall, but supplies were projected to recover in the second half of this year.

It has been reported that while neon export restrictions were “concerning,” chipmakers were not caught off guard. It’s been said that the business had been ready for more supply delays from the region since Russia annexed Crimea from Ukraine eight years ago. Neon is used in the manufacture of semiconductors in a technique known as lithography. As a laser etches patterns onto the silicon wafers that make up the chip, the gas affects the wavelength of light produced.

Prior to the war, Russia acquired raw neon as a byproduct of its steelworks and shipped it to Ukraine for purification. According to Jonas Sundqvist, senior technology analyst at market research firm Techcet, the two countries have been leading manufacturers of noble gases since the days of the Soviet Union, when the superpower used them to create its military and space systems.

Capacity has been permanently harmed as a result of the conflict. Intense fighting in major Ukrainian cities, particularly Mariupol and Odessa, two strategically vital port cities, has devastated industrial facilities and made exporting products from the region extremely difficult.

However, following Russia’s invasion of Crimea in 2014, semiconductor makers have been lowering their reliance on the region. According to Peter Hanbury, a partner in Bain & Company’s manufacturing practice for the Americas, chip producers have increased their efforts in the aftermath of the February invasion.

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According to Hanbury, the industry’s reliance on Ukraine and Russia for neon was “historically very high,” ranging between 80 and 90 percent. However, chipmakers have reduced this to less than one-third since 2014.

Prior to the war, Russia acquired raw neon as a byproduct of its steelworks and shipped it to Ukraine for purification. According to Jonas Sundqvist, senior technology analyst at market research firm Techcet, the two countries have been leading manufacturers of noble gases since the days of the Soviet Union, when the superpower used them to create its military and space systems.

Capacity has been permanently harmed as a result of the conflict. Intense fighting in major Ukrainian cities, particularly Mariupol and Odessa, two strategically vital port cities, has devastated industrial facilities and made exporting products from the region extremely difficult.

However, following Russia’s invasion of Crimea in 2014, semiconductor makers have been lowering their reliance on the region. According to Peter Hanbury, a partner in Bain & Company’s manufacturing practice for the Americas, chip producers have increased their efforts in the aftermath of the February invasion. It is too early to tell how Russia’s export restrictions will affect semiconductor manufacturers.

According to Hanbury, the fighting in Ukraine has not hampered chip output so far. Even if chipmakers can replace lost supplies from the region, they will almost certainly wind up paying significantly more for the essential gases. The price of neon and other gases is difficult to track because most are exchanged under private long-term contracts, according to Sundqvist. However, Techcet forecasts that neon contract costs have already grown fivefold since the invasion early this year and will continue to rise in the foreseeable future.

South Korea, home to chipmaker Samsung (SSNLF), would bear the brunt of the hardship initially, he says, because it is reliant on imports of noble gas and, unlike the United States, Japan, and Europe, lacks large gas businesses that might ramp up output. According to Counterpoint Research data, Samsung surpassed Intel (INTC) as the largest semiconductor maker by revenue last year.

Micron Technology (MU), another of the world’s largest chip manufacturers, reported that while noble gas costs have risen, the company has “adequate supply for the next few months” and does not anticipate to decrease in output in the near future. After two years of being painfully exposed to the unpredictability of global supply chains, countries are suddenly racing to build up their chipmaking capacity.

Intel has promised to assist the US government with its plan, and earlier this year proposed a $20 billion investment in two new factories. Samsung also committed to building a $17 billion factory in Texas last year. More chip manufacturing will very certainly result in increased demand for noble gases. With Russia threatening to cut exports, China might benefit greatly. According to Sundqvist, it has the “largest, newest” production capacity.

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Since 2015, the country has invested heavily in its own semiconductor industry, including technology for separating noble gases from other industrial goods. China is currently considered  a net exporter of these gases and claims to be self-sufficient.