Russian attack on Ukraine could break chip-making supply lines

Any disruption from the conflict will follow an already dwindling inventory of chips, a matter of global strategic importance that cuts across industries and is a priority for the Biden administration.

According to market-research firm Tekset CA LLC, Russia and Ukraine produce 40% to 50% of semiconductor-grade neon. Largely derived from steelmaking, neon gas is used in lasers that help in the design of semiconductors.

According to TechSat, about 37% of the world’s palladium production comes from Russian mines, and the metal is used in sensor chips and some types of computing memory. Lita Schon-Roy, chief executive of San Diego-based Tekset, said a prolonged war could cause shipping delays, drive up prices and prompt manufacturers to look for other sources of supply.

Ms Shaun-Roy said uncertainty over the supply chain for neon could also send semiconductor makers looking for sources from other countries, including China.

“China will be the next place for neon, and of course, there is a lot of geopolitical tension between the US and China,” Ms Shaun-Roy said. “This is going to be a tough nut for America to swallow”

Most small manufacturers will be affected by the disruption in the semiconductor supply chain, he added.

According to Tekset, Russia’s steelmaking plants produce raw neon, which is purified in Ukraine. Stacey Rasgon, senior analyst at Bernstein Research for AllianceBernstein Holding LP, said while other countries, including the US, have the capacity to produce neon, accelerating production could be difficult. According to Bernstein, up to 75% of the world’s supply of neon is used to make semiconductors.

Elsewhere, producing more neon could be complicated, Rasgon said, as it involves building specialized infrastructure within steel plants to extract it.

“It probably takes a long time to build and you may need to take the steel plant down for retrofitting,” he said.

A tense supply chain for neon could drive up component prices, but given how small the market is, it’s unlikely to have a huge impact on semiconductor prices, Mr. Rasgon said. He said estimates vary widely, but the size of the neon market could range up to several hundred million dollars at the high end.

ASML Holding NV, a Dutch supplier to computer chip makers, said the situation in Ukraine had no direct impact on its business.

“We only use a small amount of neon gas, and less than 20% of that small amount is sourced by our supplier from that area,” a spokesperson for the company said.

John Neufer, chief executive of the Semiconductor Industry Association, said in a statement that he does not believe there are immediate supply disruption risks related to Russia and Ukraine.

But the risk prolongs the longer the conflict, analysts said.

“Potentially pouring a significant fraction of [neon] The purging potential at risk seems somewhat ominous,” Mr Rasgon wrote in a February 14 report.

Brady Wang, associate director of semiconductors at Counterpoint Research, said the long-term impact on the neon market can only be known once the contingency stockpile is exhausted.

“The time gap between the exhaustion of stockpiles and new factories coming online is where chip makers are at risk,” he said.