The semiconductor industry just can’t take a break.
After dealing with pandemic-related supply bottlenecks, chipmakers are facing a new headache: Russia, one of the world’s largest suppliers of gases used in semiconductor manufacturing, has begun restricting exports.
According to a report by Russia’s state news agency TASS, Moscow began restricting the export of noble gases, including neon, argon and helium, to “unfriendly” countries in late May.
All three gases are used to make the tiny electronic chips found in a range of consumer products from smartphones to washing machines to cars, and have been in critically short supply for months.
It is one of President Vladimir Putin’s most recent salvos against countries that have imposed a series of sanctions on Moscow in response to its attack on Ukraine. Before the war, Russia and Ukraine together accounted for about 30% of the chip industry’s supply of neon gas, according to consulting firm Bain & Company.
The export limits are coming, as are the semiconductor industry and its customers, began to shake off the worst of the supply crisis. According to LMC Automotive, car manufacturers built 10 million fewer vehicles last year due to the shortage of chips supplies were expected to improve in the second half of this year.
“Of course, what we don’t need is another chip supply drama that could hamper and perhaps stall a recovery,” said Justin Cox, director of global manufacturing at the automotive consultancy.
He told CNN Business that neon export restrictions were “worrying” but didn’t surprise chipmakers. After Russia annexed Crimea from Ukraine eight years ago, the industry braced itself for further supply disruptions from the region, he said.
Neon plays a crucial role in the manufacture of semiconductors in a process called lithography. The gas controls the wavelength of the light produced by a laser as it etches patterns onto silicon wafers form the chip.
Before the war, Russia collected raw neon as a by-product in its steel mills and then sent it to Ukraine for purification. The two countries have been leading noble gas producers since the days of the Soviet Union, when the superpower used them to build its military and space technologies, Jonas Sundqvist, a senior technology analyst at Techcet, a market research firm, told CNN Business.
The conflict has permanently damaged capacities. Intense fighting in some Ukrainian cities, including Mariupol and Odessa, two strategic port cities, has destroyed industrial sites and made it extremely difficult to export goods from the region.
“Now we have a permanent loss of some cleaning capacity in Mariupol and Odessa,” Sundqvist said.
But semiconductor manufacturers have reduced their dependence on the region since Russia invaded Crimea in 2014.
Peter Hanbury, a partner in Bain & Company’s Americas manufacturing practice, told CNN Business that chipmakers had redoubled their efforts after February’s invasion.
The industry’s reliance on Ukraine and Russia for neon has been “historically very high,” between 80% and 90%, Hanbury said. But since 2014, chipmakers have reduced that to less than a third.
“The industry has recognized the risk involved [the region] and basically started qualifying new sources, opening up new countries and specific suppliers,” he added.
It’s too early to know how Russia’s export restrictions will affect semiconductor manufacturers.
So far, the war in Ukraine hasn’t affected chip production, Hanbury said.
“I don’t think we’re going to see any impact for at least a couple of months … I think the impact that we’re seeing will probably be rather minimal,” he said.
But even if chipmakers can replace lost supplies from the region, they’ll likely end up paying a lot more for the vital gases.
It’s difficult to track the price of neon and other gases because most are traded under private long-term contracts, Sundqvist said. But Techcet estimates that neon contract prices have already quintupled since the invasion earlier this year and will remain at these high levels in the short term.
“[Russia’s export limits] will definitely impact all new contracts,” Sundqvist said.
South Korea, home of giant chipmaker Samsung (SSNLF), will feel the pain first, he added, because it relies on inert gas imports and — unlike the United States, Japan and Europe — doesn’t have big gas companies to ramp up production.
According to data from Counterpoint Research, Samsung overtook Intel (INTC) as the top-selling semiconductor manufacturer last year.
Micron Technology (MU), another of the world’s largest chipmakers, told CNN Business that it has seen noble gas prices increase but that it has “sufficient supply for the next few months” and does not expect to cut its production in the short term.
“[We] Take steps to secure additional supply for an extended period of time,” a company spokesman said.
After two years of brutal exposure to the volatility of global supply chains, countries are now trying to build up their chip manufacturing capabilities.
Intel has offered to help the US government with its plan and announced earlier this year that it would invest $20 billion in two new factories. Last year, Samsung also committed to building a $17 billion facility in Texas.
More chip manufacturing is likely to lead to higher demand for the noble gases.
With Russia threatening to limit its exports, China could be a big beneficiary. According to Sundqvist, it has the “largest, newest” production capacity.
Since 2015, the country has invested in its own semiconductor industry, including the equipment needed to separate noble gases from other industrial products. China is now a net exporter of these gases and claims to be independent, he said.
Global demand for noble gases is likely to be concentrated in China, Sundqvist added, and the country will “fetch a good price.” [its] Product.”