Ukraine-Russia sector considerations: Semiconductor industry

The conflict in Ukraine has the potential to exacerbate semiconductor supply chain issues and the chip shortage that has impacted the industry for the past two years. Prior to the conflict, more than half (56 percent) of semiconductor firms believed chip shortage wouldn’t end until 2023. The most immediate risk is to the supply of specific raw materials used in semiconductor manufacturing such as neon and palladium.

While the impacts of inflation and indirect supply-chain effects appears to be manageable in the near term, the potential for longer-term impacts is yet to be determined and will likely be predicated on how events continue to unfold.

The challenges of the past two years have highlighted the importance of semiconductors in almost all aspects of life. The economic resiliency of many industries is supported by solutions powered by semiconductors, including remote connectivity, portable computing and communication infrastructure.

Russia and Ukraine are major producers of two key materials used in semiconductor manufacturing: neon and palladium. Ukraine represents about 70 to 80 percent of the global supply of neon¹, and Russia produces about 35 to 45 percent of the world’s palladium supply².

• Neon: Neon is used in the deep-ultraviolet lithography process in semiconductor manufacturing, which accounts for about 45 percent of neon demand³. Neon is a byproduct of older types of steel plants, which still exist in Ukraine but have been phased out elsewhere (which is why supply is so concentrated). Technically, neon can be recycled and reused⁴. Not all semiconductor firms have made the investment to do so, preferring to stockpile the gas — despite the warning signs seen after the 2014 Russian annexation of Crimea, when neon prices spiked by 600 percent⁵.
• Palladium: The palladium supply is less exposed to the war, but shortages could affect both semiconductor production and demand. Palladium is used in plating applications in semiconductor production and is essential for catalytic converters. Automakers that can’t produce vehicles because of catalytic converter shortages would also reduce chip orders.
• Other materials: Nickel, gold and silver are also important for semiconductor manufacturing. Russia is one of the top five global producers of nickel, but the nickel supply is less concentrated so the impact may be limited. Prices for gold and silver have also jumped. Semiconductor customers are usually on direct pass-through price agreements for such volatile commodities, so they may feel the impact more than manufacturers will.

Due to the 2014 Russian invasion of Crimea and the shortages of the past 18 to 24 months, many companies put in place risk-mitigation plans. As a result, several key companies and industry alliances have said there will be no short-term impact due to lack of materials.⁶ It’s estimated that these mitigation plans can only prevent production disruptions for two to three months. The industry still depends on the region and can’t quickly find effective alternative supply.

The semiconductor supply chain is extremely interconnected, and should tariffs and trade limitations be expanded, the complexity and cost for the industry will likely increase. Depending on how events unfold, there may be serious consequences with production line closures, price increases and decreased output, revenues and profits.

Keep a close eye as the situation evolves — but it’s important to note that the industry isn’t yet at this stage.

Short-term impacts on semiconductor production are expected to be manageable. But the war’s effects on raw material prices, supply-chain constraints and uncertainty may affect chipmakers and consumers.

If the war continues, companies should be prepared for more severe supply-chain impacts.

Companies should review their business continuity plans, look for alternative sources of neon and palladium, and use forward pricing to protect against price fluctuations on other critical materials.

In the medium term, companies should also fully understand their supply chains and customer fulfillment networks so they can model the impact of potential disruptions from the war and sanctions. In the longer term, companies might also consider making more substantial investment in neon recycling technologies.

Unless neon prices increase permanently, producing neon outside Ukraine isn’t likely to become economical. But some governments may see it as a national security option.