Explained: Why the Russian-Ukrainian Crisis Could Lead to a Shortage of Semiconductors

Supply of semiconductors, which dropped due to Covid-related disruptions, but had started to pick up again as production lines normalized, is now again threatened by the Ukrainian crisis. This is due to the supply of two key raw materials – neon and palladium – which are likely to be limited.

Why was there a shortage of semiconductors?

The trigger point was the onset of the Covid-19 pandemic and subsequent shutdowns across the globe that forced chip manufacturing facilities to close in countries including Japan, South Korea, China and the United States. United States. A key characteristic of a flea shortage is that it almost always causes cascading effects, as the first creates pent-up demand which becomes the cause of the famine that follows.

How does the Russian-Ukrainian crisis prolong this shortage?

According to a report by Moody’s Analytics, palladium and neon are two essential resources for the production of semiconductor chips. Now that Russia supplies over 40% of the world’s palladium and Ukraine produces 70% of neon, “we can expect the global chip shortage to worsen if the military conflict persists.” Based on past events, the report notes that during the invasion of Crimea in 2014-2015, neon prices increased several times, which indicates the severity of the current crisis for the semi- drivers.

How long will the semiconductor shortage last?

The answer to this question is a function of two variables – the existing stocks of these raw materials at chipmakers and how long the crisis in Ukraine lasts.

“Granted, technology has improved dramatically since 2015 and chip companies have stockpiled resources due to high demand during the pandemic, but stocks can only last for so long. If a deal is not negotiated in the coming months, expect the chip shortage to worsen and industries that rely heavily on it to be affected as well. This means significant risks lie ahead for many automakers, electronics makers, phone makers and many other industries that increasingly rely on chips to make their products work,” Moody’s Analytics noted.

According to a Reuters report, while estimates of the amount of neon chips stored vary widely, the consensus is that production could be hit if the dispute continues. “If inventory runs out by April and chipmakers don’t have orders blocked in other parts of the world, that likely means additional strain on the wider supply chain and the inability to manufacture the end product for many key customers,” CFRA analyst Angelo Zino was quoted as saying by Reuters.

Why are neon and palladium important for chip manufacturing?

Neon gas is used in the photolithography process which is the most common method for making integrated circuits. Specifically, neon gas is used in laser machines that cut integrated circuits. But for the use of neon gas in the semiconductor industry, the gas must reach a purity level of 99.99%, which makes it a rarity. More than half of semiconductor-grade neon comes from Ukrainian companies Incas and Cryoin.

Palladium is used for multiple purposes in the manufacture of semiconductors and electronics. It is used to cover electrodes that help control the flow of electricity. It is also used in the plating of microprocessors and printed circuit boards – which is an essential chip manufacturing process. Russia accounts for nearly half of the world’s palladium supply and multiple trade sanctions against Moscow threaten to limit the element’s availability.

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