Ukraine crisis brings fresh wave of uncertainty to semiconductor industry

The market is apprehensive the Ukraine crisis will result in shortages of key raw materials, eventually affecting the semiconductor supply chain. Besides, financial sanctions have blocked Russia‘s foreign trade and major semiconductor foundries have stopped shipping to Russian customers. All this has created new uncertainties for the hard-won recovery of semiconductor trade. The result and the extent of this non-economic event are unpredictable. But it has already started affecting the supply chain. In the following lines, we will provide a quick analysis of potential supply disruptions in the semiconductor industry based on the current status.

Some raw materials exported from Russia and Ukraine, such as rare gas neon, chemical C4F6 and metals palladium, nickel, platinum, rhodium and titanium, are critical for semiconductor manufacturing.

A neon gas mixture is commonly utilized as a light source in the ArF and KrF excimer lasers for lithography. The chemical C4F6 is used in the etching stage. Since the semiconductor process for 3D structures needs a significant number of etching steps, the shortage of C4F6 will have a bigger impact on 3D NAND production than on foundry logic fab.

However, we should note that neon prices soared by more than 10x during the 2014 Crimean crisis in Ukraine even as the semiconductor industry cut the total usage of the gas by 20%-40% after adjusting software logic and optimizing the purging process of the gas filling procedure. Therefore, the supply chain will be impacted if the gas manufacturing facilities are destroyed during the current war. If not, we may still see rising prices, though the impact on production will remain manageable.

However, the gas and chemical produced in Russia and Ukraine are not exclusive to the region. The manufacturing sites are limited because the production involves high energy consumption and environmental pollution. But if prices rise rapidly and demand remains strong, there will undoubtedly be more players entering the market in other parts of the globe.

Palladium is used in component production, like for the substrate in PCB. However, precious metals such as palladium, platinum and rhodium are mainly used in the catalytic converters for vehicles. Titanium nitride (TiN) is a widely used material for semiconductor manufacturing as a diffusion barrier. The world’s second-largest exporter of titanium is Russia (the US is No.1). The production of lithium batteries may also face some turbulence because nickel, of which Russia is a major producer, is an important metal for these batteries

Implications:

• The short-term risk of supply shortage comes not only from wars and bans but also from trading. Trading with other nations has become extremely difficult for Russia due to its exclusion from SWIFT and worsening inflation.
• In the medium term, the lack of the aforementioned raw materials will have little influence on semiconductor producers. The situation will be managed through existing inventory and other suppliers. However, it is inevitable that prices will rise significantly.
• Larger enterprises have more purchasing power. Small and medium chipmakers and allied businesses may face increased supply pressure owing to exhausted inventories and the difficulty in connecting with new sources if the conflict continues.
• In the long run, small and medium chip producers may place multiple orders to offset this risk, resulting in the raw material supply to deteriorate.
• Rapidly rising metal (nickel and palladium) prices will represent a new impediment to the revival of the automotive market if the conflict continues.
• With geopolitical tensions now extending from Asia to Europe and from semiconductor manufacturing to raw material supply, capacity expansion and investment decisions will have to be reevaluated.
• The upstream supply chain, as well as semiconductor manufacturers, will be encouraged to go local, which implies higher costs.
• If the conflict persists, supply chain uncertainty will keep raw material inventories at higher levels for a longer length of time. Supply chain management will become more complicated as well.

CT Bureau