The war in Ukraine could worsen an already serious shortage of semiconductors as the embattled nation supplies roughly half of the neon gas used for making chips.
The two Ukranian plants that supply the gas have been shut down since Russia launched its invasion three weeks ago and it is unclear whether other sources could make up the gap.
The loss of production from the two Ukrainian companies, Ingas and Cryoin, could complicate an already serious situation. Semiconductor production has fallen well short of demand since the COVID pandemic first struck. The auto industry has been particularly hard hit, forcing sharp cuts in vehicle production that have left dealers with a severe lack of inventory.
“If stockpiles are depleted by April and chipmakers don’t have orders locked up in other regions of the world, it likely means further constraints for the broader supply chain and inability to manufacture the end-product for many key customers,” Angelo Zino, an analyst at CFRA, warned in a report on the situation.
A critical supply disrupted
Somewhere between 45% and 54% of the semiconductor-grade neon comes from Ukraine, according to an analysis by Reuters. Research firm Techset said about 540 metric tons of the gas were used by the chip industry in 2021.
Ingas alone produced as much as 20,000 cubic meters of neon each month before the Russian invasion, with 75% of that going to the chip industry. The company is based in Mariupol, one of the cities besieged by the Russian army.
Cryoin produces as much as 15,000 cubic meters every month. It is based in Odessa, which has been less hard hit by the invasion. But officials halted operations Feb. 24, Reuters reported, to keep employees safe.
Compounding a crisis
Semiconductors are crucial to modern life, playing an essential role in the operation of everything from smartphones to appliances. The typical automobile uses dozens of chips, sometimes hundreds. But supplies have been disrupted since the pandemic began, leaving automakers struggling to maintain production. Vehicle output fell as much as 10 million unit short of original forecasts, costing more than $200 billion in lost revenue last year, according to a study by AlixPartners.
The crisis has only slightly eased so far this year. Manufacturers as diverse as Toyota, General Motors and Porsche have had to trim production. Ford is one of several carmakers now deleting features on vehicles rather than delaying production due to a lack of chips.
Some semiconductor manufacturers appear to be lining up alternative supplies. That includes chip giants like Samsung, Intel and TSMC. The latter firm, based in Taiwan, is the primary supplier to Apple. The Taiwan Ministry of Economic Affairs said last week that TSMC and other chipmakers based in the country have adequate supplies of neon. But research firm Techset warned that many smaller suppliers could run short within the next month or two.
Other shortages
Other producers would need as much as a year to boost production and fill the gap in neon supplies, said Reuters.
Neon gas prices were already rising sharply ahead of the Russian invasion and have jumped as 500% since late 2021, according to industry data.
The Ukraine War and subsequent sanctions on Russia threaten to disrupt numerous commodity supplies. Russia, in particular, is a primary source for metals such as aluminum, nickel and palladium, all critical to the auto industry. It is also a major global source of petroleum and natural gas. President Joe Biden last week banned the import of Russian fossil fuels.