The gas shortage triggering the world’s next supply chain crisis

It marks another route through which Putin’s war is upsetting global commodities markets, as European and US leaders grapple with how to replace supplies of Russian oil and natural gas.

“Neon is not a large component of the cost of manufacturing [semiconductors]”Says Ralph Butler at Techcet, a semiconductor advisory in California.

“But it’s a critically important part of the process. Without supply, you’re going to see fewer of those products being manufactured. ” About 540 tonnes of neon gas were used in chip-making last year, Techcet estimates.

Ukraine’s dominance in the neon gas supply chain comes through the steel mills of Ukraine, which purify oxygen for steel-making and sell on remaining industrial gases, including neon, for purification and re-sale.

In 2014, Russia’s annexation of Crimea triggered a six-fold increase in neon prices, from $ 1,000 per liter bottle to $ 6,000, according to reports at the time. Some customers started to try and diversify supplies, with producers in China and the US taking market share.

Analysts believe the latest attack has similarly pushed up prices, which had already been pushed higher by the pandemic.

Many chipmakers such as Taiwan’s TSMC, the world’s largest, are thought to have neon stockpiles to buffer supplies, but smaller companies may have been less able to protect themselves.

Analysts at investment firm CFRA have estimated the industry has up to two months of neon stockpiles. There are concerns, however, over what will happen as the conflict drags on.

“Our channel checks suggest immediate risks are low thanks to semiconductor makers holding sufficient gas inventory, but visibility is poor,” Demian Flowers, automotive financial analyst at S&P Global Mobility, said in a recent note.

Producing neon gas, particularly at the high purity needed for microchips, is a difficult, expensive process, meaning replacing Ukrainian supplies is not straightforward and could take up to two years to ramp up, experts say.

Switching between suppliers can also be expensive and difficult for chipmakers, given the highly sensitive product specifications required.

“Changing supplier requires a significant amount of evaluation time by the chip manufacturers with associated costs, and it can take six to nine months, typically, to make those types of changes,” says Butler, though he adds: “We’re not in normal times so there’s possibly some ways to expedite that process. “

While Germany’s Electro and Digital Industry Association, which represents semiconductor makers, said it doesn’t yet have any indication of neon shortages, manufacturers are braced for other potential difficulties as customers start to feel the effects of the war.

“There are semiconductor manufacturers fearing the secondary effect [of the war on Ukraine] on their customers, ”says Martin Pioch, senior manager for European affairs.

“During Covid one of the problems was the downstream industry stopped production, then the chip manufacturers switched to a different type of product, and when the downstream industry started again, there was a shortage [of chips]. “

Mercedes-Benz, General Motors and Ford are among the car companies that have been hit by the global microchip shortages over the last year.

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