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Ukraine crisis may increase global chip woes

Ukraine crisis may increase global chip woes

Conflict between Moscow, Kyiv likely to interrupt vital world supply chains for semiconductors

The Ukraine crisis may exacerbate the global chip shortage, as Ukraine and Russia are an important part of semiconductor supply chains.

Russia produces 35 percent of palladium and Ukraine makes more than 90 percent of the world's supply of neon gas, according to estimates from consulting firm Techcet. Both materials are critical to semiconductor manufacturing.

Neon gas is used to power the lasers that etch patterns into computer chips, while palladium is used in sensors and memory, among other applications.

The Ukraine crisis comes as the semiconductor industry has already endured more than a year of a worldwide shortage of chips, which has hurt a wide range of industrial sectors, with carmakers hit particularly hard.

Companies have suffered from higher costs of materials and lengthy delivery times for equipment and materials due to the impact of the coronavirus pandemic.

The White House has warned chipmakers of a supply shortage and asked them to diversify their supply chains in case Russia retaliates against US export curbs by blocking access to key materials, Reuters reported.

If the conflict escalates, Techcet said, it's possible that neon exports from Ukraine would be affected and Russia could use its palladium exports as leverage against trade sanctions.

But big semiconductor companies said they expected limited supply chain disruption from the Ukraine crisis. Micron Technology, a memory chip maker, said in a statement that reports of potential disruption of the supply of noble gases, particularly neon, are of concern to the semiconductor industry, but it has diversified sourcing for all of its noble gases.

Intel Corp said it was not anticipating any impact to the neon supply, and South Korean chipmaker SK Hynix also said it has sufficient supplies of neon.

The Semiconductor Industry Association, representing nearly all US semiconductor companies, said that "the semiconductor industry has a diverse set of suppliers of key materials and gases, so we do not believe there are immediate supply disruption risks related to Russia and Ukraine".

Analysts said big chipmakers usually have higher levels of inventory, but small and mid-sized companies have fewer resources and they would feel the tightness of supplies.

If the Russia-Ukraine conflict drags on, chipmakers will feel the impact, and this will likely result in higher chip prices, according to a Moody's Analytics report.

Techcet estimates that demand for all these materials will rise by more than 37 percent over the next four years, based on recently announced expansion plans by Intel, Samsung and TSMC in three US states.

Industry experts warn that the shortage of semiconductors will have a ripple effect on other industries, causing a consequent increase in costs for the automotive, electronic appliance and smartphone industries, among others.

Energy prices are also expected to remain high, as the European Union relies on Russia for more than a third of its natural gas supply.

In addition, Ukraine is the world's largest exporter of wheat, and together Ukraine and Russia account for a quarter of global wheat exports. Disruptions to the global wheat supply could lead to higher food prices and threaten social stability, analysts said.

Wheat futures trading on the Chicago Board of Trade on Tuesday hit their highest levels since the global financial crisis in 2008, in response to the Ukraine crisis.

By LIA ZHU in San Francisco