Chip Shortage Fears Raised, After Ukraine Halts Neon Production

Russia’s invasion of Ukraine continues and its impact continues to be felt around the world, as well as in the technology sector.

Reuters reported that Ukraine’s two leading suppliers of neon, which produce about half the world’s supply of the key ingredient for making chips, have halted their operations.

The move has raised concern about a potential impact on semiconductor production. The world remains skittish, considering the huge supply chain disruption caused by the Coronavirus pandemic, which led to widescale chip shortages which has damaged multiple industries.

Neon production

Last month as Russia’s invasion began, large chip companies said they expected limited supply chain disruption for now from the conflict, thanks to raw material stockpiling and diversified procurement.

But the question remains why Ukraine (or indeed Russia) matters in chip production?

Both Russia and Ukraine are well known exporters of wheat for example, but what is not commonly known is that Ukraine supplies more than 90 percent of US semiconductor-grade neon.

And neon is critical for the lasers used in chipmaking.

The gas, a biproduct of steel manufacturing in Russia, is reportedly purified in Ukraine before being exported.

Meanwhile thirty-five percent of US palladium, used in sensors and memory, among other applications, is sourced from Russia. The metal is used in sensors and memory, among other applications.

Now Reuters has reported that as Moscow continues its push into Ukraine, Ukraine’s two leading suppliers of neon have halted production.

Reuters reported that the two Ukrainian companies, Ingas and Cryoin, are responsible for between 45 to 54 percent of the world’s semiconductor grade neon. It based its figures from the companies themselves and market research firm Techcet.

Global neon consumption for chip production reached about 540 metric tons last year, Techcet estimates.

Both firms have shuttered their operations, according to company representatives contacted by Reuters, as Russian troops have escalated their attacks on cities throughout Ukraine, killing civilians and destroying key infrastructure.

Chip shortage?

Estimates vary widely about the amount of neon stocks chipmakers keep on hand, production could take a hit if the conflict drags on, Angelo Zino, an analyst at CFRA was quoted as saying by Reuters.

“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,” he reportedly said.

Before the invasion, Ingas produced 15,000 to 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the United States and Germany, with about 75 percent going to the chip industry, Nikolay Avdzhy, the company’s chief commercial officer, reportedly said in an email to Reuters.

The company is based in Mariupol, which has been under siege by Russian forces.

On Wednesday, Russian forces destroyed a maternity hospital there, in what Kyiv and Western allies called a war crime.

Cryoin, which produced roughly 10,000 to 15,000 cubic meters of neon per month, and is located in Odessa, halted operations on 24 February when the attacks began to keep employees safe, business development director Larissa Bondarenko told Reuters.

Bondarenko told Reuters the company would be unable to fill orders for 13,000 cubic meter of neon in March unless the violence stopped.