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The conflict between Russia and Ukraine

Impact on the global semiconductor market

The conflict between Russia and Ukraine has far-reaching implications not only on a geopolitical scale, but also in various industries. One of the most affected sectors is the semiconductor market, which is already under pressure due to the COVID-19 pandemic and the growing demand for digital and electronic products. This article focuses on the impact of the Russia-Ukraine conflict on the semiconductor industry, key factors affecting the market and the possible future outlook.

Factors affecting the semiconductor market

Lack of raw materials

Russia and Ukraine are major producers of two key materials used in the production of semiconductors: neon and palladium. Ukraine accounts for about 70 to 80 percent of the global neon supply, while Russia produces about 35 to 45 percent of the world's palladium supply. Neon is used in the lithography process in semiconductor manufacturing, accounting for about 45 percent of neon demand. Palladium is used in plating applications in semiconductor manufacturing and is essential for catalysts. Conflict could disrupt the supply of these raw materials and put further pressure on an already tight market.

Supply chain disruption

The semiconductor industry is highly intertwined and the conflict between Russia and Ukraine may lead to disruption of supply chains. Possible trade restrictions and tariff increases could increase complexity and costs in the industry, resulting in production line closures, price increases and reductions in production, sales and profits. The COVID-19 pandemic has already caused supply chain disruptions and increased demand for digital and electronic products, leading to chip shortages.

Impact on the automobile industry

The shortage of semiconductors is already affecting the automotive industry, which is one of the most affected sectors. Continued conflict could cause further supply disruptions and limit car production, further reducing demand for chips. Automotive companies that cannot produce vehicles due to a shortage of catalysts could also reduce chip orders.

Other affected materials

In addition to neon and palladium, nickel, gold and silver are also important for semiconductor manufacturing. Russia is one of the world's top five nickel producers, but nickel supplies are less concentrated, so the impact may be limited. Gold and silver prices have also risen. Customers in the semiconductor industry typically have direct forward pricing agreements for these volatile commodities, so the impact may be felt more than by producers.

Outlook for the semiconductor market

Short-term impact

Due to the risk mitigation plans that companies have put in place following the Russian annexation of Crimea in 2014 and the shortages of the last 18 to 24 months, the short-term impact on semiconductor production is expected to be manageable. It is estimated that these plans may only prevent production disruptions for two to three months. Several key companies and industry alliances have indicated that there will be no short-term impact due to material shortages.

Long-term consequences

If the conflict continues, companies should be prepared for more serious supply chain impacts. It is important to monitor how the situation develops, as the long-term consequences depend on how events continue to unfold. If tariffs and trade restrictions are extended, complexity and costs for the industry are likely to increase. Depending on how events unfold, there may be serious consequences such as production line closures, price increases and reductions in production, sales and profits.

Potential solutions

In the long term, companies could consider investing more heavily in neon recycling technologies. Unless there is a sustained increase in neon prices, it is unlikely that neon production outside Ukraine will become economic. However, some governments may consider this an option as a national security issue. jCompanies should also fully understand their supply chains and customer order fulfillment networks to model the impact of potential disruptions caused by war and sanctions.

Measures for companies in the semiconductor industry

Review business continuity plans

Companies should review their business continuity plans and be prepared for the potential long-term consequences of conflict. They should seek alternative sources of neon and palladium outside the conflict region and use forward pricing to protect against price fluctuations for other critical materials.

Monitoring and compliance with sanctions

It is important to constantly monitor and comply with sanctions imposed on Russia and its allies. Companies should create centralised teams dedicated to overseeing the purchase of specific components, avoid a just-in-time approach and expand the use of micro-supply chains.

Summary

The conflict between Russia and Ukraine has the potential to exacerbate semiconductor supply chain issues and chip shortages that have been affecting the industry for two years. The most immediate risk is to the supply of specific raw materials used in semiconductor manufacturing, such as neon and palladium. While the short-term impacts appear manageable, the potential long-term consequences depend on how events unfold. Companies should be prepared for more severe supply chain impacts, review their business continuity plans, seek alternative sources of key materials, monitor and comply with sanctions, and consider investing in recycling technologies.

FAQ

What are the main commodities affected by the conflict between Russia and Ukraine?

The main raw materials affected by the conflict are neon and palladium. Ukraine accounts for about 70 to 80 percent of the global neon supply, while Russia produces about 35 to 45 percent of the world's palladium supply.

How long can companies prevent production disruptions through risk mitigation plans?

It is estimated that mitigation plans can prevent production disruptions for only two to three months.

What steps should companies take to prepare for possible long-term consequences?

Companies should review their business continuity plans, seek alternative sources of neon and palladium, use forward pricing to protect against price fluctuations for other critical materials, monitor and comply with penalties, and consider investing in recycling technologies.

Which industry sector is most affected by the semiconductor shortage?

One of the most affected sectors is the automotive industry, which is already facing a shortage of semiconductors. Automotive companies that cannot produce vehicles due to a shortage of catalysts could also reduce chip orders.

What other materials are important for semiconductor manufacturing and how are they affected by conflict?

In addition to neon and palladium, nickel, gold and silver are also important for semiconductor manufacturing. Russia is one of the world's top five nickel producers, but nickel supplies are less concentrated, so the impact may be limited. Gold and silver prices have also risen, but customers in the semiconductor industry typically have direct pass-through pricing arrangements for these volatile commodities.