Ukraine’s situation grows more dire with each passing day. Russian artillery and aerial assaults lay waste to cities and towns, indiscriminately wounding and killing civilians and attacking Europe’s largest nuclear plant. Russian President Vladimir Putin appears committed to capturing and occupying Kyiv, Ukraine’s capital, and other major Ukrainian cities despite sanctions and worldwide protests.
One of the cities Russian forces are heading toward is Odesa, a strategic port on the Black Sea in southern Ukraine, with the aim of sealing Ukraine’s southern coast. At press time, Ukrainian artillery has successfully defended Odesa from bombardment by Russian ships.
Besides its strategic location as a port, Odesa is the headquarters of Cryoin Engineering Ltd. and Iceblick, two of three Ukrainian companies that supply the world with 70 percent of the noble gas neon. The other Ukrainian company that produces neon is Ingas, headquartered in Mariupol, which Russian forces have taken. neon is used in lighting, vacuum tubes, high-voltage indicators, lightning arresters, wavemeter tubes, television tubes, and helium- neon lasers. Cryoin supplies 90 percent of U.S. semiconductor-grade neon, according to research firm Techcet.
The semiconductor industry uses helium- neon lasers to produce chips and consumes nearly half of the worldwide production of neon, according to Expert Market Research.
The supply of neon is complicated because Russia produces it as a byproduct of steel manufacturing. The neon is transported to Ukraine to be purified by Cryoin and others.
The 2022 Russian invasion of Ukraine is likely to create a shortage of industrial neon, which could negatively impact the manufacture of semiconductors. The last time the semiconductor industry experienced a severe neon shortage was when Russia took control of Ukraine’s Crimean region in 2014. The following year neon gas prices increased by a factor of 10.
Russia’s troop build-up around Ukraine began in October 2021, giving the world an early warning of the possible consequences, including the potential for a dramatic spike in neon, should Russia invade. This lead time allowed semiconductors companies to evaluate and adjust their sources of supply and to stockpile inventory of critical materials, including neon.
“The big semiconductor manufacturers are all stockpiling inventory to abate their risk,” said Beth Davis-Sramek, Professor of Supply Chain Management and Co-Editor in Chief, Journal of Business Logistics, Auburn University. “Inventory is the key factor that will determine the ultimate impact for the chip industry.”
There are two factors companies need to focus on, according to Davis-Sramek: time-to-survive and time-to-recover. “If a company’s survival time is longer than its recovery time, its operations will continue uninterrupted when there is a disruption in the supply chain,” she said.
Stockpiling inventory is the short-term solution to ensure continuity of operations. It gives companies time to continue operations while tapping other sources. “Everyone is up against capacity constraints. How long their shortages impact the chip industry depends on how much inventory they have stockpiled,” said Davis-Sramek.
For example, Dutch-based ASML, a key semiconductor manufacturing equipment supplier to TSMC, Intel, and Samsung, currently sources less than 20 percent of it neon from Ukraine, according to Reuters. Of course, if Russia’s occupation of Ukraine lasts through 2022 and into 2023, the impact on the price of neon and other raw materials is bound to cause significant price inflation and long-lead times.
Not all chipmakers are so prepared. According to Peter Lee, a Citi Research analyst, as reported by the Washington Post, memory chip manufacturers hold about six to eight weeks of neon gas inventory.
Long term, if Ukraine is unable to supply neon gas, it could increase microchip lead times to over 52 weeks, according to Patrick Penfield, a supply chain management professor at Syracuse University.
Other materials at risk
Ukrainian neon is not the only raw material that the Russian invasion could impact. Russia is the second-largest supplier of palladium, a rare earth metal used in computer hard disks, semiconductors, and multilayer ceramic capacitors. South Africa is the top palladium producing nation accounting for 40 percent of the world’s supply. The U.S. production of palladium in 2021 is just 5 percent of the world’s total. As with neon, if the U.S. and Europe ban the importation of Russian palladium, prices will surely rise.
In 2021, global leaders in palladium production, in kilograms, were:
- South Africa 80,000 kg; 40%
- Russia 74,000 kg; 37%
- Zimbabwe 13,000 kg; 6.5%
- Canada 17,000 kg; 5.7%
- United States 14,000 kg; 4.7%
- Other countries 2,800 kg; 1.4%
World total: 200,000 kg (rounded)