Moscow began restricting exports of inert, or “noble” gases, including neon, argon and helium to “unfriendly” countries at the end of May, according to a report by Russian state news agency TASS.
It is one of the latest salvos by President Vladimir Putin against countries that have imposed a slew of sanctions on Moscow in response to his assault on Ukraine. Prior to the war, Russia and Ukraine together accounted for about 30% of the chip industry’s supply of neon gas, according to consultancy Bain & Company.
The export limits come just as the semiconductor industry, and its customers, were beginning to shake off the worst of the supply crisis. Last year, carmakers built 10 million fewer vehicles because of the chip shortage, according to LMC Automotive, but supplies were expected to improve in the second half of this year.
“What we don’t need, obviously, is another drama with the chip supply that could affect and perhaps stall a recovery,” said Justin Cox, director of global production at the automotive consultancy.
Chipmakers have been preparing
Neon plays a critical role in the production of semiconductors, in a process called lithography. The gas controls the wavelength of light produced by a laser as it etches patterns onto the silicon wafers that make up the chip.
Before the war, Russia collected raw neon as a byproduct in its steelworks, then sent it to Ukraine for purification. The two countries have been leading producers of noble gases since the days of the Soviet Union, when the superpower used them to build its military and space technologies, Jonas Sundqvist, senior technology analyst at Techcet, a market research company, told CNN Business.
“Now we have permanent loss of some purification capability in Mariupol and Odessa,” Sundqvist said.
But semiconductor manufacturers have been reducing their dependence on the region ever since Russia invaded Crimea in 2014.
Peter Hanbury, a partner at Bain & Company’s manufacturing practice for the Americas, told CNN Business that chip makers have redoubled their efforts in the wake of February’s invasion.
The industry’s dependence on Ukraine and Russia for neon was “historically very high” at between 80% and 90%, Hanbury said. But since 2014, chipmakers have whittled that down to less than one third.
“The industry recognized the risk associated with [the region] and began basically qualifying new sources, developing new countries and specific suppliers,” he added.
So far, the war in Ukraine has not impaired production of chips, Hanbury said.
“I don’t think we’re going to see an impact for at least a few months… I do think that the impact that we see will likely be somewhat minimal,” he said.
However, even if chipmakers can replace lost supply from the region, they are likely to end up paying much more for the vital gases.
It is difficult to track the price of neon and other gases, because most are traded under private long-term contracts, Sundqvist said. But Techcet estimates that neon contract prices have already increased fivefold since the invasion earlier this year, and will remain at those elevated levels in the near-term.
“[Russia’s export limits] will definitely have an impact on any new contracts,” Sundqvist said.
“[We] are taking steps to secure additional supply for a longer period,” a company spokesperson said.
China could benefit
Countries are now racing to build up their chipmaking capacity after two years that left them brutally exposed to the volatility of global supply chains.
More chipmaking will likely translate into higher demand for the noble gases.
With Russia threatening to curtail its exports, China could be a big beneficiary. It has the “biggest, newest” production capacity, according to Sundqvist.
Since 2015, the country has poured investment into its own semiconductor industry, including into the equipment needed to separate noble gases from other industrial products. China is now a net exporter of these gases, and claims to be self-reliant, he said.
The world’s demand for noble gases will likely concentrate on China, Sundqvist added, and the county will “get a good price for [its] product.”