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Russia’s attack on Ukraine halted half of the world’s chip neon production

Between 45 and 54 percent of the world’s semiconductor-grade neon, which is critical for lasers used to make chips, comes from two Ukrainian companies, Ingas and Cryoin, according to Reuters calculations, based on data from companies and research firm Techcet. Techcet estimates that global consumption of neon for chip manufacturing reached about 540 metric tons last year.

Both firms have shut down operations as Russian forces have stepped up their attacks on cities across Ukraine, killing civilians and destroying key infrastructure, according to company representatives contacted by Reuters.

The shutdown overshadows global chip production, which was already in short supply after the coronavirus pandemic boosted demand for mobile phones, laptops and later cars, forcing some firms to cut production.

According to Angelo Zino, an analyst at CFRA, while estimates of the amount of neon stock chipmakers keep in stock vary widely, production could suffer if the conflict drags on.

“If stocks are depleted by April and chip makers have no orders in other regions of the world, this likely means additional restrictions on the wider supply chain and the inability to produce the final product for many key customers,” he said.

Prior to the invasion, Ingas was producing between 15,000 and 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the United States and Germany, of which about 75 percent was chip production, Nikolay Avdzhi, the company’s commercial director, says in a statement. email to Reuters.

The company is based in Mariupol, which is under siege by Russian troops. On Wednesday, Russian troops destroyed a maternity hospital there in what Kyiv and Western allies called a war crime. Moscow said the hospital was no longer functioning and had been occupied by Ukrainian militants.

“Civilians are suffering,” Avji said in an email last Friday, noting that the company’s marketing employee was unable to respond because he did not have access to the Internet or telephone.

Cryoin, which produces between 10,000 and 15,000 cubic meters of neon per month and is based in Odessa, ceased operations on Feb. 24 when the intrusion began to keep employees safe, according to business development director Larisa Bondarenko.

Bondarenko said the company would not be able to fulfill orders for 13,000 cubic meters of neon in March if the violence didn’t stop. She said the company could endure at least three months with the plant closing, but warned that if the equipment was damaged, it would put even more of a burden on the company’s finances and make it difficult to quickly resume operations.

She also said she wasn’t sure the company would be able to access additional neon cleaning raw materials.

Taiwan’s economy ministry, home to the world’s largest contract chipmaker TSMC, said Taiwanese firms have already pre-qualified and have “safety stocks” of neon, so no supply chain issues are foreseen in the near term. The statement to Reuters echoed similar remarks by Taiwan’s central bank earlier on Friday.

Smaller chip makers could be hit harder, according to Lita Shawn-Roy, president of Techcet.

“The biggest chip makers like Intel, Samsung and TSMC have more purchasing power and access to inventory that will last for longer periods of time, two months or more,” she said. “However, many other chip makers don’t have that buffer,” she added, noting that rumors had begun to circulate that companies were trying to ramp up inventories. “This will exacerbate the problem of supply availability.”

Ukrainian neon is a by-product of steel production in Russia. The gas, which is also used in laser eye surgery, is also produced in China, but prices in China are steadily rising.

Bondarenko says prices, already under pressure since the pandemic, have surged 500 percent since December. According to a Chinese media report citing Chinese commodity market information provider, the price of neon gas (99.9% grade) in China has quadrupled from 400 yuan (about Rs. 4,800) per cubic meter in October last year to over 1,600 yuan (roughly Rs. 19,400) per cubic meter at the end of February.

Neon prices rose 600 percent ahead of Russia’s 2014 annexation of the Crimean peninsula, according to the US International Trade Commission.

Companies in other countries could start producing neon, but ramping it up will take nine months to two years, according to Richard Barnett, chief marketing officer of Supplyframe, which provides market intelligence to companies in the global electronics sectors.

But CFRA’s Angelo Zino noted that companies may be reluctant to invest in the process if the supply crunch is seen as temporary.

© Thomson Reuters 2022

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