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Ukraine stops the production of neon, key in the semiconductor industry, and would complicate (even more) the shortage of chips

The two largest neon producing companies in Ukraine have stopped their activity and this could further complicate the prevailing shortage of chips. Due to the escalation of the war with Russia, Ingas and Cryoin have decided to suspend their operations for an indefinite period. According to Reuters, both companies are suppliers of about half of the gas used in the world for the manufacture of semiconductors.

Neon is key to chip production, as it is used in the manufacturing process of laser equipment. It is estimated that during 2021 the world consumption of this gas in the semiconductor industry was around 540 metric tons; Of this amount, between 45 and 54% comes from the Ukrainian firms mentioned above.

As the weeks went by, and in the face of the worsening of the war in Ukraine, the production of neon suffered the blow. Cryoin closed its doors on February 24, the day the invasion of the Russian armed forces under the orders of Vladimir Putin was unleashed. This company is located in Odessa and, until before the start of the conflict, it produced between 10,000 and 15,000 cubic meters of neon per month.

For its part, Ingas is located in Mariúpol and has a monthly production capacity of between 15,000 and 20,000 cubic meters of gas. And three-quarters of what it produces goes to the semiconductor industry, a company official explained. The main recipients of their shipments are firms from Taiwan, China, South Korea, Germany and the United States, he assured.

The war in Ukraine puts the supply of neon for semiconductors at risk

The problem with the supply of neon for the manufacture of semiconductors could appear more firmly in the coming months. It all depends on how long the war between Russia and Ukraine lasts, although there are multiple factors beyond the end of the conflict.

As mentioned by Cryoin, the firm can withstand up to three months with its facilities closed; however, if the attacks cause damage to your infrastructure or equipment, the demand for time and money to reactivate operations would be even greater. Even the company indicated that no one could guarantee access to all the raw material needed to produce the gas. And if the conflict persists, it could not meet orders estimated at 13 thousand cubic meters for the current month of March.

As soon as the war between Russia and Ukraine broke out, we mentioned the possibility that it could put more pressure on an already battered supply line for the technology sector. Let's keep in mind that, beyond providing half of the neon needed by the world's semiconductor industry, what Ukrainian companies export represents 90% of the gas used by American chipmakers .

According to analysts, the real effects of the neon production halt on the chip shortage could be seen as early as April. If manufacturers exhaust their reserves and, by then, have not secured the supply of gas from other parts of the world, restrictions in the supply chain would be inevitable.

China could position itself as an alternative to Ukraine in the neon-producing market. However, the prices that are handled in the Asian giant are well above those of Europe. In fact, it is estimated that between October 2021 and February 2022 the price in yuan per cubic meter of neon will have quadrupled.

Dissimilar views on the impact on the shortage of chips

As soon as the war between Russia and Ukraine broke out, the main Asian semiconductor manufacturers estimated that their operations would not be affected. However, the outlook could change as the armed confrontation in Eastern Europe intensifies. “Chipmakers don't feel any direct impact, but the companies that supply them with materials for semiconductor manufacturing buy neon and palladium from Ukraine and Russia. The availability of those materials is already tight, so any additional pressure on supplies could drive up prices”, a Japanese analyst had mentioned at the time.

The truth is that, confirmed the interruption in the production of Ukrainian neon, the outlook does not seem encouraging. In addition, today it would not be feasible for other companies to try their luck from scratch in this sector, with the sole motivation of replacing Ukraine. This is because they would need between 9 months and two years to increase gas production ; therefore, it would be impossible to scale the business in the short term.