Russia's Invasion of Ukraine Impacts Gas Markets Critical to Chip Production

By: Gabrielle Athanasia and Gregory Arcuri

Global supply chains can lower production costs and improve efficiency, but recent events remind us that these networks need to be embedded in a stable international order to be effective. A case in point is the current Russian invasion of Ukraine, which is disrupting the supply of noble gases that are essential for the manufacture of semiconductor chips.  This disruption adds to concerns about structure and resilience of global supply chains, particularly for strategically sensitive technologies.

Recent Russian offensive operations along the Black Sea coast have forced at least two of the three major Ukrainian air-separation firms (Cryoin and Ingas) to shutter their operations in Odesa and Mariupol, halting a significant portion of the world’s noble gas exports. Ukraine is the world’s largest supplier of noble gases including neon, krypton, and xenon. Globally, Ukraine supplies about 70% of the world’s neon gas and 40% of the global krypton supply. Moreover, Ukraine supplies 90% of the highly purified, semiconductor-grade neon for chip production used by U.S. industry. China, Japan, and South Africa are among the other major suppliers of neon.

Gas mixtures that include neon, krypton, and xenon power lasers are used in photolithography, the process of etching circuits into silicon wafers. A prolonged interruption in the supply of neon and other noble gases will therefore disrupt the production of semiconductors—a critical platform technology—when current stockpiles are depleted. An interruption in the supply of noble gases will further disrupt the production of semiconductor-embedded high-technology goods, including automobiles. Volkswagen notably closed two of its factories in Germany for several days following the launch of the invasion.
 
Stockpiles and Supply Shocks
The Biden Administration warned chipmakers that they should identify alternative sources of purified noble gases in the days before the Russian attack. In fact, many semiconductor firms had earlier prepared for this eventuality—augmenting their gas stockpiles following the Russian invasion and annexation of Crimea and aggression in the Donbas region of Ukraine—causing neon prices to spike by 600% in 2014.

According to the Financial Times, many East Asian chipmakers, including Renesas, Samsung, SK Hynix, and Rohm report that they presently have adequate supplies of neon form China, and that their operations are consequently insulated from the pinch in supplies from Ukraine. In the United States, the Semiconductor Industry Association announced  that the industry has a “diverse set of suppliers of key materials and gases,” and that there is no immediate risk of disruption.

Meanwhile, a repeat of the 2014 rush on these commodities is underway. The spot price of krypton per liter, even before the invasion, had reportedly nearly quadrupled by the end of January 2022. Even in China, neon prices have been steadily rising, where the cost per cubic meter increased from 400 yuan (approximately $63) in October of last year to 1,600 yuan ( approximately $252) in February 2022.

Downstream, while larger manufacturing firms may have strategic stockpiles of semiconductors that could last several months, other companies are likely to face the impacts of the supply shortage. The median inventory of chips has fallen from forty days to five days. This comes at a time when semiconductor fabricators are already straining to increase production in response to the global chip shortage.
 
Need for Strategic Resilience
While existing gas stockpiles would appear to mitigate the immediate risk for major disruptions, a drawn-out conflict that halts Ukrainian gas exports for an extended period could have significant consequences for semiconductor production as well as for downstream products. While China is currently an alternative to Ukraine as a source of noble gases, a dependence on Chinese supplies also poses a vulnerability to an industry vital to U.S. national security.

As the U.S. Congress begins the task of reconciling the provisions of the America COMPETES Act and the U.S. Innovation and Competition Act, semiconductor and other high technology companies have called for the inclusion of provisions that would expand the resiliency of value chains that supply critical industries. These provisions include grants to spur the domestic manufacture of noble gases essential for advanced manufacturing, develop assured access to new sources, and establish strategic stockpiles of critical materials.

Whether the conflict in Ukraine is resolved quickly or becomes a protracted struggle is still unclear. However, the new churn in geopolitics underlines the imperative for the public and private sectors to cooperate on enhancing resiliency of the semiconductor supply chain to prepare ourselves for more uncertain times.
 
Gabrielle Athanasia is a Program Coordinator and Research Assistant with the Center for Strategic and International Studies in Washington, DC.

Gregory Arcuri is a research intern with the Center for Strategic and International Studies in Washington, DC.

The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).