The global supply of semiconductors is now being threatened once again by the Ukraine crisis on account of supply of two key raw materials — neon and palladium — that are at a risk of being constrained.

What are Semiconductors?

• A semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
• It’s generally created using silicon, germanium, and other pure elements.
• Semiconductors are created by adding impurities to the element.

Why are neon and palladium important for chipmaking?

(a) Neon

• Neon gas is used in the photolithography process that is the most common method for fabricating integrated circuits.
• Specifically, the neon gas is used in the laser machines that carve the integrated circuits.
• But for use of neon gas in the semiconductor industry, the gas has to reach 99.99% purity levels — which makes it a rarity.
• More than half of semiconductor-grade neon comes from Ukrainian companies Incas and Cryoin.

(b) Palladium

• It is used for multiple purposes in semiconductor and electronic manufacturing.
• It is used to coat electrodes that help control flow of electricity.
• It is also used in plating of microprocessors and printed circuit boards — which is an essential process of chip making.
• Russia accounts for nearly half the global supplies of palladium and the multiple trade sanctions on Moscow threaten to constrain the availability of the element.

Why was there a shortage in semiconductors?

• The trigger point was the beginning of the Covid-19 pandemic and the subsequent lockdowns across the world that forced chip-making facilities to shut in countries like Japan, South Korea, China and the US.
• A key feature in a chip shortage is that it almost always causes cascading effects, given that the first one creates pent-up demand that becomes the cause for the follow-up famine.

How is the Russia-Ukraine crisis protracting this shortage?

• Palladium and neon are two resources that are key to the production of semiconductor chips.
• Russia supplies over 40 per cent of world’s palladium and Ukraine produces 70 per cent of neon.

How long will the semiconductor shortage last?

• The answer to that question is a function of two variables:

1. Existing stockpiles of these raw materials with chip manufacturers
2. Time for which the crisis in Ukraine prevails

• If a deal is not brokered in the coming months, expect the chip shortage to get worse and for industries highly dependent on them to be similarly affected.
• This means significant risks are ahead for many automakers, electronic device manufacturers, phone makers, and many other sectors that are increasingly reliant on chips for their products to work.

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