Lack of laser neon threatens the semiconductor industry

Russia’s war in Ukraine could lead to the production of neon, a critical gas in advanced semiconductor production, falling to an alarmingly low level at a time when the world is already struggling with a shortage of chips.

Neon is needed for lasers used in the chip manufacturing process, known as lithography, when machines cut patterns on tiny pieces of silicon made by such as Samsung, Intel and TSMC.

According to Peter Hanbury, a semiconductor analyst at research firm Bain & Co., more than half of the world’s neon is produced by several companies in Ukraine.

Among these companies – Mariupol “Ingos”, as well as “Cryoin” and “Iceblik”, based in Odessa.

The firms did not immediately respond to CNBC’s request for comment, but Ingas and Cryoin have both ceased operations in recent weeks amid attacks by Russian forces, according to Reuters.

Due to the fact that the world’s leading Ukrainian firms have ceased operations, neon production must now fall off the cliff if the conflict drags on.

According to the consulting firm Techcet, last year worldwide consumption of neon for the production of semiconductors reached about 540 metric tons. Given that Ukraine produces more than half of the world’s neon, that figure could fall below 270 tons in 2022 if the country’s neon producers remain closed.

“Of the materials used in the manufacture of chips that could affect their supplies as a result of the conflict in Ukraine, the biggest potential problem is neon,” Hanbury told CNBC by e-mail.

The continuing global shortage of chips has already wreaked havoc on supply chains and has led to long delays for products such as new cars and game consoles such as the PlayStation 5.

Potential global neon shortages now threaten even worse.

Neon is a by-product of large-scale steel production.

It is obtained after fractional distillation (chemical separation process) of liquid air, which is air cooled to very low temperatures.

“Historically, up to 90% of neon for the chip industry was produced as a by-product of Russian steel production and then processed by companies based mainly in Ukraine,” said Hanbury, pointing to firms such as Cryoin, Ingas and UMG RT.

Alan Priestley, a Gartner analyst, told CNBC that most major chipmakers have a few months of neon in stock, adding that for them this is not yet a major problem.

Intel said it was closely monitoring the situation. “Intel has assessed the possible impact of the Russia-Ukraine conflict on supply chains,” a CNBC spokesman said.

The man added: “Intel’s strategy of having a diverse global supply chain minimizes the risk of possible local outages. We continue to monitor the situation closely.”

TSMC declined to comment, and Samsung did not immediately respond to CNBC’s request for comment.

“Some smaller businesses with limited supply may be affected sooner,” Priestley said. Chip manufacturers are working with their supply chains to try to minimize the impact, he added. The factory is a chip factory where semiconductors are “produced”.

The global semiconductor industry has been preparing for such an event for years.

He has taken important steps to try to limit the future risks associated with neon supplies following Russia’s 2014 annexation of Crimea.

“After the annexation of Crimea, the chip sector has reduced the need to use neon in the production process,” Hanbury said. “At the same time, steps have been taken to increase gas reserves at two points in the supply chain, so both gas suppliers and semiconductor manufacturers typically now have reserves of three to 12 months.”

New suppliers outside Ukraine and Russia have also been created by semiconductor manufacturers, Hanbury added.

“We estimate that only about two-fifths of the neon currently used in global semiconductor production comes from Russia and Ukraine,” Hanbury added.

The Dutch firm ASML, which produces very sophisticated lithography machines used by chip giants, has reduced its dependence on neon from Ukraine to about 20% from previous levels, Hanbury added.

An ASML spokesman told CNBC: “ASML recognizes the importance of preparing to manage unplanned events, including conflicts, when they can affect our supply chain.”

They added: “We continue to closely monitor the state of the conflict and are currently working with our suppliers to find out what the consequences (if any) will be and to what extent our suppliers can use alternative sources if necessary.”