Nowadays, producing the microchips found in our smartphones, computers, cars, and toothbrushes requires almost all elements (except radioactive ones) present in the periodic table to some degree, as illustrated in the below figure. Not all elements are equally important, but many are hard to substitute. This brief aims at assessing the additional threats that the recent Russian invasion of Ukraine may pose on the microchip industry, a sector already under heavy pressure following the pandemic.

Source: S. Dhong and J.P. Colinge, FinFET to Nanowire Transistor, in DAC 2014 Tutorial 8, 2014.

For the past two years, the pandemic has precipitated the dysfunction of a particularly complex value chain that was already close to its limits, resulting in massive bottlenecks in the production of semiconductors. Entire industries like automotive or game consoles have nearly frozen due to chip shortages. These disruptions primarily stemmed from unanticipated demand surge (partly due to lockdowns and home working) in an industry with largely fixed capacities (new foundries taking years to build, slow and insufficient mining exploration), combined with a few exceptional circumstances (a fire in Japan, extreme drought in Taiwan). As a result, the US decided to increase its domestic semiconductor production, and the EU has plans to develop its own. These plans may be severely slowed down by raw material supply issues, and the Russia-Ukraine crisis is likely to make things worse at global and EU levels.

Some reports have raised alarming concerns, suggesting that the crisis in Eastern Europe is about to cause further chip shortages for the car manufacturing industry, among others. 

Our research suggests things may not be that critical in the short run, but clouds are accruing on the horizon.

To assess the disruptive potential of the conflict, we reviewed the geography of global supply for the elements needed to produce a chip. For most of these raw materials—especially silicon, gallium, and germanium—Russia and Ukraine are relatively small players, representing less than 3 percent of global supply. So, we focused on elements that are significantly sourced from Russia and/or Ukraine.

Our research led to a short list of key materials at risk:

1. Neon: Ukraine supplies about 90 percent of the neon for the US semiconductor industry. Neon is a key gas needed to operate lithography lasers and for deep-UV lithography used for transistors, and nearly half of it is sourced from Russia and purified in Ukraine. In 2014, when Russia annexed Crimea, prices increased by 600 percent, highlighting the critical role of Ukraine in its supply. Semiconductor producers have learned to stockpile the gas, diversify their supply sources, and hedge against high prices (and do not seem too concerned at this stage). That said, only very limited alternative gases or supply sources are available, and disruption in the neon supply is likely to boost prices to new heights.
2. Palladium: About a third of the global supply of this noble metal primarily used in sensors and memories comes from Russia. While prices may rise in the short term (they are already up +85 percent since December 2021), the industry could probably adjust to a negative shock in Russian supply for now. Long-term impacts are less obvious.
3. Aluminum: 10 percent of worldwide exports of this prime metal used in chips to ensure conductivity between components come from Russia, a close second only to Canada. Prices have risen +48 percent since December 2021.
4. Scandium: This rare-earth metal, mostly used as an alloy to strengthen aluminum, is significantly sourced from Russia, as are noble gases such as krypton, xenon, and helium.

Although Russia and Ukraine play a significant (if not major) role in a small set of key elements of the chip value chain, short-term prospects hint at price increases rather than shortages. Prices are up big-time for some of them.

Strategies have been deployed to somewhat mitigate the risks of hardcore disruption and shortages in the near future, and there is no clear evidence that Russian supply would entirely dry up. After all, Russia is a net importer of chips, and interruption of its own supply due to sanctions may have ripple effects on its own industries and economy at large. However, should the crisis last and the demand for chips be sustained or even increase in the months to come in an industry already under pressure, bottlenecks are likely to show up again and prices might climb through the roof.

Still, the clouds seem darker in the longer term, and the issue of the Russian and Ukrainian supply of raw materials may soon pale in comparison with the risk of resource depletion. A 2017 study from the French Environment and Energy Management Agency predicts that the world profitable reserves of key resources such as tin, lead, antimony, gold, and zinc—all significantly used in semiconductors—will be depleted within the next five to 20 years. A 2020 study from the European Commission indicates that others are dependent upon very vulnerable supply chains for geopolitical reasons such as rare earths, germanium, magnesium, or cobalt. Combined, these factors are likely to drive volatility in the markets for raw materials in the years to come. Regardless of the situation in Eastern Europe, the chip industry and its users will likely need to prepare for a world of scarce supply and surging prices.

In the short run, the main mitigation strategies may involve stockpiling and diversifying the supply sources as much as possible. At government level, this will involve a substantial amount of economic diplomacy to secure partnerships with key countries. IT-producing and IT-using firms should urgently consider financial strategies to hedge against surging prices. Given the growing tensions and risks, companies and governments should seek to build and maintain tools to monitor critical raw material flows and develop industry-by-industry supply security strategies. In the longer run, a proactive strategy should rely on three main pillars: 1) development of recycling ecosystems to create extra domestic supply from reuse; 2) research to find alternatives to most at-risk materials and reduce their use; and 3) encouragement of digital sobriety across value chains to moderate the growth in demand for chips and electronics.

The authors wish to thank Prof. David Bol, Prof. Jean-Pierre Raskin, Grégoire Le Brun, and Thibault Pirson, from UCLouvain, for their precious insights and feedback. Any errors would be ours alone.