Neon Shortages Due to Ukraine-Russian Conflict

In News

• Ukraine’s two leading suppliers of neon, which produce about half the world’s supply of the key ingredient (Neon) for making chips, have halted their operations due to Russian attack.

Ukraine and Neon

• Some 45%-54% of the world’s semiconductor grade neon, critical for the lasers used to make chips, comes from two Ukrainian companies.
  • Global neon consumption for chip production reached about 540 metric tons last year.
• Before the invasion, Ingas (Ukrainian company) produced 15,000 to 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the United States and Germany, with about 75% going to the chip industry.
• Ukrainian neon is a by-product of Russian steel manufacturing.
  • The gas, which is also used in laser eye surgery, is produced in China as well, but Chinese prices are rising steadily.
• Neon prices rose 600% in the run-up to Russia’s 2014 annexation of the Crimean peninsula from Ukraine, according to the U.S. International Trade Commission.

Issues associated

• Shortage in supply: The stoppage casts a cloud over the worldwide output of chips, already in short supply after the coronavirus pandemic drove up demand for cell phones, laptops and later cars, forcing some firms to scale back production.
  • Prices, already under pressure after the pandemic, had climbed by up to 500%.
• Hit on production: While estimates vary widely about the amount of neon stocks chipmakers keep on hand, production could take a hit if the conflict drags on.
• Shortage of High end products: It likely means further constraints for the broader supply chain and inability to manufacture the end-product for many key customers.
• Additional raw materials: It is unsure the companies could access additional raw materials for making neon.

Implications/ Impact of shortage of semiconductors

• Impact on production of electronics: A supply crunch has a consequent impact on sales of cars, fridges, laptops, TVs and other electronic devices.
• Automobile production takes a hit: Some domestic and global automobile manufacturers have had to cut output and temporarily halt production due to the semiconductor shortage.
  • This has only added to the automobile industry’s troubles, which was already bruised by COVID-induced disruptions.
  • The consequent production disruptions will only delay the recovery of the industry.
• Inflation: The semiconductor shortage is bound to directly impact the consumers. It has disrupted the global supply chain and constrained the production of electronics.
  • Chip prices are on the rise and as a result, prices of electronic devices are also rising.

Steps taken by India to boost semiconductor production

• India has approved a production-linked incentive (PLI) scheme worth Rs 76,000 crore (roughly $10 billion) to attract global chipmakers to set up FABs in the country.
  • The government will extend fiscal support of up to 50 percent of a project’s cost to eligible display and semiconductor makers, offsetting the high costs of setting up a plant.
• Besides helping the country reduce import dependency, the scheme to boost semiconductor production will bring in massive investments and create a large number of jobs.
• The recent announcement of Tata Group entering semiconductor manufacturing is being seen positively.
• US-based memory chipmaker Micron Technologies had announced that it will set up a Centre of Excellence in memory and storage systems in India.
  • Micron is a major supplier to Apple.

Way Forward

• Companies elsewhere could initiate neon production but it would take nine months to two years to ramp up.
• The US is now looking elsewhere to source its chips and India, with its low labour costs, could be a good alternative to China and Taiwan.

Source: ET