Nobody knows of its existence, and yet many companies indirectly depend on it. Purified Neon has been added to the long list of strategic resources whose supply is threatened by the war in Ukraine. The neon market only weighs a few hundred million euros, but it is an important link in semiconductor production. It’s used to power the lasers that etch the delicate circuits of electronic chips that are now found in everything from smartphones to computers, cars and industrial robots.
The problem ? More than 50% of the world’s high-purity neon comes from a single country: Ukraine. This specialization is not new. It was built during the Soviet era. The USSR had bet that neon could be used to manufacture certain military equipment and chose to equip many of its steel mills with air separation units. These modules separate oxygen and nitrogen (consumed by the plant) from other gases present in the air in small doses, such as B.Neon. The latter has since been sent to Ukraine, where it was refined to reach a very high degree of purity (99.999%).
Manufacturers have a few weeks in stock
The war that Russia has declared on Ukraine obviously upsets the situation. While some citizens join the army to defend their country and others desperately try to protect themselves or flee the incessant bombing raids, the country’s businesses find it impossible to function. Strategic neon producers like Cryoin in Odessa had to stop their chain.
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Admittedly, their customers are a little better prepared for this crisis than they were in 2014, when Russia’s invasion of Crimea caused great tension in the neon market. The manufacturers who buy this gas, in particular, have reserves to work normally for the time being. “However, the durability of the materials used on the semiconductors is limited to ensure their reliability,” explain the analysts at the industry consultancy Techcet. On the other hand, there is a cost associated with storing this gas (even more so in times of storage shortages). Manufacturers therefore have limited reserves. “Smartphone makers have plenty of time for the month of March or even April,” said Neil Mawston, executive director of Strategy Analytics. But by May they have to find alternative suppliers.”
The problem is that there are only a few options. China refines neon. However, the increase in the quantities produced does not happen overnight. “And Chinese companies will likely serve their local customers before selling to others,” said CCS Insight analyst Marina Koytcheva. The United States, which also lists some producers, will certainly do the same.
Chip shortage blocks manufacturers
The option to open new locations would take even longer. “Everything used to manufacture semiconductors has to meet very strict specifications to avoid the risk of chip malfunctions,” confirm Techcet analysts. According to the specialist company, the certification process for a new neon supplier takes “six to nine months at best” and can cost “millions of dollars”. Therefore, if Ukrainian industry and its logistical hubs (particularly ports) continue to be blocked or damaged, the impact will soon be felt on the semiconductor industry as well.
This is all the more problematic as this industry has two dark years behind it. Waves of Covid contamination have prevented semiconductor fabs from operating normally. Add to this telecommuting, which has fueled an already growing demand for connected devices. The result is bottlenecks that have had serious consequences for the economy. Tech makers have had to revise their production targets downwards (like Apple, which made 11 million fewer iPhones than expected in 2021). And the automotive sector is badly affected. Many manufacturers (Renault, Stellantis, General Motors, etc.) therefore had to temporarily close their factories.
Of course, it is not easy to diversify such an extraordinarily complex manufacturing chain as that of semiconductors. “We’re talking about a process with several hundred steps, carried out in different places around the world,” argues Julian Ringhof, specialist in geopolitics of technologies at the European Council on International Relations (ECFR). A clever circuit between specialized world poles that had the advantage of always improving these products and reducing their costs.
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But it also weakens a chain that is of strategic importance in today’s economies. The old continent has started to recognize it. Last February, the Brussels Commission proposed a €42 billion investment plan to build a European semiconductor industry worthy of the name. While it occupied 40% of that market in the 1990s, it’s capped at a meager 10% now. On this occasion, Internal Market Commissioner Thierry Breton warned of the risks of overdependence on other countries (especially in Asia) for such a sensitive product: “If Taiwan could no longer export in three weeks, all the factories in the world would come to a standstill.” No one suspected back then that deliveries from Ukraine could also run out.