Shortage of raw materials may have impact on supply chain

The Ukraine-Russia conflict is expected to further impact the already stressed global semiconductor supply as raw material exported from the two countries such as neon gas, chemical C4F6 and palladium are critical for semiconductor manufacturing. This has also put the Indian electronics and automobile manufacturing industry in a wait-and-watch mode.

“The [global] market is apprehensive that the Ukraine crisis will result in shortages of key raw materials, eventually affecting the semiconductor supply chain… The result and the extent of this non-economic event are unpredictable. But it has already started affecting the supply chain,” Brady Wang, semiconductor analyst at Counterpoint Research, said. The two countries also export other key metals such as nickel, platinum, rhodium and titanium.

Mr. Wang pointed out that neon prices had witnessed a tenfold increase during the 2014 Crimean crisis in Ukraine even as the semiconductor industry cut the total usage of the gas by 20% to 40% after adjusting software logic and optimising the purging process of the gas filling procedure. “Therefore, the supply chain will be impacted if the gas manufacturing facilities are destroyed during the current war. If not, we may still see rising prices, though the impact on production will remain manageable,” he said.

Noting that two of Ukraine’s leading suppliers of semiconductor-grade neon have halted their operations, Prabhu Ram, head of Industry Intelligence Group at CyberMedia Research, said that in an interconnected world, India would also face some direct or indirect impact in its electronics manufacturing. “The unavailability of crucial upstream raw materials can have a cascading impact through the supply chain, and impacting especially those manufac- turers in Asia, who are reliant on Ukraine,” he said.

While the consumer appliances sector in India is more likely to be impacted by the increase in prices of other raw materials such as steel, semiconductor shortage is expected to put pressure on the supply of smartphones, laptops and automobiles. Earlier this month, the Federation of Automobile Dealers Associations had revised downwards its outlook for the already struggling Indian automobile sector from ‘neutral’ to ‘negative’ amid concerns over the impact of the Ukraine conflict on the automobile supply chain.

With Omicron passing away without much impact and supplies showing signs of recovery, it looked as if the Indian auto industry was at the cusp of recovery until Russia invaded Ukraine. This will once again have ripple effects on the global automobile supply chain,” the industry body had said.

According to Counterpoint Research, Ukraine and Russia hold reserves of some rare elements required in the production of semiconductors, vehicle batteries and other related components.

Ukraine caters to almost 70% of the world’s neon demand and the neon gas is a by-product of Russian steel plants, which is then filtered and supplied by Ukrainian companies. “…The larger manufacturers of microchips and batteries hold some material in reserve, but these are likely to be quickly depleted if the crisis stretches on for months. This will lead to increased prices of the respective components. With the financial sanctions imposed on Russia, the prices of these elements are likely to increase by at least 20%, which will make the production of electric vehicles more costly.”

For the consumer appliances industry, semiconductors do not play a major role, and the industry does not foresee any direct short term impact. “We need to wait and watch. With the Ukraine-Russia conflict… already prices of steel have increased… semiconductors are not going to hit us directly right now, but we could see price increases because of other raw material costs going up, crude prices going up… automatically shipping costs will go up. The rupee has devalued against the dollar, so all this put together could see a further increase in prices,” Eric Braganza, president, Consumer Electronics and Appliances Manufacturers Association (CEAMA), said.

He added that since the main business season for the consumer appliance sector was now beginning, most large manufacturers would have already made arrangements for production in March and April. “In the short term I don’t see any major price increase happening, but if the situation persists then yes, by May-June, depending on the stock inventories of each individual company, we could start seeing a price increase in the industry.” In the past 18 months, the consumer appliance/durable sector has seen an increase of up to 15% in prices.