Russia-Ukraine conflict exacerbates chip shortage: Moody’s Analytics

Russia controls 44% of the world’s palladium supply, while Ukraine produces a whopping 70% of neon materials – the two most important raw materials for making chips

Russia controls 44% of the world’s palladium supply, while Ukraine produces a whopping 70% of neon materials – the two most important raw materials for making chips

The Russia-Ukraine war could hit global supply chains already constrained by the pandemic, and the worst impact would be ongoing chip shortages as the warring nations control significant stocks of key commodities used to make semiconductors, Moody’s warned Analytics a report.

Russia controls up to 44% of the world’s supply of palladium, Ukraine produces a whopping 70% of the world’s supply of neon – the two most important raw materials for making chips.

Markets can expect the global chip shortage that began with the pandemic to worsen if the military conflict continues, the agency said in the report released on Friday.

Palladium and neon are the two key resources for manufacturing semiconductors, and these chips are needed in industries like automotive, cellphone, and consumer electronics.

The Russian invasion of Ukraine will also result in higher oil prices (oil is already at a nine-year high and hovering around the $111 a barrel mark) and natural gas prices worldwide, even as additional shipments ramp up outside of Russia, the agency noted.

According to the agency, Russia controls 12% of world crude oil production, 17% of natural gas, 5.2% of coal, 4.3% of copper, 6.1% each of aluminum and nickel, 15% of zinc, 9.5% % of gold, 5.4% silver, 14% platinum, 44% palladium and 11% wheat.

On the other hand, Ukraine covers up to 70% of the world neon demand.

During the 2014-15 Russia-Ukraine war, neon prices rose multiple times, indicating how important the metal is to the semiconductor industry.

Though chipmakers have hoarded resources since the 2015 shortages, increased demand during the pandemic signals chip shortages would worsen unless a peace deal is negotiated soon, the agency warned.

On the energy front, the worst negative impacts would be felt in Europe, which was already mired in an energy crisis before the Russia-Ukraine war began last week, as the continent is heavily dependent on Russian oil and natural gas supplies, Moody’s Analytics said.

Global supply chains have been in a fragile state since the pandemic began, and the military conflict between Russia and Ukraine will only exacerbate the situation for companies in many industries, especially those heavily dependent on energy resources.

Energy prices in Europe differed significantly from oil prices in the rest of the world last year, in part due to Europe’s distribution network and over-reliance on a few key suppliers.

The problem with rising crude oil prices is that it will have a serious impact on inflation, which will spill over into energy-intensive goods and services and affect the entire world.

Although the US does not directly depend on Russia or Ukraine for energy, it faces significant indirect energy risk from imports of goods and services from Europe and Asia that are manufactured with Russian energy.

On the other hand, India and China are more directly exposed to Russian energy, but with sanctions on Russian exports around the world, those countries that continue to sign deals with Russia will have better bargaining power and are unlikely to suffer from rising prices as a result too much .

Transportation is another industry that will suffer from the war, as transportation is the most energy intensive of any major industry.

Even before the war, the pandemic has sent shipping costs skyrocketing by over 300 percent in 2021, as border and port closures caused containers to be stuck in various ports around the world, pushing global shipping to the most profitable routes between East and West concentrated .

Shipping costs, while down from their peaks at the end of last year, remain high and will continue to be high due to the shortage of new containers.

What is certain is that this conflict will contribute to the increasingly inflationary environment most countries find themselves in, which in turn will likely lead to tightening of central banks, higher interest rates and slower growth, which will be detrimental to businesses and consumers, too which there are no direct links to the situation via higher prices and interest rates, the report concludes.

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