War in Ukraine inflates price of neon for chip-making, but it might be good for China

The price of neon, a gas necessary in semiconductor production, has skyrocketed in China amid the war in Ukraine, prompting concerns that this might disrupt global supply chains.

The average wholesale price of industrial-grade neon in China shot up to 16,000 yuan (US$2,500) per cubic metre on Thursday, nearly nine times the quote of 1,850 yuan on February 24, when Russia’s invasion began, according to SCI99.com, a website tracking commodity prices in China.

“The Ukraine war tilted the supply and demand quickly out of balance lately, leading to big price increases,” said Liu Yin, a sales manager at Shanghai-based special gas supplier Song Ci Technology. Liu added that neon could become even more expensive, given that production in Ukraine is unlikely to resume to previous levels any time soon.

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A large industrial base of the former Soviet Union, Ukraine is a huge supplier of gases used in chip-making. Leading Ukrainian neon suppliers Ingas and Cryoin, which have halted operations, according to a Reuters report, together produce about 45 per cent to 54 per cent of the world’s semiconductor-grade neon.

Reduced exports could be good news for China, though, as the country is another major producer of neon.

China’s share in global neon supply may rise to 50 per cent from 30 per cent, as some foreign buyers switch to Chinese production to maintain a stable supply, said Chen Zhina, a general manager at Changzhou Naxin Special Gases Co in the eastern province of Jiangsu.

Chen estimated that before the war, Ukraine produced about 40 per cent of the world’s neon, while Russia accounted for 30 per cent.

Global consumption of neon for chip production reached 540 metric tons last year. The gas is needed to make laser light sources in lithography systems.

Stock of neon varies at different foundries, but most have stored enough to last at least two to three months amid a protracted semiconductor shortage and geopolitical uncertainties, according to analysts and industry insiders.

Shanghai-listed Huate Gas, a leading Chinese specialty gas supplier in the southern province of Guangdong that currently has six months’ stock, expects that China could switch to domestic substitutes if Ukrainian deliveries were completely cut off, the Chinese newspaper Securities Times reported.

The imminent impact on Chinese fabs or gas importers would be minor, as foundries in the country have sought to diversify their pool of gas suppliers since 2015, after Russia annexed the Crimean Peninsula from Ukraine, said Ren Lu, a senior special gas analyst at think tank Gas Ecosphere.

“China has abundant resources of special gases” because a strong steel industry has allowed the country to develop mature technologies for the production of neon and other gases, Ren said. Large factories often use oxygen to produce steel, a process that also captures neon.