Russia - Ukraine war: Brace for chip shortage, warns Moody's Analytics

The ongoing geopolitical tussle between Russia and Ukraine is likely to have another casualty – the semiconductor chip. Palladium and neon are two resources that are key to the production of semiconductor chips.

Given that Russia supplies over 40 per cent of the world’s supply of palladium and Ukraine produces 70 per cent of the global supply of neon, we can expect the global chip shortage to worsen should the military conflict persist, Tim Uy, of Moody's Analytics wrote in a recent report.

“During the 2014-2015 war in Ukraine, neon prices went up by several times over, indicating how serious this can be for the semiconductor industry: semiconductor-exposure companies make up 70 per cent of total neon demand, as it is an integral part of the lithographic process for making chips,” Uy of Moody's Analytics said. GRAPHIC: RUSSIA'S SHARE IN COMMODITIES

In terms of regions, Moody's Analytics believes the most salient adverse impact will be felt in countries primarily in Europe that are recipients of Russian oil and natural gas. Russia, according to their estimates, holds 12 per cent of the world’s oil supply and 17 per cent of its natural gas. It is also a key supplier of palladium and wheat, and along with Ukraine has most of the world’s neon supply.

The global chip shortage came to the forefront during the Covid pandemic in 2020-21, as remote work and mobility restrictions caused the acceleration of digitization worldwide. If a deal is not brokered in the coming months, Moody's Analytics expects the chip shortage to worsen, and for industries highly dependent on them to be impacted accordingly.

“This means significant risks are ahead for many automakers, electronic device manufacturers, phone makers, and many other sectors that are increasingly reliant on chips for their products to work,” it cautions.

Double whammy for auto sector

Back home, it will be a double whammy for the auto sector that is likely to face multiple headwinds in the form of rising metal prices and a possible shortage in semiconductor chips.

Add to that rising crude oil prices, which in turn will see the government hike auto fuel prices once the assembly elections across five key states get over next week. Most analysts expect a sharp hike of around Rs 8 – 10 per liter in diesel and petrol prices as crude oil prices moved past $115 a barrel – the highest level since 2014. All this is likely to impact auto sales over the next few months, analysts believe.

“The passenger vehicle (PV) segment reported volume drop in February 2022 primarily owing to semiconductor shortages although demand remains robust. The domestic two-wheeler market continues to display weakness due to subdued demand. Maruti Suzuki is our top pick in the PV segment even though total sales in February were impacted primarily due to semiconductor shortage, which is likely to remain for next two-three quarters,” said a latest note on the auto sector by IDBI Capital.