Russia-Ukraine conflict to further worsen chip shortage: Report

The Russian-Ukraine war can hit the global supply chains that are already constrained due to the pandemic and the worst impact will be on ongoing chip shortage because the warring nations brutally control supplies of key raw materials that go into making semiconductors, warns a report.

Since Russia controls as much as 44 percent of global palladium suppplies, Ukraine produces a significant 70 per cent of the global supply of neon -- the two key raw materials that go into making chips.

The markets can expect the global chip shortage, that began with the pandemic, to worsen if the military conflict lingers on, says a Moody's Analytics report on Friday.

Palladium and neon are the two resources that are key to the production of semiconductor chips and these chips are necessary in almost all other industries like automobiles, mobile phones and consumer electronics and many others.

The Russian invasion of Ukraine will also lead to higher oil (oil is already at nine-year high and hovering around USD 111 a barrel) and natural gas prices worldwide, even if additional supply outside of Russia comes on line, impacting every oil importing countries, the report notes.

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

On the other hand, Ukraine meets as much as 70 percent of the global neon demand.

During the 2014-15 Russia-Ukraine war, neon prices went up by several times, indicating how serious this can be for the semiconductor industry.

Though chip-making companies have stockpiled resources since the 2015 shortage and due to the elevated demand during the pandemic, if a deal is not brokered soon, the chip shortage will get worse impacting almost all industries, like automakers, electronic device manufacturers, phone makers, and many other sectors that are increasingly reliant on chips for their products to work, the report warns.

On the energy front, the worst adverse impact will be felt in Europe, which was mired in an energy crisis even before the Russia-Ukraine war began last week, as they depend heavily on Russian oil and natural gas supplies, the report said.

The global supply chains have been in a fragile state since the start of the pandemic, and the Russia-Ukraine military conflict will only exacerbate the situation for companies in many industries, particularly those heavily reliant on energy resources.

Energy prices in Europe significantly diverged from oil prices in the rest of the world last year partly due to the distribution network in Europe and overreliance on a few key suppliers.

The problem with rising crude prices is that it will have serious impct on inflation which will get passed through to energy-intensive goods and services, affecting the whole world.

Though the US does not directly rely on Russia or Ukraine for energy, it has significant indirect energy exposure through goods and services imports from Europe and Asia that are produced using Russian energy.

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

Transportation is another industry that will suffer from the war since transportation has the highest energy intensity of all major industries.

Even before the war, the pandemic has caused shipping costs to skyrocket over 300 percent in 2021 as border and port closures caused containers to be stuck at different ports around the world, and global shipping focused on the most profitable routes between the East and West.

While shipping costs have come down from their highs at the end of last year, they still remain elevated and will continue to be high due to the scarcity of new containers.

What is certain is that this conflict will feed into the increasingly inflationary environment most countries find themselves in, which in turn is likely to lead to central banks tightening, higher interest rates, and slower growth, adversely impacting companies and consumers with no direct links to the situation via higher prices and interest rates, concludes the report.