After two years of dealing with crimped supply chains caused by the global coronavirus pandemic, it appears that semiconductor companies got out in front of Russia’s invasion of Ukraine.
Over the near to medium term, that foresight could prove beneficial for chip stocks and the related exchange traded funds, including the VanEck Vectors Semiconductor ETF (SMH). While the war in Ukraine is stoking interest in the energy sector due to soaring oil prices, it’s a scenario that tech investors should stay abreast of because both Russia and Ukraine are major sources of raw materials integral to the production of semiconductors.
“About a quarter to a half of the world’s semiconductor-grade neon comes from Russia and Ukraine, while roughly a third of the world’s palladium comes from Russia, analysts and industry consultants estimate. A potential shortage of those materials has sparked concern among some analysts that an industry already struggling to meet hot demand could suffer a blow to production,” reports Asa Fitch for the Wall Street Journal.
Following a drought in Taiwan, a fire at a major chip facility in Japan, and the pandemic, semiconductor makers are moving to ease supply chain issues. For example, Taiwan Semiconductor (NYSE:TSM), operator of one of the world’s largest chip foundries, moved to secure materials supplies from other countries besides Russia and Ukraine before the conflict there escalated. Taiwan Semiconductor is SMH’s largest holding at a weight of 10.32%, as of March. 11, according to VanEck data.
The company “ensured it had alternate supplies of neon after Russia amassed a force along the Ukrainian border, threatening a conflict, according to a person familiar with TSMC’s strategy. It now doesn’t anticipate supply problems, the person said,” according to the Journal.
Interestingly, sanctions on Russia by the West don’t apply to chip makers, but SMH member firms Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Intel (NASDAQ:INTC) halted sales in the country. Still, some companies are feeling effects of the sanctions.
“IPG Photonics (IPGP) a U.S.-based company that supplies optical components to industries including semiconductor manufacturing, last week said U.S. sanctions would increase lead times and shipping costs for products that involve its operations in Russia, where it has about 2,000 employees,” reports the Journal.
That company isn’t a member of the SMH roster.
As the Journal notes, Russia’s annexation of Crimea eight years ago may have given semiconductor companies the warning they needed to diversify materials away from that region.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.