Russia-Ukraine conflict will worsen global semi-conductor shortage: Moody's

New Delhi [India], March 4 : The ongoing Russia-Ukraine military conflict and the geopolitical and economic uncertainties are likely to further worsen the global semi-conductor shortage, Moody's Analytics said in a report on Friday.
COVID pandemic has caused shipping costs to skyrocket over 300 per cent and will continue to be high due to the scarcity of new containers.
According to Moody's Analytics analysis, Palladium and neon are two resources that are key to the production of semiconductor chips, and 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," Moody's said in the report.
During the 2014-15 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.
Granted, technology has improved significantly since 2015 and chip-making companies have stockpiled resources owing to elevated demand during the pandemic, but inventory can only last so long. If a deal is not brokered in the coming months, expect the chip shortage to get worse and for industries highly dependent on them to be similarly affected. 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.
According to Moody's Analytics analysis, transportation is another industry that will be suffering from the military conflict since transportation has the highest energy intensity of all major industries.
Even before the conflict, the pandemic had caused shipping costs to skyrocket over 300 per cent last year 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 remain elevated and will continue to be high due to the scarcity of new containers.
Transportation and logistics are key to a wide range of industries from processed food to advanced industrial manufacturing and affect especially those that rely on inputs from many different parts of the world.
Finally, if energy extraction is upstream, and freight and transportation midstream, the impact of the military conflict will also be felt in industries that are downstream, where oil and gas are refined and used to make rubber, preservatives, plastics, containers, and many other products that play an important role in the agricultural and medical fields. Understanding these input-output linkages is essential to gauging the true impact of the conflict on the various sectors of the economy.
Moody's Analytics says that in terms of evaluating country risk, the most salient adverse impact will be felt in countries primarily in Europe that are recipients of Russian oil and natural gas. Uncertainty over the conflict, however, will lead to higher oil and natural gas prices worldwide, even if additional supply outside of Russia comes on line. Inventory and reserves can help mitigate short-term supply-chain disruptions, but shortages will be inevitable should the conflict persist.
The United States does not rely on direct energy imports from Russia or Ukraine but does have significant indirect energy exposure through the goods and services it imports from Europe and Asia that are produced using Russian energy.
China and India have more direct exposure to Russian energy, but given the sanctions placed on Russian exports around the world, countries that continue to contract with Russia will have bargaining power in those negotiations and are unlikely to suffer from prices rising too much as a result.