Energy prices, materials access threaten semiconductor demand

Analysts warned that a prolonged conflict in the Middle East could affect the semiconductor industry’s access to key materials and that rising costs could hurt demand for chips that have been at the heart of the artificial intelligence boom.

The US-Israel war on Iran has put a spotlight on the role Middle Eastern countries play in the complex semiconductor supply chain.

Semiconductor stocks were caught up in the decline seen in the stock market until President Donald Trump said on Monday that the war would be over “soon.”

Memory chip makers SK Hynix and Samsung have been particularly hard hit, with more than $200 billion collectively wiped out since the war began, even though their stock prices soared on Tuesday. of VanEck Semiconductor ETF After rising 3.6% on Monday, it is down about 3% since the war started, with some losses.

“Prolonged regional conflicts could disrupt chipmakers’ manufacturing operations when it comes to sourcing materials such as helium and bromine,” Lei Wang, memory analyst at Semianalysis, told CNBC.

“For now, the impact appears to be limited. However, a prolonged conflict could ultimately lead to disruption and the need to make adjustments to the procurement of key materials.”

According to Reuters, a South Korean lawmaker warned last week that a war with Iran could hinder access to key materials from the Middle East such as helium. The lawmaker also warned that a prolonged conflict could lead to higher energy prices.

So what exactly is the role of certain Middle Eastern countries in the semiconductor supply chain?

Qatar produces more than a third of the world’s helium supply, according to the U.S. Geological Survey. Helium is used to dissipate heat during the manufacturing process. It is also used in areas such as lithography, which is key to printing complex circuits on chips. There are no viable alternatives to helium.

The Semiconductor Industry Association warned in 2023 that a disruption in helium supplies would “likely cause a shock to the global semiconductor manufacturing industry.”

Production is not the only issue. The effective closure of the critical Strait of Hormuz sea route could make it increasingly difficult to transport elements from the Middle East.

Phil Kornbluth, president of Kornbluth Helium Consulting, told CNBC that a prolonged closure of the Strait of Hormuz would remove more than 25% of the world’s helium supply from the market.

Qatar’s state-owned Qatar Energy produces helium as a byproduct of liquefied natural gas (LNG). Qatar Energy’s Ras Laffan Industrial City site was taken offline last week after an Iranian drone attack.

Kornbluth said it was “becoming difficult to imagine” the world not expecting a “minimum” of two to three months of helium production outage, and four to six months for the helium supply chain to “return to normal.”

Bromine is also an element of interest and is an important part of the semiconductor manufacturing process. According to the USGS, about two-thirds of the world’s bromine production comes from Israel and Jordan.

Peter Hanbury, a partner in Bain & Company’s technology practice, told CNBC: “There’s some risk with any critical material. Helium is the material we’re primarily looking at. Qatar is one of the largest sources of helium. Canada and the United States are also large suppliers.”

Rising energy costs may also impact the semiconductor industry. This is because there is a huge demand for semiconductors. NvidiaSamsung and SK Hynix’s graphics processing unit and memory chip products are designed for data centers that train and run large AI models.

These energy-intensive data centers are being built by major US technology companies. microsoft to Amazon Who is buying up these semiconductors?

The dispute sent Brent crude oil prices soaring by more than $100, but they pared some of that gain on Tuesday. Jing Jie Yu, an equity analyst at Morningstar, told CNBC that the U.S.’s “high dependence” on crude oil “means the cost of AI data centers is significantly higher,” and that AI data centers “consume more electricity than regular data centers.”

“This could significantly increase the total cost of ownership (TCO) of hyperscalers, which could result in threats to AI infrastructure deployments,” Yu added. “If the war continues for a long time, demand for AI memory chips will decline to some extent.”

Samsung and SK Hynix are two major manufacturers of memory chips. These are important components for consumer electronics such as smartphones and laptops. But in recent years, it has become an important semiconductor in data centers designed for AI.

HBM is a type of dynamic random access memory, also known as DRAM, whose chips are arranged vertically. HBM is a key component of Nvidia systems. Other types of memory are also installed in data centers.

With huge demand for AI and hyperscalers pouring hundreds of billions of dollars into building infrastructure, the world’s supply of memory chips is being funneled into these projects. This led to memory shortages and an unprecedented spike in the prices of these chips.

This has fueled both Samsung and SK Hynix’s strong profits and strong stock price gains over the past nine months or so based on this AI enhancement. But rising costs and the threat of weaker demand are spooking investors.

MS Hwang, research director at Counterpoint Research, said electricity accounts for about half of a data center’s operating costs, and about half of that is used to power memory.

“Thus, if memory prices continue to rise due to supply chain instability, while energy-powered operating costs also rise, data center customers may reduce capital expenditures and semiconductor demand,” Huang told CNBC.

Morningstar’s Yu pointed out that both Samsung and SK Hynix have finalized HBM supply contracts by the end of this year, and that “both companies have sufficient spare capacity to maintain production for the time being.”

However, Yu said that “a prolonged war could significantly delay the construction of AI infrastructure,” which could weigh on “traditional DRAM” products that are not covered by these long-term contracts. If that happens, DRAM prices could fall, leading to lower-than-expected profits.

“A prolonged war will increase overall production costs in terms of utilities, as well as lower yields due to the lack of key stabilizing materials as mentioned above. Combined with falling DRAM prices, we believe this could potentially put pressure on the high profit margins currently priced into market valuations,” Yu said.

—CNBC’s Dylan Butts contributed to this report.