Energy prices, material access threaten semiconductor demand

A prolonged conflict in the Middle East could impact the semiconductor industry’s access to key materials while rising costs could hit demand for chips that have been central to the artificial intelligence boom, analysts warned.

The U.S.-Israel war with Iran has shone a spotlight on the role countries in the Middle East play in the complex and intricate semiconductor supply chain.

Semiconductor stocks were caught in the sell-off seen in equity markets before President Donald Trump said on Monday that war will end “very soon.”

Memory chipmakers SK Hynix and Samsung have been hit particularly badly with more than $200 billion wiped off their combined value since the start of the war, even with both stocks rallying sharply on Tuesday. The VanEck Semiconductor ETF is down about 3% since the start of the war paring some losses after a 3.6% jump on Monday.

“A prolonged regional conflict could potentially disrupt chipmakers’ manufacturing operations regarding sourcing materials like Helium and Bromine,” Ray Wang, memory analyst at SemiAnalysis, told CNBC.

“For now, the impact appears to be limited. However, a prolonged conflict could eventually lead to disruptions or require adjustments in the sourcing of key materials.”

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

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

Qatar produces over a third of the world’s helium supply, according to the U.S. Geological Survey. Helium is used in the manufacturing process to transfer away heat. It is also used in areas like lithography, which is key for printing the intricate circuitry of a chip. There is no viable alternative to helium.

In 2023, the Semiconductor Industry Association warned that if the supply of helium were to be disrupted, “there would likely be shocks to the global semiconductor manufacturing industry.”

Not only is production an issue. Transportation of the element out of the Middle East could become increasingly difficult with the effective closure of the crucial Strait of Hormuz shipping route.

More than 25% of the world’s helium supply would be taken off the market by an extended shutdown of the Strait of Hormuz, Phil Kornbluth, president of Kornbluth Helium Consulting, told CNBC.

Qatar’s state-owned QatarEnergy produces helium as a byproduct of liquefied natural gas (LNG). QatarEnergy’s Ras Laffan Industrial City was hit by an Iranian drone attack last week, taking the site offline.

Kornbluth said it “is getting hard to imagine” that the world is not looking at a “minimum” two-to-three month shutdown of helium production and a four-to-six month period before the helium supply chain “returns to normal.”

Bromine is another element in focus and is a key part of the semiconductor manufacturing process. Around two-thirds of the world’s bromine production comes from Israel and Jordan, according to the USGS.

“There is modest risk to critical materials. Helium is the main one we are watching. Qatar is one of the largest sources of Helium. Canada and the United States are also large suppliers,” Peter Hanbury, partner in Bain & Company’s Technology practice, told CNBC.

Rising energy costs could also impact the semiconductor industry. That’s because so much of semiconductor demand, from Nvidia‘s graphics processing units to the memory chips products by Samsung and SK Hynix, are designed for data centers that are training and running huge AI models.

These energy-intensive data centers are being built by large U.S. tech companies from Microsoft to Amazon who are buying up these semiconductors.

The conflict caused the price of Brent crude to rise above $100 before paring some of those gains on Tuesday. The “high depedency” of the U.S. on crude oil “indicates significantly higher costs for AI datacenters” which are roughly three-to-five times “more power-hungry than regular data centers,” Jing Jie Yu, equity analyst at Morningstar, told CNBC.

“This could significantly increase the total cost of ownership (TCO) for hyperscalers, thereby posing a threat towards AI infrastructure adoption,” Yu added. “An extended war would lead to some pullback in AI memory chip demand.”

Because of the huge demand for AI and the hundreds of billions of dollars being poured by hyperscalers into building infrastructure, the world’s supply of memory chips has been funnelled into these projects. This has created a shortage of memory and an unprecedented price rise of these chips.

This, in turn, has fueled strong profits at both Samsung and SK Hynix and a massive rally in the share price over the last nine months or so, which has been built on this AI build out. But rising costs and the threat of weaker demand is making investors nervous.

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

“Therefore, if memory prices continue to rise due to supply chain instability while energy-driven operating costs also climb, customers operating data centers may reduce their capital spendings and semiconductor demand,” Hwang told CNBC.

Morningstar’s Yu noted both Samsung and SK Hynix have supply contracts for HBM locked in for the year and “both players have sufficient reserves to sustain production for the time being.”

However, Yu said “an extended war could materially delay AI infrastructure builds” and weigh on more “conventional DRAM” products that are not subject to these longer-term contracts. That could lead to weaker DRAM pricing and lower-than-expected revenues.

“An extended war also drives up overall cost of productions, from a utilities angle as well lower yields due to the lack of key stabilizing materials as mentioned above. Coupled with weaker DRAM pricing, we think this potentially weighs on the high margins that the market is currently pricing into valuations,” Yu said.