Chip Shortages to Persist on the Back of Rising Geopolitical Risks
For over two years the issue of chip shortages has been prominent in the news, mainly because this technology is now integrated into many of the products people use on a daily basis. Inflation is now rising around the world and policymakers, as well as the big names in the private sector, continue to look for ways to increase productivity, yet the latest global developments don’t look encouraging.
Pandemic effects still impact the industry
Speaking of the pandemic, rising COVID-19 cases still put pressure on large factories that account for a big share of the chip market. Mitigating the spread of the virus was important, so production stalled while demand certainly did not.
Coupled with that, transportation issues further increased pressure on the industry. Shipping prices are on the rise, even now that this industry is trying to show that things are back to normal. The future of the pandemic’s spread remains an enigma, so nobody knows if these issues will persist in the future.
The shortage of chips did start to ease once economic activity got back to more normal levels, but as of late, the military conflict between Russia and Ukraine exacerbated the crisis once again, because these two countries alone are in charge of producing basic materials required for the semiconductors.
Ukraine – Russia war – an aggravating factor?
In terms of the chip manufacturers’ share prices traded on stock exchanges and through CFD trading, companies like Intel, Nvidia, and Qualcomm have been under pressure since the end of last year. Their stocks are over 20% below the all-time highs because capital is now entering cyclical sectors. Tech tends to underperform when inflation and interest rates are rising, and this situation is no exception.
The clash between Russia and Ukraine adds to the list of concerns for a few important reasons. 40% of the global supply of palladium comes from Russia, while 70% of the global supply of neon comes from Ukraine.
Companies producing semiconductors make up to 70% of the global neon demand. Military tensions in Ukraine surged in 2014-2015 as well, and back then neon prices went up by several times over.
Chip producers under pressure
When demand is elevated, chip producers naturally have pricing power. Despite rising inflation, sectors in need of semiconductors managed to adapt to these challenging circumstances, yet the current rise in geopolitical tensions could have broad implications if it is going to continue for an extended period.
Higher costs for materials needed to produce semiconductors might also put pressure on big brands in the industry, as they will be forced to buy at higher prices. This will impact their bottom line, while also creating the so-called “demand destruction”, given that at some point buyers will have to stall and wait until chip prices start to fall. The impact on the global economy is still unclear, but analysts are already revising their expectations for 2022 downwards.