Energy prices and access to materials threaten semiconductor demand

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

The US-Israel war with Iran has highlighted the role Middle Eastern countries play in the complex and intricate semiconductor supply chain.

Semiconductor stocks were caught in the selloff seen in stock markets before President Donald Trump said Monday that the war will end “very soon.”

Memory chip makers SK Hynix and Samsung have been especially hard hit, with more than $200 billion wiped from their combined value since the start of the war, even as both stocks rose sharply on Tuesday. He 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 when it comes to 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 cause disruptions or require adjustments to the sourcing of key materials.”

A South Korean lawmaker warned last week that Iran’s war could hamper access to key Middle Eastern materials such as helium, Reuters reported. The lawmaker also warned that a prolonged conflict could cause energy prices to rise.

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 United States Geological Survey. Helium is used in the manufacturing process to remove heat. It is also used in areas such as lithography, which is key to printing the complex circuits of a chip. There is no viable alternative to helium.

In 2023, the Semiconductor Industry Association warned that if helium supplies were disrupted, it would “likely result in shocks to the global semiconductor manufacturing industry.”

Not only production is a problem. Transporting the element out of the Middle East could become increasingly difficult with the effective closure of the crucial Strait of Hormuz sea route.

More than 25% of the world’s helium supply would be taken off the market due to a prolonged closure of the Strait of Hormuz, Phil Kornbluth, president of Kornbluth Helium Consulting, told CNBC.

The state-owned company QatarEnergy produces helium as a by-product of liquefied natural gas (LNG). QatarEnergy’s Ras Laffan industrial city was hit by an Iranian drone strike last week, taking the site offline.

Kornbluth said it is “becoming difficult to imagine” that the world is not looking at a “minimal” 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 the spotlight and is a key part of the semiconductor manufacturing process. According to the USGS, about two-thirds of global bromine production comes from Israel and Jordan.

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

Rising energy costs could also affect the semiconductor industry. This is because much of the demand for semiconductors, from NVIDIAFrom graphics processing units to memory chip products from Samsung and SK Hynix, they are designed for data centers that train and run huge AI models.

These energy-intensive data centers are being built by large American technology companies from microsoft to Amazon who are buying these semiconductors.

The conflict caused the price of Brent crude to rise above $100 before paring some of those gains on Tuesday. The United States’ “high dependence” on crude oil “indicates significantly higher costs for AI data centers,” which consume about three to five times “more energy than regular data centers,” Morningstar equity analyst Jing Jie Yu told CNBC.

“This could significantly increase the total cost of ownership (TCO) for hyperscalers, posing a threat to the adoption of AI infrastructure,” Yu added. “A prolonged war would cause some reduction in demand for AI memory chips.”

Samsung and SK Hynix are the two largest producers of memory chips. These are critical components for consumer electronics like smartphones and laptops. But in recent years, they have been critical semiconductors in data centers designed for AI.

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

Due to the huge demand for AI and the hundreds of billions of dollars that hyperscalers invest in building infrastructure, the world’s supply of memory chips has been funneled into these projects. This has created a memory shortage and an unprecedented price increase for these chips.

This, in turn, has driven strong gains in both Samsung and SK Hynix and a massive rally in the share price over the last nine months or so, which has been based on this AI construct. But rising costs and the threat of weaker demand are making investors nervous.

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

“Therefore, if memory prices continue to rise due to supply chain instability, while power-driven operating costs also increase, customers operating data centers may reduce their capital expenditures and demand for semiconductors,” Hwang told CNBC.

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

However, Yu said that “a prolonged war could materially delay the construction of AI infrastructure” and affect more “conventional DRAM” products that are not subject to these longer-term contracts. That could lead to weaker DRAM prices and lower-than-expected revenue.

“A prolonged war also increases the overall cost of production, from a utility standpoint, as well as lower yields due to a lack of key stabilizing materials as mentioned above. Coupled with weaker DRAM prices, we believe this potentially weighs on the high margins the market is currently pricing into valuations,” Yu said.

— CNBC’s Dylan Butts contributed to this report.