As Russia's incursion into Ukraine escalates into a structurally damaging war, the falling supply and rising price of Neon and Palladium could send semiconductor stocks soaring worldwide.
Palladium's price has soared since the start of Russia’s incursion into Ukraine, rising 54% from $1,617/oz on 15 December to $2,492/oz on 23 February.
And this dizzying price rally could continue. Russia produced 2.6 million troy ounces of palladium in 2021, representing 40% of global production. And the country’s Nornickel is the largest palladium miner in the world.
Palladium price could hit a record high
TD Securities’ Bart Melek believes that ‘if we see a set of sanctions that reduce financing and free flow of the material to the rest of the world, we could see a significant tightening of conditions for palladium probably in the not too distant future.’ And he’s predicted a ‘pretty significant rally’ for the metal, to a potential record high. Goldman Sachs also expects Palladium to rise, saying ‘the price of consumed commodities that Russia is a key producer of to rally.’ The metal is already closing in on the record $2,967/oz it struck in May last year.
Moreover, the neon price is also rising. The noble gas is an essential material in gas-phase lasers used to manufacture semiconductors. According to Techcet, Ukraine is the largest neon manufacturer in the world and supplies more than 90% of the US’s semiconductor-grade neon. With Neon’s price previously soaring in the Russia-Ukraine conflict of Crimea in 2014, Stephen Innes at SPI Asset Management fears a market repetition could happen, as ‘there's just real concern here that shipping channels are just going to get disrupted because of this Ukraine situation.’
Semiconductor stocks to watch
Even before the Russian aggression, there was already a semiconductor shortage arising from the wider supply chain crisis in the wake of the covid-19 pandemic. In simplest terms, the global economic shutdown saw demand for semiconductors fall. Then as the global economy reopened, demand exploded faster than the ability of supply chains to deliver, sending semiconductor stocks soaring.
Deloitte now predicts the shortage will last through 2022, and potentially into 2023, hitting industries from car manufacturers, to smartphones, PCs, gaming consoles and data centres. The auditor expects lost sales from the supply crunch to hit $500 billion globally between 2020 and 2022.
But with significant levels of palladium and neon supplies compromised across Russia and Ukraine, palladium miners such as Anglo American Platinum, Sibanye Stillwater, Impala Platinum and Northam Platinum with projects in stabler regions like Africa could see their share prices spike.
Microchip foundries could also benefit. $600 billion Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest semiconductor manufacturer, in a country responsible for 92% of global semiconductor manufacturing. It also designs chips, and will outspend Intel by $15 billion on R&D in 2022. Smaller Taiwanese proposition, United Microelectronics Corporation has only a $28 billion market cap. But as demand is currently far higher than TSMC can supply, this growth stock might also have strong potential.
Then there’s ASML Holdings, ‘the world’s supplier to the semiconductor industry.’ The Dutch company counts TSMC and Intel amongst its customers and is now looking at alternative sources for the 20% of neon it buys from Ukraine and Russia. As it expects a limited impact on production, it could capitalise on the growing demand for microchips.
There’s also semiconductor designer Arm Holdings to consider. Slated for an Initial Public Offering later this year, the Cambridge-based company designs 95% of smartphone chips worldwide and could now be an even hotter IPO prospect.
Finally, US giants AMD and Nvidia are also semiconductor stocks to watch. While both have fallen from their pandemic share price highs, they are still far above pre-covid-19 levels. The challenge is that the higher cost of palladium and neon could send the price of semiconductors soaring, dampening demand. Of course, with fewer semiconductors being made they could both charge a premium on their products. A similar conundrum faces BP and Shell; oil prices are rising, but their source of oil is being cut off.
Moreover, Russia’s RBC has reported that both AMD and Intel have ‘verbally informed Russian manufacturers’ that they are complying with the US Treasury department ban on exports of semiconductor technologies to Russian industries. Early reports indicate that TSMC is also halting supplies to Russia. While ‘consumer communication devices’ such as personal PCs and phones are exempt, the move is likely to see palladium prices rising further, especially if Russia escalates its response.
And as the palladium price rises on contstricted supply, semiconductor stocks could soar.
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Charles Archer | Financial Writer, London
01 March 2022