Semiconductor Octopoda
Semiconductor prices have been rising as capacity constrained fabs are forced to allocate resources to high volume profitable customers, but as inflation dampens demand, the question is whether the industry will continue to have the bargaining power to continue to increase chip prices for the remainder of the year and into 2023. Throughout the development of the global semiconductor industry, the majority of material suppliers have been able to maintain a stable supply chain and reasonable profitability, but the global macro-economic situation in which we currently live continues to spread higher cost and disruptions in areas that rarely see market perturbations, and those ‘pockets of problems’ are and will likely continue to be a thorn in the side of the semiconductor industry.
Semiconductor material suppliers seem to all be in agreement that the industry has become so interrelated that almost no one is immune to being affected by bottlenecks or escalating costs. A simple illustration (Figure 3) given by a chemical company executive illustrates how the price of crude oil, which has risen by more than 70% since last June, affects the production of EIPA (Electronic-grade Isopropyl Alcohol), which is used to clean wafers and tools during the semiconductor production process. Aside from the increased cost of crude, the increased cost of processes that require heat (gas), and the cost of transportation, is the cost of building a new plant to add purification processing, which is now at least 20% to 30% than it was one or two years ago, according to the company representative.
Considering that there are hundreds of gases, liquids, and metals used in the manufacture of semiconductors, the cost of refining these materials, many of whom have only a few sources, continues to rise with energy prices and have increased far beyond what might be considered ‘normal’, and all of those costs make it more expensive to produce semiconductors, in addition to the cost of more expensive single digit node tools, and while semiconductor manufacturers have been enjoying the ability to run fabs at full or near full capacity, even with the price increases seen thus far, the tentacles of material cost price increases continue to take hold of almost every aspect of semiconductor production, which will impact fab margins unless they are able to pass on those increases, which will become increasingly difficult as demand slows.
All in, it is logical to expect semiconductor producers to see lower margins going forward as the vast chain of materials necessary for chip production continue to see higher prices, but we expect that demand will weaken enough by the beginning of 2023 that material prices will stabilize, which will begin to depressurize semiconductor pricing in 1Q ’23. While COVID-19 and China’s strict policies toward the virus are still a factor to a degree, we see the war in Ukraine as the biggest risk factor to a more stabilized semiconductor material market in 1Q ’23. If that conflict continues or escalates, any price stability could be pushed out and 1H 2023 will see more of what we have seen in recent months or an even greater reduction in demand, a prospect that will make it even harder for semiconductor fabs to raise prices to meet higher costs, a prospect we would see as quite disastrous to the industry. More likely the scenario will far somewhere in between, but even that prospect still carries considerable risk.
Semiconductor material suppliers seem to all be in agreement that the industry has become so interrelated that almost no one is immune to being affected by bottlenecks or escalating costs. A simple illustration (Figure 3) given by a chemical company executive illustrates how the price of crude oil, which has risen by more than 70% since last June, affects the production of EIPA (Electronic-grade Isopropyl Alcohol), which is used to clean wafers and tools during the semiconductor production process. Aside from the increased cost of crude, the increased cost of processes that require heat (gas), and the cost of transportation, is the cost of building a new plant to add purification processing, which is now at least 20% to 30% than it was one or two years ago, according to the company representative.
Considering that there are hundreds of gases, liquids, and metals used in the manufacture of semiconductors, the cost of refining these materials, many of whom have only a few sources, continues to rise with energy prices and have increased far beyond what might be considered ‘normal’, and all of those costs make it more expensive to produce semiconductors, in addition to the cost of more expensive single digit node tools, and while semiconductor manufacturers have been enjoying the ability to run fabs at full or near full capacity, even with the price increases seen thus far, the tentacles of material cost price increases continue to take hold of almost every aspect of semiconductor production, which will impact fab margins unless they are able to pass on those increases, which will become increasingly difficult as demand slows.
All in, it is logical to expect semiconductor producers to see lower margins going forward as the vast chain of materials necessary for chip production continue to see higher prices, but we expect that demand will weaken enough by the beginning of 2023 that material prices will stabilize, which will begin to depressurize semiconductor pricing in 1Q ’23. While COVID-19 and China’s strict policies toward the virus are still a factor to a degree, we see the war in Ukraine as the biggest risk factor to a more stabilized semiconductor material market in 1Q ’23. If that conflict continues or escalates, any price stability could be pushed out and 1H 2023 will see more of what we have seen in recent months or an even greater reduction in demand, a prospect that will make it even harder for semiconductor fabs to raise prices to meet higher costs, a prospect we would see as quite disastrous to the industry. More likely the scenario will far somewhere in between, but even that prospect still carries considerable risk.
Material Processing for EIPA - Source: LCY Chemical, Nikkei Asia, SCMR LLC
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