How the Iran war and rising energy prices are threatening semiconductor demand

The ongoing conflict in the Middle East is raising alarms in the semiconductor industry, with analysts cautioning that it could disrupt access to essential materials and dampen demand for chips crucial to the artificial intelligence sector. As tensions escalate between the U.S.-Israel coalition and Iran, the complex semiconductor supply chain faces scrutiny. Recent market turmoil has seen semiconductor stocks suffer, particularly memory chip giants SK Hynix and Samsung, which have lost over $200 billion in value since the conflict's onset. Despite a modest recovery, the VanEck Semiconductor ETF has declined approximately 3% since the onset of hostilities. Ray Wang, a memory analyst at SemiAnalysis, noted that a prolonged regional conflict could hinder chipmakers' manufacturing capabilities, especially in sourcing critical materials like Helium and Bromine. Although the immediate impact appears limited, the potential for significant disruptions looms if the conflict continues. Helium, essential for chip manufacturing, is predominantly produced in Qatar, which accounts for over a third of the global supply. The U.S. Geological Survey highlights that Helium is vital for various manufacturing processes, including lithography, which creates intricate chip circuitry. Any disruption in Helium supply could lead to severe repercussions for the global semiconductor industry. Transportation challenges are also a concern, particularly with the Strait of Hormuz, a crucial shipping route, becoming increasingly jeopardized. An extended closure could remove more than 25% of the world's Helium from the market, according to Phil Kornbluth, president of Kornbluth Helium Consulting. Recent drone attacks on Qatar's industrial sites have raised fears of a prolonged shutdown of Helium production, with estimates suggesting it could take months for the supply chain to stabilize. Bromine, another key component in semiconductor manufacturing, is primarily sourced from Israel and Jordan, further complicating the situation. Experts like Peter Hanbury from Bain & Company are closely monitoring the situation, emphasizing the critical nature of these materials to the semiconductor landscape. As energy costs surge due to the conflict, the semiconductor industry may face additional challenges. Major tech companies, from Microsoft to Amazon, rely on semiconductors for data centers that support AI operations. The demand for chips, particularly from memory producers like Samsung and SK Hynix, is closely tied to these energy-intensive infrastructures. The price of Brent crude oil recently exceeded $100 per barrel, impacting operational costs for data centers. Jing Jie Yu, an equity analyst at Morningstar, highlighted that rising energy prices could significantly increase the total cost of ownership for AI data centers, jeopardizing infrastructure investments amidst a climate of uncertainty. While Samsung and SK Hynix have secured contracts for high-bandwidth memory (HBM) for the year, the potential for increased production costs and reduced demand looms large. Research director MS Hwang from Counterpoint Research warned that rising electricity prices could lead data center operators to reduce capital expenditures, further diminishing semiconductor demand. Ultimately, the combination of rising costs, potential supply chain disruptions, and geopolitical tensions poses a significant threat to the semiconductor industry, which is already grappling with unprecedented demand and supply challenges. This evolving situation underscores the interdependencies within the semiconductor supply chain and the broader implications of geopolitical conflicts on technological advancements.