Energy and key material supply risks are emerging! Middle East warfare spills over to global semiconductor industry.

As the Middle East war enters its third week, the global semiconductor industry is facing an increasingly severe threat - the war may cut off critical supplies needed for chip manufacturing and push up electricity costs in the Taiwan region of China. Despite reassurances from Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) and regional officials, investors, analysts, and industry executives warn that risks are rising as the conflict continues. Taiwan's huge chip manufacturing industry - which accounts for about one-fifth of the local economy - relies on a large amount of chemicals, components, equipment, and other materials from overseas to support the global semiconductor market, with sales expected to reach about $1 trillion this year. These materials include helium (one-third of which is processed in Qatar) and sulfur (produced through oil and natural gas refining). Any serious interruptions in the supply of these raw materials or the Taiwan power grid (one-third of which comes from the Middle East) would impact the chip production of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is the exclusive chip manufacturer for NVIDIA Corporation (NVDA.US) advanced AI chips and Apple Inc.'s (AAPL.US) iPhone processors, producing about 90% of the world's most advanced logic chips. Demand for AI chips has already exceeded its capacity, meaning any production issues will complicate the $650 billion in planned AI spending by large tech companies this year. Production disruptions will also affect industries beyond tech, from consumer electronics to car manufacturing - at a time when these companies are grappling with soaring prices for the storage chips needed for most modern devices. Shawn Kim, head of Asian technology research at Morgan Stanley, said last week, "The disruption in the Strait of Hormuz won't automatically halt chip production, but it could create ripple effects in electricity costs, material supplies, and the economic viability of building AI infrastructure." He added that companies building energy-intensive facilities such as large-scale data centers might face higher operating costs and lower revenues. The development of the situation largely depends on the duration of the war. But the biggest concern is Taiwan's unusually high dependence on liquefied natural gas (LNG). Taiwan relies heavily on imported LNG by sea, with reserves of only about 11 days, making it particularly vulnerable to supply disruptions. In comparison, according to data from the Institute for Energy Economics and Financial Analysis, South Korea's storage capacity is enough to store at least 52 days of LNG, and Japan currently has about three weeks of LNG stock. Morgan Stanley estimates that Taiwan still has several weeks of LNG stock on board ships sailing to the island. Goldman Sachs Group, Inc. analysts estimated in a report that 97% of Taiwan's energy needs depend on foreign imports, with about 37% of its LNG supply coming from the Middle East. They warned that Taiwan may have to pay a significant premium for substitute goods. The analysts said, "Commercial shipping through the Strait of Hormuz remains severely disrupted, and Qatar has announced a stoppage of LNG production due to force majeure. For Taiwan, critical risks include not only oil prices but also the actual availability, pricing, and delivery times of natural gas." Taiwan authorities said last Saturday that the region has secured LNG supplies for March and April to compensate for transportation restrictions from Qatar, and that electricity supply is sufficient. In addition, Taiwanese companies have the ability to source helium from multiple sources, including the US and Australia, so the supply should not be affected by the situation in a single region. In addition, to address the issue of insufficient LNG reserves, Taiwan has decided to increase the minimum natural gas inventory from 11 days to 14 days from next year and will reassess the rule in the future. Analyst Michael Deng said that if supply interruptions persist for a long time, a helium shortage could force chip manufacturers to prioritize the production of higher-profit AI chips over lower-profit other components. Since the outbreak of the Middle East war, shares of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR have fallen by about 7%, while global stock markets have fallen by about 6%. The company said on Monday that it currently expects its operations will not be significantly affected. Over time, Europe may also become another fragile link in the global tech supply chain. European chip manufacturers also rely on imported helium, with Poland being the only helium-producing country in the EU. Julia Christina Hess, head of the "Global Chip Dynamics" project at the think tank Interface, said its production can only meet about 8% of the region's demand. She added that about 40% of the EU's helium comes from Qatar. To cope with the Russia-Ukraine war and the closure of the US national helium reserve enrichment facility, Europe has strengthened its strategic reserve capacity. Julia Christina Hess said that Air Liquide's underground helium storage facility in Gronau-Epe, Germany, has an annual capacity of about 47 million cubic meters, and "may now serve as a buffer." EU chip companies say they are not worried at the moment. A spokesperson for the European Semiconductor Industry Association said in an email that its member companies have not yet seen a direct threat to the overall helium supply. A spokesperson for Infineon said that the company sources helium from multiple regions and has reserves, so it can mitigate the impact of the Middle East situation. But other pressures on the supply chain may hit EU chip manufacturers faster. Frank Bsenberg, Managing Director of the German industry lobbying organization Silicon Saxony, said that CATHAY PAC AIRs' cargo business accounts for 30% of global wafer transport, and its regional hub in Dubai, operated by Hub Group, Inc. Class A, is currently unable to operate fully, posing new risks of interruptions. Given the many risks in the global supply chain, the broader question is how severe the economic impact will be if the war continues. In particular, if Taiwan's broader chip ecosystem is disrupted, it could have a cascading impact on some of the world's largest industries. This will further exacerbate the existing historic shortage of storage chips, which has already forced global consumer electronics companies to raise product prices.