In the chip industry lately, it seems everything, even components manufacturers took for granted, are in short supply. Shortages and supply disruptions are rocketing up and down supply chains in today’s disrupted economy.

Vincent Liu, an industry veteran and president of Taiwan’s LCY Chemical, a key supplier to global chipmakers, said, “The industry is very interconnected. The bottlenecks and the price dynamic in an upstream material can impact other key products downstream. It’s like a chain reaction.”

Liu cited electronic-grade isopropyl alcohol, or EIPA as an excellent example of this.

EIPA is a vital solvent used for cleaning sensitive wafers and other equipment used to make chips. However making it relies on the use of petroleum products., so its supply is directly connected to the supply of crude oil. Crude oil is required to make naphtha. Naphtha is then turned into propylene, which is key to making EIPA. As the price of crude rises, so does the cost of EIPA, as well as the scarcity as some suppliers look for products to produce with greater margins.

Liu went on to say, “We noticed such an uptick trend for multiple metals and materials since 2021 and started to get prepared for that. To add to those pressures, costs for logistics are also increasing. We don’t expect the logistics bottlenecks to resolve till the end of this year, and hiccups could even extend into next year.”

It takes hundreds of highly purified chemicals, gasses, and materials to manufacture semiconductors. Those materials are responsible for about 20% of the total cost to manufacture a chip. But these supply chains have always been very stable, so companies have not sought out redundancies and alternative sources for these products to harden their supply chains against disruptions.

Now however, we are seeing the after-effects of the pandemic, there is a war in Ukraine, where key products are sourced, Russian sanctions are impacting the petroleum sector, and at the same time, there is a surge of demand for chips for everything from 5G infrastructure to electric vehicles, whereas those things were not even on the radar just a few years ago. As a result, in the chip sector, supply and demand are totally out of balance.

An executive with Wah Lee Industrial, a supplier to chipmakers, noted, “The industry is very interconnected. It’s likely that we will need to bear a more costly future. It’s not likely that all these metal and chemical prices will go down suddenly.”

Phosphoric acid, wafers, and noble gases like neon have all seen prices surge since mid 2020, sometimes doubling. High purity metals needed for chipmaking, like palladium, indium, platinum, copper, aluminum and stainless steel are also rising in price.

Liu Chi-tung, chief financial officer at United Microelectronics Corp said, “The price increases are of a magnitude beyond the common, reasonable price increases in the past due to supply chain disruptions and geopolitical tensions.”

Making matters more difficult is the exacting standards of purity required for chipmaking. It is not enough to source a material or reagent from a new supplier, but you must also verify the purity of the product before it can be put into your process. That is a process which can take months.

Jeffrey Pan, chairman of chip material and chemical distributor Topco Scientific said, “Most major chipmakers are qualifying new sources after securing emergency supplies, but the verification process needs at least six months to ensure the quality won’t affect their manufacturing quality.” 

And on top of all that is the issue of logistics, as these pure reagents and materials will tend to have very specific transport and storage requirements.

An executive with a Japanese chipmaking equipment supplier noted, “Chemicals, unless they are locally produced, have to be stored in specially designed containers known as ISO tanks and shipped via the ocean. But we all know how messy ocean freight has become since the onset of the pandemic. Not only have the costs of logistics gone up, but the general waiting time has also extended from around a month to at least three months.”

And if they find a supplier, verify the quality of the product, and are able to take possession of the product, then there is the issue of pricing. In this specialty there are no specialized exchanges. Buyers approach sellers, are quoted prices, and accept or reject them with only opaque ideas of what the markets are pricing the materials at.

All of it is working to raise the costs of chipmaking. And as it is doing that, it foisting those costs on smaller chipmakers, who are buying smaller quantities of supplies, and who lack the reach and logistics – and cachet, to locate the best pricing and secure reliable, regular supplies.

Smaller chipmakers in Taiwan and China are said to be paying 40% more for CMP slurry, a polishing compound used to smooth the surface of wafers.

An executive with a Taiwan-based chipmaker said, “Our procurement team is struggling extremely hard and suffering because the shortage of these key materials could risk our production continuity.”

Lita Shon-Roy, president and CEO of Techcet noted these problems are less prominent for the big names, like Intel, TSMC and Samsung Electronics, who normally have long term agreements with larger, more reliable suppliers for regular bulk orders.

Shon-Roy said, “You will hear less supply chain problems from big chipmakers. They are like Walmart. They have huge buying power and greater control of their supply chain. When big chipmakers ramp up production of massive chip plants, other smaller chip companies could face all sorts of material problems.”

And these relationships are growing stronger between big names and important suppliers.

President Liu of LCY Chemical said, “Now chipmakers and chemical suppliers [have] become more like partners to secure supplies, chipmakers are more willing to share their expansion plans and road maps with us earlier. We do feel the importance of the materials sector has been significantly elevated.”

But it does not change the reality that at present the market is disrupted, and supply and demand are no longer aligned.

Liu went on, “At the end of the day, the costs to build chips and to make electronic devices are all increasing. Those could eventually be passed on to consumers.”