Iran war choke-points begin to cast doubt on global chip supply

As the war in the Middle East stretches into a third week, the global semiconductor industry is facing mounting threats the conflict will choke off key supplies vital for chipmaking and spike the cost of power in Taiwan — the foundation of today’s technology industry.

While Taiwan Semiconductor Manufacturing Co. and government officials have offered reassurances, investors, analysts and executives in the industry warn the risks are increasing as the fighting drags on. The island’s vast chipmaking sector — which drives about a fifth of the economy — depends on a sweeping array of chemicals, components, machinery and other materials from abroad to support the global semiconductor market, which is projected to hit about $1 trillion in sales this year.

Those include helium — a third of which is processed in Qatar — and sulfur, which is made through oil and gas refining. Any severe interruptions to either of those inputs or to Taiwan’s electrical grid, which draws a third of its fuel from the Middle East, would affect TSMC.

The company is the sole chipmaker for Nvidia Corp.’s advanced AI accelerators and Apple Inc.’s iPhone processors, and it makes roughly 90% of the world’s most advanced logic chips. Demand already outstrips its capacity to manufacture AI chips, meaning any production snarls would complicate Big Tech firms’ $650 billion in planned AI spending this year. Interruptions would also spill into industries beyond tech, from consumer electronics to car-making — at a time those companies are grappling with the soaring price of the memory chips needed in most modern devices.

“A disruption in the Strait of Hormuz wouldn’t automatically halt chip production, but it could ripple through power costs, materials supply, and the economics of building AI infrastructure,” Shawn Kim, head of Asia technology research at Morgan Stanley, said on a podcast last week.

He added those constructing energy-intensive facilities like large-scale data centers may face higher operating costs and low revenues.

Much depends on how long the war persists. The biggest concern, however, centers on Taiwan’s unusually high dependence on liquefied natural gas.

A heavy reliance on seaborne cargoes and an LNG reserve of around 11 days leaves Taiwan especially vulnerable to supply disruptions. In comparison, neighboring South Korea has storage capacity that allows it to store at least 52 days of LNG, according to the Institute for Energy Economics and Financial Analysis. Japan also currently holds about three weeks of LNG stockpiles. Taiwan has another few weeks’ of inventory on ships bound for the island, Morgan Stanley estimates.

Taiwan has a 97% dependence on imports for its energy needs, Goldman Sachs Group Inc. analysts led by Alvin So estimated in a note on Sunday, with about 37% of LNG supply coming from the Middle East. They warned that Taiwan is likely to pay a significant premium for the replacement cargoes.

“Commercial transit through the Strait of Hormuz remains severely disrupted, and Qatar has declared force majeure. For Taiwan, the key risk channel is not only oil prices, but physical gas availability, pricing, and delivery timing,” the Goldman Sachs analysts said.

For now, Taiwan has secured the liquefied natural gas for March and April to make up for a constraint in shipments from Qatar, and the island has adequate power supply, Taiwan’s Ministry of Economic Affairs said on Saturday. Local companies are also capable of procuring helium from multiple sources, including the U.S. and Australia, and supplies shouldn’t be affected by situations in a single region, the ministry added separately.

To address the vulnerability of LNG reserves, Taiwan has decided to lift the statutory minimum natural gas inventory to 14 days starting next year from the current 11 days, and will review that rule in the future, according to the island’s Energy Administration Deputy Director General Chen Chung-hsien. Taiwan has secured over half its LNG needs for May and has started negotiations with the U.S. for its June supply, he said.

Beyond LNG, Taiwan also secured crude oil for March and April, and is currently working on May shipments. “Semiconductors is Taiwan’s strategic industry, we will make sure that the power supply to chip plants is stable,” he told Bloomberg News.

If the disruption is sustained over an extended period, helium shortages could force chipmakers to prioritize production of higher-margin AI chips over less profitable components, Bloomberg Economics analyst Michael Deng said.

TSMC shares have shed about 7% since the beginning of the war in the Middle East, while global stocks have lost about 6%. The company said on Monday it does not anticipate significant impact to its operations at this time.

Europe is another link in the global tech supply chain that may prove vulnerable over time. The continent’s chipmakers also depend on helium imports, with Poland the only producer in the EU. Its output covers about 8% of the region’s demand, Julia Christina Hess, leader of the Global Chip Dynamics program at think tank Interface, said. The EU sources roughly 40% of its helium from Qatar, she added.

Europe has built up its strategic storage capacity in response to the Russian war in Ukraine and the shutdown of the U.S. National Helium Reserve’s enrichment unit. Air Liquide SA’s underground helium storage facility in the German city Gronau-Epe has a capacity of around 47 million cubic meters per year, Hess said, “which could perhaps act as a buffer now.”

Chipmakers in the bloc say they aren’t concerned for now. A spokesman of the European Semiconductor Industry Association said in an email that their members see no immediate threat to overall helium availability. A spokesman for German chipmaker Infineon Technologies AG said the company gets supplies of helium from several regions and has reserves in place, mitigating any impact from Hormuz.

But other pressures on the supply chain could challenge chipmakers in the EU more quickly. Frank Bösenberg, managing director of German lobby group Silicon Saxony, said Cathay Pacific Airways Ltd.’s cargo arm handles 30% of global wafer transport. Its regional hub in Dubai can’t be fully serviced currently, creating the potential for disruption, he said.

Given the multitude of supply chain risks globally, the broader question is the severity of economic impact should the war continue. Any disruption to Taiwan’s broader chip ecosystem, in particular, may exert ripple effects on some of the world’s biggest industries.

And it will exacerbate an existing, historic crunch of memory chips, which is already forcing consumer companies to hike prices around the globe.

-• With assistance from Miaojung Lin and Sing Yee Ong.