Neon, for example, is a key part of the semiconductor manufacturing process. The gas is a by-product of steel production and is only commercially viable when produced in significant quantities from very large steelworks such as Azovstal. Producers such as Ingas (linked to Mariupol) and Cryoin in Odessa can then take the neon from the air and make it available. But with production at both companies now suspended indefinitely, analysts are concerned about the supply of neon and other gases, especially for Western manufacturers.
A big problem is that the noble gas market remains dependent on a handful of specialists – companies such as Linde plc, Air Liquide SA and Air Products and Chemicals Inc. – who prefer to engage in long-term confidential contracts. The lack of transparency has hindered the development of a spot market (where non-contract supplies can be sold at current market prices) and has discouraged natural price discovery.
Since no one can be sure of current prices, it is difficult to assess noble gas supply. What we do know is that until the war in Ukraine broke out in 2014, up to 90% of the world’s neon supply came from Ukraine. Most of these goods came from Mariupol and most of them were destined for Western markets.
Cliff Cain of the Edelgas Group, an independent consultancy, told me that some production has since moved to China, with Ukraine now probably accounting for 50-70% of global neon production. . South Korean steel company POSCO has also started producing a small amount to meet domestic demand.
In a recent earnings call, Linde CEO Sanjiv Lamba said his company was getting less than 20% of its neon supply from Ukrainian and Russian sources and remained well diversified. (Linde and Air Products did not respond to emails seeking comment. An Air Liquide spokeswoman said the company currently has no exposure to the Ukrainian or Russian neon markets.)
But if Russia retains control of Mariupol and restarts the city’s damaged factories, 95% of the market could end up in the hands of just two potentially “hostile” players, according to Cain.
Metinvest Group, the mining company of Ukrainian billionaire Rinat Akhmetov, which owns Azovstal as well as the nearby Ilyich steel mill, said his company was preparing a $10 billion lawsuit against Russia over the destruction of the two facilities from Mariupol. This sum, however, will barely hit second-order effects if semiconductor manufacturing becomes constrained due to neon shortages.
Uncertainty around the supply of helium – another noble gas needed to make semiconductors – is also growing.
Helium comes from natural deposits in the ground or can be extracted as a by-product of the gas liquefaction process under the right circumstances. Although production is more diversified, with the United States, Qatar and Algeria being among the largest producers, the helium market nevertheless suffers from significant price opacity.
The same specialized companies also dominate. Competitors and potential buyers say that in many cases they are making deals on bargain terms to capture more gas supply activity, preventing price discovery. What little non-contract supply does exist is currently quoted at five times the usual rate, says Cain of Edelgas – a figure confirmed to me by Stefano Marani, the CEO of South Africa-based Renergen, an independent producer of helium and natural gas.
Since the problems in the noble gas market predate the war in Ukraine, it is hard not to blame the market structure for the current circumstances. But sometimes pressure is just enough to encourage transparency.
It was the tightness of the market in the wake of the 1979 Iranian revolution that ultimately shook the grip of the Seven Sisters cartel – the group of Western oil producers that dominated long-term contracts in the market – and enabled the emergence of an active oil market.
More recently, the liquefied natural gas (LNG) market opened following market tensions caused by the Fukushima disaster in 2011 and the drop in Egyptian gas production after the Arab Spring. The market has moved gracefully from a “take or pay” type system pegged to oil prices to one in which spot cargoes now dominate, promoting better price visibility and a better understanding of supply dynamics .
The noble gas market would be well advised to follow suit.
A good first step would be for Western governments to call for more transparency from big business about how much supply has been affected by the war and how much is still coming from disputed territories or those at risk. to be sanctioned.
Market participants should also support the development of new platforms that allow them to post offers to court supply and cover shortages, or urge existing exchanges to support rare gas listings. The crypto market, for its part, is already looking for opportunities in this space. He convinced Renergen, which is bringing a new offering to the market starting this year, to sell its volumes as tokens.
Whatever the path to a spot market, it is becoming increasingly clear that gases such as neon and helium are too important to be controlled by just a few big players. Noble gases should be able to float freely in the market.
More from Bloomberg Opinion:
• The oil market need not fear a calamitous recession in the United States: Javier Blas
• The exit of McDonald’s from Russia puts an end to an era full of hope: Thérèse Raphaël
• Chipmakers need supply chain that avoids Ukraine: Tae Kim
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Izabella Kaminska is the founder and editor-in-chief of Blind Spot. She spent 13 years at the Financial Times, most recently as editor of FT Alphaville.
More stories like this are available at bloomberg.com/opinion