Critical Materials Can Make or Break America’s Semiconductor Supply Chains
The United States must increase its domestic capacity for high-purity minerals, gases, and chemicals, or else American semiconductor capacity—and national security—will remain highly dependent on foreign factors outside of its own control.
The most advanced semiconductors in the world—leading-node logic chips—are foundational for essential, “must-win” emerging technologies such as artificial intelligence, quantum computing, robotics, and advanced wireless networks. It goes without saying that the potential of these applications for U.S. national security is enormous. Equally as great though is America’s utter dependence on East Asia for these chips via foreign supply links, which is in turn rife with market and geopolitical risks. While both the White House and Congress have prioritized semiconductor fabrications through bills like Chips for America Act (the CHIPS Act for short), which intends to address various supply chain vulnerabilities, the overriding focus on fabrication neglects the importance of critical materials: the minerals, industrial gases, and chemicals that are the building blocks of any computer chip.
Critical Materials: Minerals, Gases, and Chemicals
Any fabrication of leading-node logic chips requires, at the very least, over three hundred materials. While these minerals, industrial gases, and chemicals only represent a small segment of the semiconductor industry, they are of utmost importance in production, even from the very beginning. As Semiconductor Industry Association bluntly puts it, “In many instances, there are no known alternatives to these materials that satisfy our functional needs, and therefore a secure and continuous supply of critical materials is of critical importance to our industry.” SEMI, a global industry association, puts the fabrication materials market at $40.4 billion. But it notes that this number is bound to scale up given that demand is leap-frogging, driven in part by increased quality and quantity requirements for producing leading-node logic chips.
At the moment, China controls 13 percent of the overall materials market, while the rest of East Asia controls around 57 percent. By contrast, the United States controls only 11 percent. This overwhelming concentration makes supply chain disruptions more likely due to market and geopolitical risks. The industry’s ongoing expansion for advanced logic chips is creating significant pressure on market actors, thereby straining current supplies in turn. Because of this, any planned expansion in capacity is going to prove insufficient to satisfy future demand. The fact that China, a strategic competitor, is also a major supplier of some materials only further complicates the picture. As the Center for Security and Emerging Technology warns, “Chinese firms are dominant suppliers of raw materials,” adding that America “has a small domestic production capacity and relies heavily on imports for raw materials.”
China, Taiwan, South Korea, the European Union, and the United States are all trying to mitigate these issues by investing in materials capacity. South Korea, for example, has already announced a $5 billion investment in materials, components, and equipment in 2019. Meanwhile, major Chinese materials suppliers, like Kempur Microelectronics, are expanding operations and selling to U.S. customers.
But the United States, in contrast, faces acute challenges in addressing this issue. U.S. labor costs are 50 percent higher than foreign competitors, and projects take two to fifteen years to begin production. Complicating this picture further is that there are impurity risks involved, which makes fabrication plants for advanced chips reluctant to switch materials suppliers.
As such, any attempt to bolster America’s domestic materials capacity must include substantial incentives by Washington to encourage the production of the relevant minerals, gases, and chemicals.
Minerals are obviously crucial for semiconductor fabrication, with the most utilized being silicon and gallium arsenide. The former has historically been the foundational semiconductor mineral, but gallium arsenide has the potential to increasingly replace silicon, given its improved operating capabilities. Other relevant minerals, such as rare earth elements and cobalt, also play crucial roles. So it comes as no surprise that the increase in fabrication capacity is resulting in expanding demand for these minerals. Cobalt demand, for instance, jumped by 30 percent between 2019 to 2020 alone. The commercialization of new compounds for enhanced semiconductor speed and reliability is already catalyzing demand for other minerals.
As a result, mineral supply chains are strained. The post-coronavirus economic recovery has pushed the demand for minerals across industries, leading to a surge in costs and delivery times. The demand for some minerals, like ruthenium and iridium, has increased by triple digits since early 2020, while the prices for copper, cobalt, and aluminum have soared. Production halts have unfortunately contributed to this. Just in 2021, Chinese production cuts increased silicon prices by 300 percent from August to December. Any such production interruption can result in heavy losses worth hundreds of millions of dollars. This continued supply risk is bound to endure, as demand for electric vehicles and renewable energy technology only continues to rise.
In this light, America’s dependence on foreign mineral supplies is not extensive—it’s also dangerous. In 2018, the U.S. Geological Survey listed thirty-five minerals as “critical to the economic and national security of the United States.” Thirty of these minerals directly affect semiconductor fabrication, and U.S. import reliance exceeds 75 percent for twenty-three of these minerals, with twelve of these having an import reliance of 100 percent on China. To put this in perspective, Chinese mines produced 60 percent of global rare earths in 2021, while U.S. mines produced a mere 15 percent. Between 2017 and 2020, China was the source of 78 percent of U.S. rare earth imports.
Chinese control of semiconductor minerals thus poses a significant geopolitical challenge. Beijing has demonstrated a willingness to wield its market influence as a weapon. Amid a diplomatic dispute in 2010, they placed a de facto ban on rare earth exports to Japan. Then, during the U.S.-China trade war in 2019, China’s National Development and Reform Commission, which oversees state economic policy, warned that “if anyone wants to use products made from rare earths to curb the development of China, then the people of the revolutionary soviet base and the whole Chinese people will not be happy.” Beijing has reportedly drafted export controls on rare earths, specifically targeting the U.S. defense industries. These export bans, along with export quotas, are responsible for further jumps in global prices. More worryingly, China’s dominion of critical materials is only set to continue, thanks to its control of significant shares of global mineral reserves. These include tungsten (51 percent), antimony (24 percent), and various rare earth elements (37 percent). This control has only grown stronger as a result of the recent merger of all the major domestic suppliers of rare earths.
Washington is trying, albeit haphazardly, to address this issue. The Department of Defense has awarded contracts to Lynas and MP Materials to build rare earth processing facilities, while the Department of Energy is exploring the development of a critical minerals refinery.
The chip fabrication process uses at least one hundred gases throughout various stages, including deposition, lithography, etching, doping, annealing, and chamber cleaning. These gases are categorized as bulk gases and electronic specialty gases. Bulk gases are nitrogen, oxygen, argon, helium, hydrogen, and carbon dioxide, while electronic specialty gases are “all other gases and number over a hundred in pure and specialty mixtures,” including ammonia, silane, hydrogen chloride, nitrogen trifluoride, and nitrous oxide. More importantly, ultra-pure, unsubstitutable industrial gases are essential for producing leading node logic chips. So as leading-node chip fabrication capacity and overall semiconductor fabrication capacity expands, industrial gas demand is likely to grow substantially over the next three to five years.
At this time, East Asia commands a staggering concentration of industrial gases supplies. More than 75 percent of the electronic specialty gas market is in South Korea, Taiwan, China, and Japan. China, for instance, produces 60 percent of all fluorspar, which is a critical ingredient in a number of other gases (CF, NF3, HF, WF6, and SF6). Nearly all the major leading gas suppliers are predominantly foreign: Merck (Germany, the market leader), 718 (China), Huate (China), Nata (China), Air Liquide (France), Linde (Netherlands), Showa Denko (Japan), Japan (Matheson), Wonik (South Korea), and SK Materials (South Korea), and Entegris (USA).
As one might expect, semiconductor gases are already experiencing demand pressure. A research note from Linx Consulting states that “capacity expansions and organic industry growth will tax current electronic specialty gases supply chains. Multiple electronic specialty gas supply chains will need investment to meet quality requirements and increased volumes, associated with new fab builds.” Gas demand is projected to rise with increased chip demand, which may lead to gas shortages, resulting in serious downstream effects. To put this into perspective, C4F6 is an unsubstitutable gas in logic chips, and a $60–$100 million loss of C4F6 supply could create a loss of $10–$18 billion downstream.
As hinted above, the industrial gas market faces substantial geopolitical risks. The Semiconductor Industry Association's warning is straightforward: “U.S. [gas] supplies are inadequate and we are dependent upon foreign sources of supply which could become unstable.” The ongoing Russo-Ukrainian War highlights this instability. Ukraine supplies 90 percent of high purity neon for U.S. semiconductor fabrication, and production stoppages have increased overall neon prices by 500 percent from December 2021 to March 2022. The country is also the primary source of xenon, while neighboring Russia, now sanctioned by the United States and Europe, is a major source of helium and C4F6 gas. The major chipmakers usually stock a year’s supply of gases, preventing immediate supply shortages but smaller chipmakers have less stored gas capacity and thus, face supply issues.