TAIPEI/KAOHSIUNG, Taiwan -- Ask someone in the chip industry what materials are getting more expensive, and the most likely answer will be: What isn't?

That is because shortages and constraints are now reaching into the most obscure corners of the supply chain, pushing up prices of vital chemicals and materials whose availability the industry once took for granted.

And these concurrent, unprecedented price increases are not going away anytime soon.

Vincent Liu, an industry veteran and president of Taiwan's LCY Chemical, a key supplier to global chipmakers, explained how complicated the situation has become for companies like his.

"The industry is very interconnected," Liu told Nikkei Asia. "The bottlenecks and the price dynamic in an upstream material can impact other key products downstream. It's like a chain reaction."

As an example, Liu took one of his company's main products: electronic-grade isopropyl alcohol, or EIPA.

At one of its flagship plants in southern Taiwan, LCY Chemical demonstrates how it recycles key chipmaking chemicals. (Photo by Cheng Ting-Fang)

EIPA is essential for cleaning wafers and equipment during the chip manufacturing process, but its production -- and thus its price -- is tied to crude oil.

Crude oil is used to make naphtha, which in turn can be processed into propylene, a key material in EIPA. That means higher oil prices indirectly inflate the cost of the chipmaking chemical. And unfortunately for companies like LCY, oil is up. Benchmark Brent crude had skyrocketed more 70% from a year ago as of June 15, and has been above or near $100 per barrel since late February, when Russia invaded Ukraine.

"We noticed such an uptick trend for multiple metals and materials since 2021 and started to get prepared for that," Liu said. "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."

Industrywide, he said, it is at least 20-30% more expensive to build a new plant than it was a year or two ago.

Semiconductor manufacturing involves hundreds of carefully formulated, highly-purified chemicals, gases and materials. Together, they account for about 20% of total chip manufacturing costs, industry executives estimate.

But this part of the $40 billion chipmaking supply chain -- including wafers, chemicals, gas to materials that are indispensable to building chips -- has long been overlooked, as the prices of these chemicals and materials tended to be stable and their availability reliable.

All that changed after the outbreak of the COVID-19 pandemic, war in Ukraine and a sudden boom in demand for chips for applications like 5G connectivity and electric vehicles, industry executives told Nikkei Asia. These factors, they said, have thrown supply and demand far out of balance.

Visitors check out 5G chips at a Chinese trade fair in 2020.   © AP

An executive with Wah Lee Industrial, a Kaohsiung-based distributor of chipmaking and electronics materials and chemicals, echoed LCY President Liu's assessment: "The industry is very interconnected," he told Nikkei Asia, pointing to how climbing energy prices are pushing up the cost of chipmaking chemicals like sulfuric acid and hydrogen peroxide.

Metal prices are also on the rise due to a combination of supply disruption and surging demand from the EV industry.

"It's likely that we will need to bear a more costly future," the executive said. "It's not likely that all these metal and chemical prices will go down suddenly."

Photoresist, phosphoric acid, wafers and noble gases like neon are just a few examples of materials whose prices have surged since mid-2020, some more than doubling, according to Nikkei Asia's analysis and interviews with over 10 industry executives and analysts.

The price of some high-purity metals vital for chipmaking -- palladium, indium, platinum, copper, aluminum and stainless steel, for example -- are also rising. Many of these are used not only in chip production and chipmaking equipment themselves, but are also mixed with chemicals to create formulas used in the chipmaking process.

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

Soaring metals prices are one of the challenges facing the chip industry.   © Getty Images

UMC is the world's fourth-largest contract chipmaker supplying everyone from Qualcomm to MediaTek to Panasonic. Liu said times are getting tougher for the industry as a whole and his company would monitor closely to see some costs could be passed on to its customers. "It's definitely much more costly to operate chip manufacturing plants than before the pandemic," he said.

Chipmakers' extremely demanding specifications for chemicals and gases mean finding alternative suppliers is no simple task. Most chipmakers have their preferred chemical formulas to optimize their chip production performance, and only a handful of suppliers can churn out these chemicals at sufficient scale to meet their needs.

This was highlighted by the scramble to secure neon after the outbreak of the war in Ukraine, a major source of the gas. The price of neon, used in a process known as lithography, has more than doubled from last year as chipmakers raced to secure supplies, according to Jeffrey Pan, chairman of chip material and chemical distributor Topco Scientific.

"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." Pan also said that the price for photoresists -- a vital chemical for the lithography process of chipmaking, in which integrated circuits are placed onto wafers -- will increase about 20% for new contracts starting this year, compared with previous contracts, citing supply constraints and surging demand.

Logistics are also contributing to the price surges, chip industry executives said.

"Chemicals, unless they are locally produced, have to be stored in specially designed containers known as ISO tanks and shipped via the ocean," said an executive with a Japanese chipmaking equipment supplier. "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."

Complicating matters is the fact that trading prices for most chipmaking chemicals and gases are opaque, as -- unlike with metals -- there are no centralized exchanges to provide a reference. This means chipmakers have to rely on suppliers or distributors to quote them a price, sources familiar with the trading practice said.

All this is bad news for companies' bottom lines. Global chipmakers have enjoyed healthy margins recently, but a squeeze is on the horizon.

"We've seen the price of [chipmaking materials, chemicals and gas] rising faster than margins across the industry," said Dylan Patel, chief analyst with SemiAnalysis.

Patel said people have not paid much attention to chipmaking materials and chemicals until now because the supply chain was generally operating "amazingly" and the companies involved in it never made enormous profits anyway. "Everyone previously focused on the sexy things: [chip] fabs and designs. Now with supply chains so broken due to COVID, war and unprecedented growth, people have shifted focus to what is limiting [industry] growth, and in many cases it is materials."

While the increases in material prices are wide-ranging, so far the impact is falling most heavily on smaller chip players.

The spot price of photoresist, for example, has doubled for some smaller chipmakers in Taiwan and China, while they are paying around 40% more for slurry, tech executives told Nikkei Asia. Slurry, or more specifically CMP slurry, is a chemical used to polish and smooth the surfaces of wafers with a combination of chemical and mechanical forces.

"Our procurement team is struggling extremely hard and suffering because the shortage of these key materials could risk our production continuity," said an executive with a Taiwan-based chipmaker, asking for anonymity as the conversation could affect his company's ability to secure materials.

Lita Shon-Roy, president and CEO of Techcet, an advisory service firm focused on process materials supply-chains, said top chip manufacturers such as Intel, TSMC and Samsung Electronics normally have long-term agreements with their materials suppliers, meaning they will probably not feel the impact of surging prices immediately.

Chipmaking is an extremely complex process requiring a vast array of specialized chemicals and other inputs. (Photo courtesy of TSMC)

"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," Shon-Roy said. "When big chipmakers ramp up production of massive chip plants, other smaller chip companies could face all sorts of material problems."

The unprecedented surge in prices is even changing how the industry operates, according to some executives.

"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," said President Liu of LCY Chemical. "We do feel the importance of the materials sector has been significantly elevated."

But closer collaboration and greater understanding can do little to change the cold facts of the situation.

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