For example, neon is an important input to the semiconductor manufacturing process. Gas is a by-product of steelmaking and is only commercially viable when produced in significant quantities from very large steelworks such as Azovstal. Manufacturers such as Ingas (linked to Mariupol) and Cryoin in Odessa can then pull the neon out of the air and make it ready for use. But as production is suspended indefinitely at both companies, analysts are particularly worried about the supply of neon and other gases to Western producers.
A big problem is that the noble gas market is dominated by Linde plc, Air Liquide SA and Air Products and Chemicals Inc., which prefer long-term confidential contracts. It is dependent on a handful of experts such as The lack of transparency hindered the development of a spot market (where non-committed supplies could be sold at current market prices) and hindered natural price discovery.
It’s hard to assess how much noble gas there is in supply, as no one can be sure of the current price. What we do know is that until war broke out in Ukraine in 2014, 90% of the global neon supply came from Ukraine. Much of it came from Mariupol, and most of it went to Western markets.
Cliff Cain of the Edelgas Group, an independent consulting firm, said some of the production has since shifted to China, with Ukraine currently representing probably 50-70% of global neon production. South Korea’s POSCO steelmaking company also started small production to meet domestic demand.
In a recent earnings call, Linde CEO Sanjiv Lamba said that his company gets less than 20% of its neon supply from Ukrainian and Russian sources and continues to be diversified. (Linde and Air Products did not respond to emails seeking comment. A spokesperson for Air Liquide said the company currently has no exposure to the Ukrainian or Russian neon markets.)
But if Russia takes control of Mariupol and rebuilds the city’s damaged factories, 95% of the market could potentially fall into the hands of two “unfriendly” players, according to Cain.
Metinvest Group, the mining company of Ukrainian billionaire Rinat Akhmetov, owner of Azovstal and the nearby Ilyich steelworks, said his company is in the process of preparing a $10 billion lawsuit against Russia for the destruction of two Mariupol plants. However, if semiconductor production is restricted due to neon shortages, this total will barely touch second-order effects.
Uncertainty about the supply of helium, another noble gas required for semiconductor production, is also increasing.
Helium is either obtained from natural deposits on the ground or can be extracted as a byproduct of the gas liquefaction process under the right conditions. While production is more diversified with the US, Qatar and Algeria counting as some of the largest producers, the helium market still suffers from significant pricing opacity.
The same specialized companies dominate. Prospective competitors and buyers claim that, in many cases, they have negotiated loss-making terms to seize the broader gas supply business and prevent price discovery. Edelgas’s Cain tells me that’s a number that was confirmed to me by Stefano Marani, CEO of South Africa-based Renergen, an independent producer of helium and natural gas.
It’s hard not to blame the market structure for current conditions, as the problems of the noble gas market preceded the war in Ukraine. But sometimes all it takes to promote transparency is compression.
Finally, it was the contraction in the market after the 1979 Iranian revolution that overturned control of the Seven Sisters cartel, the Western oil producer group that dominated the market for long-term contracts, and allowed an active oil spot market to emerge.
More recently, the liquefied natural gas (LNG) market has opened in the wake of the 2011 Fukushima disaster and market congestion caused by the post-Arab Spring decline in Egyptian gas production. The market has gracefully shifted from a “take or pay” type system indexed to oil prices to one now dominated by spot cargoes, promoting better price visibility and understanding of supply-side dynamics.
It would be wise for the noble gas market to do the same.
A good first step for Western governments would be to demand greater transparency from large corporations about how much supply has been damaged by the war and how much funding is still available from disputed territories or those at risk of sanctions.
Market participants should also support the development of new platforms that allow them to bid or encourage existing exchanges to support noble gas prices to increase supply and close shortages. First, the crypto market is looking at opportunities in this space. He convinced Renergen, which has launched a new offering starting this year, to sell its volumes in tokenized form.
Whatever the path to the spot market, it’s becoming increasingly clear that gases like neon and helium are too important to be under the control of just a few big players. Noble gases should be allowed to circulate freely on the market.
More From Bloomberg Opinion:
• The Oil Market Doesn’t Have to Fear a Catastrophic US Recession: Javier Blas
• McDonald’s Exit from Russia Ends an Age of Hope: Therese Raphael
• Chipmakers Need a Ukraine Avoidance Supply Chain: Tae Kim
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Izabella Kaminska is the founder and editor of Blind Spot. She most recently spent 13 years at the Financial Times as editor of FT Alphaville, she.
There are more stories like this bloomberg.com/opinion