The Air Liquide announcement linked is consistent with the widely held view that semiconductor markets desperately need new capacity and shows that existing China-based manufacturers are stepping up. Air Liquide will supply new capacity in Wuhan, where it has been an active producer of high purity gases for the semiconductor industry for decades. While this is likely a sound investment for Air Liquide, backed by strong “take or pay” agreements from customers, the risk to the expansion is that while the world is in dire need of new semiconductor capacity, it is unclear how much of that need is for more China-based production. There is significant semiconductor demand in China and that demand will continue to grow, but consumers in the West are not only looking for more semiconductor supply but also more semiconductor supply security, and with the concentration of production in China and Taiwan, supply from outside the region is more desirable. We see new semiconductor capacity announced for the US and the auto industry, in particular, is calling for more diversity of supply, not just for semi’s but also for other EV components, especially batteries. There is already anecdotal evidence of a preference for non-China-based materials – all the way back to lithium - but how much more US and European producers are willing to pay for this “preference” will dictate the ultimate level of spending. Despite these concerns and absent broader geopolitical risk, this is likely a relatively safe project for Air Liquide and the capital commitment is not going to break the bank.
Working against the desire for more supply diversity are labor costs in the US. Higher trade costs (chart below) and supply security are at odds with labor availability, especially in the US. The infrastructure bill, should it pass, would be a step in the right direction, but not if a step up in associated construction jobs makes the labor market even tighter in the US and we see additional wage inflation. Any manufacturing company looking to expand its US production base because of customer demand will have labor costs and potential escalation at the top of its list of concerns today. See today's daily report for more.
Source: Baltic Exchange, Bloomberg, C-MACC Analysis, June 2021