Climate change could raise chip prices. this is how

Semiconductor companies like A Taiwanese semiconductor manufacturing company are at risk of water shortages as treatment technology advances, S&P Global Ratings a report said.

Semiconductor chips are found in everyday consumer devices from smartphones to televisions. TSMC is the largest contract chip manufacturer in the world and produces the most advanced processors for companies such as Nvidia and An apple.

The chip-making industry is thirsty, as factories consume vast amounts of water every day to cool machines and ensure wafer sheets are free of dust or debris.

“There is a direct correlation between water use and chip complexity, as fabs use ultrapure water – fresh water processed to extremely high purity – to rinse wafers between each process. The more advanced the semiconductor, the more process steps, the more water consumed,” said S&P Global Ratings credit analyst Hins Li.

TSMC’s water consumption per unit has increased by more than 35% since it switched to 16-nanometer process nodes in 2015, data from S&P revealed.

“We believe this is mainly due to the migration to advanced nodes that require more manufacturing processes,” S&P said. “Given TSMC’s dominance in advanced chip manufacturing, potential disruptions to water-related operations could disrupt the global technology supply chain.”

But the credit ratings firm noted that TSMC’s dominance allows the chip giant to “lock in terminal demand and offset lower unit sales with price increases.”

“If the company can maintain its technology leadership, the impact on TSMC’s business profile and profitability from any production volatility is likely to be manageable,” S&P said.

The Taiwanese chip giant makes approx 90% of the world’s modern chips which are used for AI and quantum computing applications.

TSMC could also focus on making more advanced chips than the usual lower-margin mature chips when water supply is tight, which S&P said could boost profits.

The report notes that water consumption in the semiconductor industry is on track to grow at a mid- to high-single-digit rate each year, driven by capacity expansion and the demands of advanced process technology.

The world’s chipmakers already consume as much water as Hong Kong, a city of 7.5 million people, S&P said.

“Water security will be an increasingly important factor in the credit profiles of semiconductor companies. Mishandling water resources can disrupt a firm’s operations, harm financial performance and potentially affect customer relationships,” Li said.

“Meanwhile, climate change is increasing the rate of extreme weather, the frequency of droughts and the instability of rainfall, limiting the ability of chipmakers to manage production stability.”