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For more than three years, AI has propped up global trade and investment and pushed stock markets from the US to Asia to record highs.
Investors have committed trillions of dollars to the technology, one of the most power-hungry inventions ever, on the assumption of ample energy supplies and a slick chip production line that can cross more than 70 borders before reaching the final consumer. But the Iran war is exposing fragilities in the AI supply chain.
First, east Asian nations at the heart of global semiconductor production are facing severe energy shocks.
South Korea’s Samsung Electronics and SK Hynix dominate memory chip manufacturing, together accounting for 80 per cent of high-bandwidth memory and nearly 70 per cent of dynamic random-access memory. These power AI systems and cloud data centres as well as smartphones and cars. Taiwan’s TSMC makes 90 per cent of advanced semiconductors and virtually all of the high-end AI chips designed by Nvidia, the world’s most valuable company.
Both South Korea and Taiwan depend on fossil fuels for energy, which almost entirely come from imports particularly via the Strait of Hormuz. The latter relies on the Middle East for more than one-third of its liquefied natural gas needs.
Asia’s chip industry is reliant on the Middle East for chemicals too. About one-third of global helium supply — a byproduct of natural gas processing that is used to cool silicon wafers — is from Qatar. South Korea and Taiwan get the majority of their helium from the Gulf country, which is a dominant provider of the hard-to-substitute, high-purity variety.
Roughly half of global seaborne sulphur — an element used for chip cleaning and etching — transits the strait. Even before the war broke out sulphur was facing a supply squeeze, owing to high demand from the tech and electric vehicle industries.
The Dead Sea is also the world’s largest source of bromine, a chemical that helps score patterns on to silicon wafers. South Korea imports virtually all of its supply from Israel.
Next, the conflict could alter the economics of data centres. In the US, where hyperscalers are set to spend $650bn on AI infrastructure this year, close to 75 per cent of planned on-site power comes from natural gas. But US LNG exporters are rushing to sell supplies to Europe and Asia, where because of shortages they can command higher prices. This will push up American energy prices. (Electricity accounts for roughly half of a data centre’s operating expenses.)
Chip deliveries already face delays thanks to bottlenecks in air and shipping transportation. For example, the freight division of Cathay Pacific Airways, which handles approximately 30 per cent of global wafer transport, has limited access to its regional hub in Dubai.
Finally, tech valuations might come under greater pressure as uncertainty lingers and investors increasingly price in stronger inflation, higher interest rates and longer supply disruptions.
For now, energy and commodity stockpiles will provide a cushion across the supply chain. South Korean chipmakers reportedly have around six months of helium supplies. Taiwan has secured over half its LNG needs for May (although it keeps about 11 days in reserve and depends on just-in-time deliveries).
The longer the Strait of Hormuz remains closed, the deeper the fallout will be. One-fifth of the world’s oil and LNG is shipped through the waterway. If the conflict lingers, chip prices will steepen as manufacturers ration and compete for tighter supplies. Eventually, production could seize up. In the US, elevated energy costs would make present and future data centres less viable. High tech valuations will unwind, and debt borrowed against AI assets would be at risk. (Even before the conflict, investors were worried companies were over spending on AI.)
Marko Papic, chief strategist at BCA Research, who said a US attack on Iran was a tail risk for 2026 in the January 11 edition of this newsletter, predicts a severe hit to chip production if the strait isn’t back in operation within a month.
“There is no way for the US to replace the oil and natural gas out of the strait on any timeline that avoids a global recession,” he said. “In my estimation, the US, Israel and Iran have about until mid-April to conclude hostilities and begin returning shipping through Hormuz, or else the world will see its first post-Covid-19 break in supply chains.”
But even if the conflict ended tomorrow, the AI supply chain will take time to bounce back. Qatari officials said attacks last week had caused years-long damage to its Ras Laffan LNG plant, the world’s largest, which had already ceased production since March 2 due to earlier drone strikes.
Still it will take “four to five weeks” for Qatar to resume gas and helium production from its plants, says Phil Kornbluth, founder of consultancy Kornbluth Helium. “It would take an additional two to three months after that to restore the helium supply chain to what it was pre-crisis,” he added.
In the Gulf, Iranian attacks will reduce the region’s appeal as a hub for data centres, while national sovereign wealth funds might redirect planned AI investments to local security needs. The Iranian regime, should it survive, also knows the strait can be weaponised any time tensions with the US or Israel return and that it can undermine oil, gas and chip production.
Investors are yet to price in the paucity of scenarios in which the AI supply chain comes through the war unscathed.
Send your thoughts in the comments, to freelunch@ft.com or via X @tejparikh90.
Food for thought
This paper from a team led by Nobel Prize winner Daron Acemoglu finds that, though AI might boost short-term decision-making, it can erode incentives to learn and tip the economy into “knowledge collapse”.
Free Lunch on Sunday is edited by Harvey Nriapia