Morgan Stanley's latest "Tech Bytes" briefing calls attention to a concentrated set of risks to advanced semiconductor manufacturing that arise from the effective closure of the Strait of Hormuz. The bank frames the problem as two linked threats: an immediate energy vulnerability for Taiwan's fabs and a second-order chemical supply disruption tied to sulfur produced in Gulf refining operations.
At the heart of the note is Taiwan's dependence on imported liquefied natural gas. Morgan Stanley's analysts observe that Taiwan normally holds only about 11 days of LNG in onshore storage, with several additional weeks' worth available from vessels anchored offshore. With the strait effectively shuttered, that limited onshore buffer leaves the island's power system exposed.
The analysts emphasize the concentration of semiconductor production in Taiwan, noting that Taiwan Semiconductor Manufacturing (NYSE:TSM) alone produces 90% of the world's advanced chips and accounts for roughly 9-10% of Taiwan's total electricity consumption. Given those figures, the report warns that "Prolonged disruption could pose a risk to the stable energy supply required to support chip wafer manufacturing."
Rather than predicting an immediate cessation of output, Morgan Stanley suggests the more likely near-term manifestation will be sizable cost pressure. The note states the immediate reality may show up as "aggressive cost increases rather than a total production halt," and that this dynamic "is a risk worth monitoring for global technology and AI chip supply." Any instability in power delivery could have immediate consequences for the availability of AI processors and smartphone chips worldwide.
Alongside the energy concern, the report draws attention to a less visible but important materials constraint. Sulfur, a byproduct of oil refining in the Gulf region, is used to produce sulfuric acid. That acid is central to extracting and processing copper and cobalt - metals the note identifies as integral to certain chip components and to broader electrification efforts.
Morgan Stanley warns that, with refining activity disrupted by the closure of the strait, supplies of sulfuric acid could be hampered. The analysts describe this as a secondary pressure on the supply chain, saying that "sulfur shortages create another second-order effect," and that interruptions could create bottlenecks for electrification projects and infrastructure work that depend on processed metals.
The briefing links these operational risks to wider macroeconomic effects. The analysts caution that "A sharp rise in the oil price could reduce demand by pushing up costs and hurting consumer spending." They argue the technology sector could face a "double whammy" - rising input costs at the same time that higher prices dampen end-user demand for hardware.
Investor attention, Morgan Stanley notes, will likely center on the resilience of large-scale cloud operators and other major technology firms - the so-called hyperscalers - and on whether big-cap companies can absorb the inflationary shock. While the industry has previously navigated supply chain disruptions, the combined threat of energy depletion and chemical shortages represents, in the bank's view, a meaningful increase in regional risk premiums for the electronics sector.
The report underscores that the initial consequences could be felt through pricing and cost pass-through rather than immediate factory shutdowns, but it stresses the importance of monitoring both the LNG and sulfur supply outlooks for signs of escalation. Given the concentration of advanced chip production and the reliance of critical fabs on consistent power and material inputs, even short-lived interruptions could reverberate through hardware supply chains and end markets.
Summary
Morgan Stanley's "Tech Bytes" highlights two interlinked threats stemming from the Strait of Hormuz closure: Taiwan's limited 11-day onshore LNG storage (supplemented by sea-based supplies) risks power instability for semiconductor fabs, and a disruption to Gulf refining could curtail sulfuric acid production used in metal processing. The bank expects initial impacts to show up as higher costs before any production stoppages and warns of wider macro pressure through oil-driven cost shocks and dampened consumer spending.
Key points
- Taiwan typically holds about 11 days of LNG on land, with additional weeks available from vessels at sea - a narrow buffer for the island's power needs.
- Taiwan Semiconductor Manufacturing (NYSE:TSM) produces 90% of advanced chips and uses approximately 9-10% of Taiwan's total electricity, concentrating energy risk in the sector.
- Sulfur from Gulf refining is essential for sulfuric acid production, which supports copper and cobalt extraction used in chip components and electrification projects.
Risks and uncertainties
- Energy disruption risk - Power volatility in Taiwan could impair wafer fabs, initially driving aggressive input cost increases across the chip supply chain (impacts: semiconductors, electronics manufacturing, cloud/hyperscalers).
- Chemical supply risk - Reduced sulfuric acid availability could create downstream bottlenecks in metal processing, affecting electrification and infrastructure projects (impacts: materials, electrification, chip component supply).
- Macroeconomic risk - A sharp oil price rise could both raise production costs and depress consumer spending, creating simultaneous demand and supply pressures for the tech sector (impacts: consumer electronics, hardware demand, broader tech earnings).