The next silicon? AI data centre material faces price spike amid China supply crunch

The artificial intelligence boom is fueling a surge in demand for optical modules, which enable rapid data transmission in data centers. At the heart of this technology is a chemical compound called indium phosphide (InP), used to create lasers that convert electrical signals into light, allowing data to travel swiftly through fiber-optic cables.

China, a major producer of InP, has seen prices skyrocket. According to Nomura, a financial services firm, two-inch InP substrates jumped to as high as 880 yuan per wafer in June, up from 500 yuan at year-end 2025. Three-inch wafers also saw a significant increase, reaching 3,200 yuan compared to 1,800 yuan. An InP index, tracking stock prices across more than 20 Chinese firms, rose 4.2% on Monday, outpacing other high-profile tech segments.

Industry experts predict further price hikes, potentially reaching 10% in the fourth quarter. JX Advanced Metals, a leading Japanese supplier, plans to raise prices two to three times current levels, citing strong customer demand outpacing production capacity. The US is considering a ban on new Chinese optical transceivers, which could complicate supply chains.

China has imposed export controls on InP since February 2025, requiring shipments to obtain licenses from the Ministry of Commerce. US suppliers, such as AXT and its customers Lumentum and Coherent, have been securing supplies by prepaying for capacity expansions or reserving InP capacity through 2031. Other Asian suppliers are also expanding production, with Japan's JX investing up to 120 billion yen in InP substrates and Sumitomo Electric scaling up production to meet growing AI data center demand.