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

The artificial intelligence boom is propelling demand for optical modules that facilitate rapid data transmission within data centers. At the center of this innovation is indium phosphide (InP), a chemical compound employed to manufacture lasers that convert electrical signals into light, enabling swift data transfer via fiber-optic cables.

China, a leading producer of InP, has witnessed a substantial surge in prices. During June 2025, two-inch InP substrates skyrocketed to 880 yuan (US$130.54) per wafer from 500 yuan by year-end, while three-inch wafers reached approximately 3,200 yuan compared to 1,800 yuan. An InP index, tracking stock prices across over 20 Chinese-listed firms, surged 4.2% on Monday, surpassing other high-profile technology sectors like lithography and semiconductor materials.

Industry analysts anticipate further price hikes, potentially reaching a 10% increase by the fourth quarter of the year.

Asian suppliers have also responded to the price surge. JX Advanced Metals, a leading Japanese InP substrate producer, plans to revise prices two to three times higher than previous levels, according to JPMorgan's report. Customer inquiries persistently outpace the company's planned production capacity expansion. The United States is contemplating a ban on new Chinese optical transceiver models through the Federal Communications Commission, which could complicate supply chains.

Although the extent of the ban remains uncertain, it may significantly impact American suppliers reliant on Chinese manufacturing, such as AXT, whose substrates are produced exclusively in China. The company has faced challenges obtaining export licenses from China's Ministry of Commerce, receiving its first permits only in June 2025.

Major clients like Lumentum and Coherent have sought to secure InP supplies. In June, Coherent committed over US$22.3 million to support AXT's expansion of six-inch InP substrate capacity in Beijing between 2026 and 2028. Lumentum followed suit, reserving InP capacity through the end of 2031 with a US$87 million deposit. Other suppliers are also expanding their InP substrate production.

Japan's JX Advanced Metals plans to invest up to 120 billion yen (US$752 million) over four years, scaling capacity seven to ten times its fiscal 2025 level. Meanwhile, Sumitomo Electric is also boosting InP production to meet the growing demand for AI data center infrastructure. As substrate availability improves, the main challenge may shift to manufacturers' ability to transform wafers into functional laser devices.