Indium Phosphide, a substrate used to power next generation optical transmission networks, is facing a surge in demand due to rapid buildup in the AI sector.
Beyond GPUs, and memory chips, the rapid AI buildup is leading to surge in demand for optical modules that enable ultra-fast data transmission in data centres, with a key compound indium phosphide facing surge in prices.
Indium Phosphide (InP) is used to make lasers that convert electrical signals into light, enabling data travel rapidly through optical fibre cables.
China being the major producer of InP has seen prices spike sharply. According to financial service firm Nomura, the two-inch InP substrate wafer price reached as much as 880 yuan ($130.54) from as little as 500 yuan ($74.18) in the end of 2025. At the same time three-inch wafer prices rose from 1800 yuan to 3200 yuan.
The industry is mulling further price hikes, which could reach 10 percent in the fourth quarter of the year. Other Asian suppliers such as Japan’s leading InP substrate producer, JX Advanced Metals can hike prices by two to three times from previous levels according to a report by JP Morgan.
As AI clusters grow faster, demand for communication networks between processors and servers has soared. Moreover, both the US import and the Chinese export controls complicate the situation.
Reuters reported, earlier this month, that Washington is drafting measures through the Federal Communications Commission to ban new models of Chinese optical transceivers from the US market. However, the scope of the ban remains unclear.
US companies are highly dependent on Chinese suppliers, such as California-based AXT, which has all its InP substrates manufactured in China.
Beijing meanwhile had placed InP exports under control in February 2025, with shippers required to obtain licences from the Chinese Ministry of Commerce. “InP export permits represent the most significant challenge we currently face,” AXT said in a regulatory filing in May.
Other suppliers are also planning to expand production capabilities such as Japan’s JX announcing in June that it would invest $752 million over four years to expand the production of InP substrates 10 times compared to 2025 levels.
Morgan Stanley said this month that substrate availability may improve as producers added capacity and Beijing started to issue more export permits.
