The artificial intelligence (AI) boom is driving demand for optical modules that enable ultra-fast data transmission in data centers, with the latest beneficiary a chemical compound that is seeing an unprecedented surge in prices. Indium phosphide (InP) is used to make lasers that convert electrical signals into light, allowing data to travel rapidly through fiber-optic cables. As a major producer of the material, China has seen prices climb sharply. According to a recent report by financial services firm Nomura citing industry experts, two-inch InP substrates surged to as much as CNY880 per wafer in June from as little as CNY500 at the end of 2025. Over the same period, three-inch wafers rose to about CNY3,200 from about CNY1,800.
An InP index compiled by financial information provider Wind, which tracks stock prices across more than 20 firms listed in mainland China, is rising steeper than some high-profile technology segments including lithography and semiconductor materials. The industry was also mulling further price hikes that could reach 10% in the fourth quarter of the year. Other Asian suppliers have followed suit. JX Advanced Metals, one of Japan’s leading InP substrate producers, was introducing a first round of revisions that could raise prices to two to three times previous levels.
The investment bank said customer inquiries continued to exceed the company’s planned production capacity expansion. As AI clusters grow larger and require faster connections between processors and servers, demand for optical transmission has soared. But a looming ban by the U.S., together with Chinese export controls, threatens to complicate supply chains. The scale of the ban remains unclear, particularly whether it would target products from Chinese companies or factories physically located in the country. The latter could deal a major blow to American suppliers. California-headquartered AXT, for instance, has all its InP substrates manufactured in China.
Beijing, meanwhile, placed InP under export controls in February 2025, requiring shippers to obtain licenses from the Ministry of Commerce (MOFCOM). AXT’s Chinese subsidiary has faced hurdles, only receiving its first export permits in June 2025 and being granted fewer licenses than expected in the fourth quarter, the company said. “InP export permits represent the most significant challenge we currently face,” AXT said in a regulatory filing in May. Meanwhile, its major clients, Lumentum and Coherent, have moved to secure supplies. In June, Coherent agreed to prepay AXT USD22.3 million to support an expansion of six-inch InP substrate capacity at the supplier’s Beijing facility between 2026 and 2028. A month later, Lumentum struck an agreement reserving InP capacity through the end of 2031, with two deposits totaling USD87 million.
Other suppliers are also responding with unusually aggressive expansion plans. Japan’s JX and Sumitomo Electric, are expanding InP substrate production. Meanwhile, Morgan Stanley said this month that substrate availability was beginning to improve as producers added capacity and Beijing issued more regular export permits. The main bottleneck could gradually shift from securing substrates to manufacturers' ability to turn wafers into finished laser devices, the bank said, as reported by the South China Morning Post.
