The next silicon? AI data centre material faces price spike amid China supply crunch
Indium phosphide (InP), a crucial material for next-generation optical data transmission in AI data centers, is experiencing an unprecedented price surge due to high demand and a supply crunch originating in China.
Intelligence analysis by Gemini 2.5 Flash
The booming artificial intelligence industry is driving significant demand for optical modules that facilitate ultra-fast data transmission within data centers. This surge has led to a sharp increase in prices for indium phosphide (InP), a key chemical compound used to create lasers for converting electrical signals into light, enabling rapid data travel through fibre-optic cables. Ch…
Imagine a super-fast highway for information inside giant computer brains that power AI, like ChatGPT. This highway uses light instead of electricity to send messages super quickly. A special material called indium phosphide is like the tiny traffic light that turns electrical signals into light so they can zoom down the highway. Because everyone wants more and more AI, they need lots of these traffic lights, and the company that makes a lot of them in China is seeing prices go way up, making it more expensive to build these super-fast AI brains.
Analysis
The rapid expansion of artificial intelligence capabilities is not solely reliant on advanced GPUs and memory chips; it also necessitates sophisticated infrastructure for data transmission. Indium phosphide (InP) has emerged as a pivotal material in this ecosystem, serving as a substrate for lasers that convert electrical signals into light, a process fundamental to ultra-fast data transfer in fibre-optic cables. As AI data centers demand ever-increasing speeds and volumes of data, the reliance on materials like InP for optical modules intensifies, positioning it as a potential 'next silicon' in the foundational components of AI hardware.
Indium Phosphide's Role
Indium phosphide is a compound semiconductor material known for its excellent electronic and optical properties, making it ideal for high-speed optoelectronic devices. In the context of AI, its primary application is in the fabrication of optical modules, which are essential for the rapid and efficient movement of vast amounts of data within and between data centers. These modules are critical for supporting the intense computational demands of AI models, where latency and bandwidth are paramount. The material's ability to facilitate the conversion of electrical signals to light allows for data to traverse fibre-optic networks at speeds far exceeding traditional copper wiring, thereby underpinning the performance of modern AI infrastructure.
Price Surge and Market Reaction
The escalating demand for InP, fueled by the AI boom, has triggered a significant price spike. According to a Nomura report, two-inch InP substrates saw prices jump from 500 yuan at the end of 2025 to 880 yuan (US$130.54) per wafer by June, while three-inch wafers rose from 1,800 yuan to 3,200 yuan over the same period. This upward trend is not confined to China, as other Asian suppliers, such as Japan's JX Advanced Metals, are also implementing substantial price revisions, with JPMorgan reporting potential increases of two to three times previous levels. The market has reacted, with an InP index compiled by Wind, tracking over 20 mainland China-listed firms, gaining 4.2 per cent on a recent Monday, outperforming other tech segments.
China's Supply Crunch
China's position as a major producer of indium phosphide places it at the heart of the current supply crunch. The rapid increase in domestic demand, coupled with potential export dynamics, has created a tight market. Industry experts cited by Nomura and the Economic Daily News suggest that further price hikes, potentially up to 10 per cent, are being considered for the fourth quarter of the year. This situation underscores the vulnerability of the global AI supply chain to disruptions or concentrated production in specific regions. The sustained high demand, with customer inquiries reportedly exceeding planned production capacity expansions at companies like JX Advanced Metals, indicates that the supply-demand imbalance for this critical AI material is likely to persist in the near term.
Key points
- Indium phosphide (InP) is a critical material for next-generation optical transmission in AI data centers.
- The AI boom is driving unprecedented demand for InP, leading to sharp price increases for InP wafers.
- China, a major producer, is experiencing a supply crunch, with two-inch InP wafers surging to 880 yuan and three-inch wafers to 3,200 yuan.
- Other Asian suppliers, like Japan's JX Advanced Metals, are also raising prices significantly due to overwhelming customer demand.
- The InP market is considering further price hikes of up to 10 per cent in the fourth quarter, indicating sustained supply-demand imbalance.
The significant price increases for indium phosphide could incentivize greater investment in production capacity and research into alternative materials or more efficient manufacturing processes. This could lead to a more diversified and robust supply chain for critical AI infrastructure components in the long run, mitigating future supply risks.
Continued price hikes for indium phosphide could significantly increase the cost of building and expanding AI data centers, potentially slowing the pace of AI development and deployment. A prolonged supply crunch, especially if concentrated in one region like China, could also create geopolitical vulnerabilities and hinder global technological progress.
Market signals
- Chinese InP-related firms An InP index tracking over 20 mainland China firms gained 4.2 per cent, reflecting increased investor interest amid rising demand and prices.
- JX Advanced Metals JX Advanced Metals is raising prices two to three times previous levels due to customer inquiries exceeding production capacity, indicating strong demand.
AI-generated analysis of potential market relevance. Not financial advice.
