"Money Can't Buy It"! Deepening Supply-Demand Imbalance Sparks Largest-Ever Price Surge in Indium Phosphide

The surge in demand for AI computing power is pushing a key semiconductor material to its supply limits.

According to a report by Taiwan's Economic Daily News on August 17, there is a severe shortage of indium phosphide (InP) substrates and epitaxial wafers, with prices expected to rise by more than 10% in the fourth quarter, setting a record for the largest single price increase in history. Suppliers stated bluntly that even if buyers are willing to pay a premium, securing supply is not guaranteed. Optical module manufacturers and AI data center operators are scrambling to snatch up this scarce material, driving the indium phosphide market into its largest-ever price surge.

This round of price hikes did not happen overnight. According to reports, industry insiders revealed that InP substrate prices entered an upward trajectory in the fourth quarter of last year and have undergone three adjustments so far, meaning they are poised for a "fourth consecutive increase." Epitaxial wafers made from these substrates have also seen two price hikes and are moving toward a "third consecutive increase" in the fourth quarter. The magnitude of the increases has also continued to expand—jumping from an initial 3% to 5% to the current historic high of over 10%.

Taiwan-based epitaxial wafer manufacturers such as Formosa Epitaxy, United Epitaxy, and IET-KY are expected to benefit directly from this supply-demand dynamic. Strong order visibility and expansion plans are supporting the operational momentum of these companies.

Supply-Demand Imbalance: Upstream Bottlenecks Difficult to Resolve Quickly

Indium phosphide has become a core material in the current optical module industry due to its high-frequency and high-speed transmission characteristics, which meet the urgent needs of AI data centers for ultra-high-speed optical interconnects. As the global optical communication industry accelerates its evolution from "parallel use of fiber and copper" to "fiber replacing copper," demand for indium phosphide has risen rapidly in recent years.

However, the production of indium phosphide epitaxial wafers relies heavily on the supply of upstream substrates, which are constrained by policy restrictions and capacity bottlenecks. Capacity expansion progress lags far behind the growth rate of downstream demand. This structural contradiction is the root cause of the current supply-demand imbalance, making strategies that rely solely on capital to secure goods frequently hit walls in practice.

The report pointed out that industry analysis indicates that as new platforms from NVIDIA are rolled out, demand for optical communications has further surged. Coupled with the seasonal peak effect, indium phosphide epitaxial wafers have become one of the tightest key components in the entire AI supply chain.

In the face of continuously rising market demand, major Taiwanese epitaxial wafer manufacturers have all launched or intensified their capacity expansion plans.

• Formosa Epitaxy continues to purchase new equipment to expand capacity. The company emphasized that current order visibility is high, estimating that third-quarter performance will improve month by month. It will continue to strive to secure substrate sources to meet customers' strong demand for indium phosphide epitaxy.
• Regarding IET-KY, construction on the second phase of its new US factory began last July and is expected to be completed within this year. The added capacity will become an important new driver for the company's operations.
• United Epitaxy is gradually expanding its epitaxial capacity, with output expected to continue increasing in the coming months. The company recently announced it would spend NT$1.315 billion to purchase equipment for expansion and signed a long-term supply contract for indium phosphide substrates with Sumitomo Electric Industries, Ltd. of Japan. This secures supply from the raw material end, providing assurance for subsequent capacity release.

Although various expansion plans are being vigorously promoted, the long cycle of capacity construction means it is difficult to effectively alleviate the supply-demand gap in the short term. Although expansion plans by upstream substrate and epitaxial wafer manufacturers have been initiated, the seller-dominated landscape in the indium phosphide market is expected to continue until new capacity is officially commissioned and forms effective supply.

The report stated that for optical module manufacturers and AI data center customers, the core challenge is no longer just price increases, but whether they can ensure a stable supply of goods. The move by United Epitaxy to sign a long-term supply contract with Sumitomo Electric is a direct reflection of this market logic—in a tight supply situation, the strategic value of locking in material sources has surpassed short-term bargaining space.