While we have a reasonable estimate of total VAP supply losses from the GCC following the declaration of force majeure from Alba, Qatalum and EGA during the ongoing conflict, the more complex question is how these losses break down by product, who is best positioned to absorb the loss and reshape VAP trade flows shifts.
Four key questions frame the analysis:
- How much will production fall? What are the projected VAP supply losses in 2026 and 2027 for each product category – ingots and value-added products (VAPs) – and what will be the strategies adopted by major producers as they curtail output and plan for eventual restart?
- Who is best positioned to absorb the loss and reshape global trade flows?, and would it be possible? Which countries or producers outside the GCC are positioned to absorb the supply gap amid VAP trade flow shifts; and critically, do they have the capacity, capability and speed to actually deliver?
- What are the barriers or potential obstacles (logistical, technical, regulatory or commercial) that stand in the way of sourcing from alternative origins?
- What will the price impact be? How will these supply dynamics translate into physical premiums and upcharges on VAPs in Europe, the US and Japan?
Who is best positioned to absorb the loss and reshape global VAP trade flow shifts?
Among all value-added products, billets and primary foundry alloy (PFA) represent the GCC's most dominant export positions, accounting for 43% and 50% of total global trade volumes, respectively. Slab and wire rod each hold a share of approximately 20% of global trade. While these shares are smaller than those of billet and PFA, they remain significant enough to cause substantial disruption to upcharges, should GCC supply be curtailed.
To date, producers in Bahrain, Qatar and the UAE have announced varying degrees of curtailments. Given these producers operate across both ingot and VAP portfolios, this raises a critical question around production mix prioritiation – what gets cut first, and what gets restarted first?
CRU's view is that producers are prioritising ingot over VAP production, driven by two factors – operational simplicity under current conditions and financing considerations. As a result, VAP supply, billets and PFA in particular are expected to tighten considerably before alternative volumes can be secured, pointing to sharply elevated upcharges through 2026 Q2 and Q3.
VAP key trade lane and alternative sources: China, SE Asia, Russia or secondary
China is the most obvious candidate to offset the supply void left by the GCC, given the scale of its domestic production. CRU has received reports that PFA A356 is already being exported to Southeast Asian markets, with upcharges reaching $300/t over SHFE and MJP ingot premiums. These elevated levels are largely a function of China's 13% VAT and 15% export duty on VAPs, which structurally inflate the cost of Chinese material relative to other origins.
Enquiries for A356 have also come from South Korea and Japan. However, the current 300/t offer levels are significantly above the 85/t contract price agreed by end-2025, making buyers reluctant to engage. Financing complexity associated with purchasing from China adds a further layer of friction. Similarly, billet enquiries are active, with offers also at approximately $300/t, reflecting the broader supply tightness, though no transactions have been concluded to date.
On a related note, small volumes (~20, 000 tonnes/month) of wire and cable are also reported to have moved from Chinese to Southeast Asian buyers under HS Code 7614 and be remelted into wanted products such as VAPs. Semis carry a competitive advantage in this context, as they benefit from a rebate on the 13% VAT that does not apply to VAPs. This cost differential creates the conditions for incremental semis exports to destinations that do not impose tariffs or anti-dumping duties on Chinese semi-finished products.
CRU will continue to monitor the VAP export arbitrage window from China closely, though we think it’s unlikely to remain open as it is not sustainable given the given the headwinds from rising SHFE prices.
Other supply options in Asia include India, Indonesia and Malaysia. India’s VAP production for this year is largely committed under existing contracts, leaving limited spot volumes available. India exported more than 300,000 tonnes of billet last year, making it the fourth-largest billet exporter.
Malaysia is expected to have additional availability, with planned 2026 capacity of 250 ktpy of billet, 200 ktpy of PFA, and 200 ktpy of wire rod. Indonesia is also expanding its billet capacity, although we currently expect the country to remain focused on ingot production.
The final option is Russia, who is the VAP key trade lane before the sanctions, but Russian material is not currently flowing into Europe or the US. The country has historically exported more than 3 Mt of metal products, with peak exports of 321,000 tonnes of billet, 347,000 tonnes of PFA, 381,000 tonnes of wire rod, and 505,000 tonnes of slab. If tariffs and sanctions against Russia were lifted, market tightness would undoubtedly ease. However, this remains uncertain and is unlikely to happen in the near term. Korean and Japanese buyers have been sending inquiries about Russian metals, especially PFA, but we believe some indirect trade has already taken place in Japan.
Secondary supply will certainly increase and should be relatively easier to source than alternative primary supply. Secondary producers are currently achieving strong profit margins, as scrap is trading at a significant discount to primary metal due to tariffs. As a result, they are already operating at maximum rates, leaving little room for further increases. Therefore, imports of VAP or semi-finished and finished products will remain necessary in the US.
Meanwhile, in Europe more than 1 Mt of secondary capacity remains available that can theoretically offset the VAP supply loss. In addition, Hydro’s 120 ktpy capacity expansion at its Torija site is scheduled to come on stream this year and its progress is on track. The key constraint is scrap availability. Europe currently continues to export more than 1.2 Mt of scrap. Without restrictions on scrap exports, European secondary producers will need to compete to secure scrap supply, which could push production costs higher, on top of already-elevated energy costs since the conflict in the Middle East began.
Hence, overall, we believe China will become the VAP key trade lane, including for fake semis and finished products, such as wheel exports that are already qualified and can offset PFA volumes loss.
Premiums and upcharges are expected to surpass the peak level back in 2022
As explained above, VAP supply losses and shortage appears inevitable unless geopolitical tensions in the region are eased. However, we do not expect upcharges and premiums to exceed the 2022 peak significantly as demand is hitting headwinds caused by high energy costs. A similar upside risk could emerge if the Middle East conflict becomes prolonged or there is further escalation.
Demand destruction will also be a key factor limiting the price ceiling for VAPs, particularly in the automotive sector, which is more sensitive to oil prices. Customers may also become more reluctant to make major purchasing decisions on internal combustion engine (ICE) vehicles due to higher oil prices. Nevertheless, the potential growth from the EV market caused by the energy shock could fuel auto demand.
In our base case, we assume Qatar and Bahrain will gradually restart production in Q3, around the time premiums are likely to peak. Supply tightness should then begin to ease in Q4. Prior to GCC supply recovery, premiums will need to remain high enough to incentivise steady exports from Chinese producers. At the same time, profitable margins should continue to encourage domestic secondary producers to restart or maintain production.
We expect VAP premiums to gradually decline toward normal levels in 2027, particularly as EGA restarts production in late 2026 or early 2027.
For readers interested in how the conflict in the Middle East will influence the future of VAP trade flow changes, premiums movements and beyond, CRU’s Aluminium Casthouse Shape Market Outlook service provides detailed understanding of current and emerging trends, technologies and products. If you want to hear more about our work on VAPs, request a demo here.
