A warning to critical minerals buyers: avoid butter mountains, aluminum floods

A worker operates heavy machinery at the site of the under construction Lynas rare earths plant in Gebeng, eastern Malaysia (AP / Lai Seng Sin)

MELBOURNE — Western governments, currently plowing tens of billions of dollars into critical minerals in an effort to break their reliance on China, could look to history to see how well-intentioned efforts to prop up commodity sectors can backfire.

As efforts to build stockpiles and combat China’s dominance gather pace, a dozen industry executives, investors and analysts interviewed by Reuters pointed to the risk of a repeat glut scenario.

“There needs to be some coordination between Western governments as they seek to incentivize new production,” said Brett Beatty, a partner at Resource Capital Funds, a mining-focused private equity firm that supplies the U.S. government with niobium and tantalum via its holdings in Global Advanced Metals.

“The biggest risk is we all do our own thing,” Beatty added. “We all generate multiples of volumes the world needs and then you just crush everything, because you’ve got an oversupply.”

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The U.S. has allocated upwards of US$20 billion to support its critical minerals sector across multiple programs and financing tools, including US$10 billion for its stockpile, Project Vault. Australia has earmarked at least A US$13 billion to support critical minerals minerals development across at least five programs including its own reserve.

Rare earths are a small piece of the US$320 billion critical minerals market that the International Energy Agency expects to double by 2040. The rare earths sector that produces strong magnets used in defense technologies, advanced manufacturing and medical equipment was worth about US$6.4 billion in 2024, according to IEA figures. And yet the U.S., European Union, Australia and Japan have promised combined financial aid to rare earths projects globally that is already beyond that market value, Reuters calculations show.

Containing oversupply risks

In the 1980s and early 1990s, subsidies, cheap energy and price guarantees fueled massive overproduction of European dairy - dubbed “butter mountains” - Russian aluminum “floods” and Australian wool, which flooded global markets, sent prices into a tailspin and spread pain far beyond national borders.

The wave of Western investment is already set to tip some rare earths, a group of 17 metallic elements, into surplus in the coming years, according to David Merriman of Project Blue, a consultancy. He added, however, that he did not expect large surpluses to develop because governments could temper support.

“Government-led stockpiles can stop purchasing, which can have a market-balancing impact and there is only limited capacity supported by price floors or guaranteed purchasing by governments at present,” he said.

For now, stockpiles do not present any risk of swamping markets, said Amanda Lacaze, the CEO of Lynas Rare Earths, the world’s top rare earths producer outside China, on May 6.

“I’m pretty alert to how much rare earths are sitting in stockpiles around the world right now and it’s not very much,” she said.

Australian Minister for Resources Madeleine King told Reuters earlier this year that the country’s support for its stockpile was “very different from the wool situation.”

“This is about a targeted, project-based investment to make something work, for creating secure supply chains for Australian manufacturing, but also for our neighbors and like-minded partners,” she said.

Some global coordination is afoot. The Group of Seven countries are in talks to create a permanent secretariat to make sure plans to increase critical mineral supplies survive beyond their rotating presidencies, five sources familiar with the discussions said earlier this month.

The DRC and Indonesia

Government intervention has yielded notable success for some, including the Democratic Republic of Congo (DRC), which has stockpiled cobalt and set export quotas to boost its mining revenue.

In the near term, the policy lifted global prices, helping to fill government coffers, but prolonged restrictions risk accelerating the shift to substitutes as buyers seek more reliable supplies, said Geraud-Christian Neema, the Africa editor at the China Global South Project, a non-profit focused on Beijing’s role in emerging economies.

Authorities now face a difficult balance: easing quotas could trigger export surges from players like China’s CMOC and erase gains, while keeping them tight risks a long-term erosion in demand, he said.

The DRC followed a path forged by Indonesia, which in 2020 banned nickel ore exports to encourage in-country processing and increase revenue from its resources.

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Within three years, production trebled and it entrenched its position as the world’s dominant producer. But it has since cracked down on mining quotas to stem overproduction and falling prices - and last week, it unveiled a plan to centralize control of commodity exports.

One way to lower the risk of oversupply would be to add processing capacity at existing operations so that target metals are produced as byproducts, rather than following price signals, said Huw McKay, a visiting fellow at The Australian National University who previously served as BHP’s chief economist.

That model is underway in Western Australia with Alcoa and Japan’s Sojitz, which includes backing from the Japanese, Australian and U.S. governments. They are adding a plant to extract gallium at Alcoa’s alumina operations near Perth. Trafigura has moved to extract antimony from its Nyrstar lead smelter in South Australia.

Given the capex of large miners, McKay said Western government investments were “more like seed funding.”

(Reporting by Melanie Burton; Additional reporting by Maxwell Adombila in Dakar and Fransiska Nangoy in Jakarta; Editing by Veronica Brown, Praveen Menon and Thomas Derpinghaus)