Critical Minerals Face Rising Oversupply Risks

Key Moments

Massive Public Spending Raises Oversupply Concerns

Western policymakers are deploying large-scale financial support to secure critical minerals supplies and reduce reliance on China, but industry participants warn that poorly coordinated intervention could trigger damaging gluts reminiscent of past commodity crises.

A dozen executives, investors and analysts cited the danger that government-backed production could outstrip demand, undermining prices and project economics.

“There needs to be some coordination between Western governments as they seek to incentivise 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.”

The United States has earmarked upwards of $20 billion for its critical minerals sector across multiple channels, including $10 billion dedicated to a strategic stockpile known as Project Vault. Australia has set aside at least A$13 billion ($9.42 billion) across at least five support programs, including its own reserve initiative.

Rare Earths: Small Market, Large Commitments

Rare earths form a relatively small slice of the roughly $320 billion critical minerals market that the International Energy Agency expects to double by 2040. According to the IEA, the rare earths segment – which supplies high-strength magnets used in defense, advanced manufacturing and medical technologies – was valued at about $6.4 billion in 2024.

Despite that modest size, pledged financial backing from the U.S., European Union, Australia and Japan for rare earths projects worldwide already exceeds the sector’s current market value, based on Reuters calculations.

Lessons From Past Commodity Booms

Industry figures warn that existing policy trajectories resemble earlier episodes when state support drove excessive output. In the 1980s and early 1990s, subsidies, cheap energy and guaranteed prices contributed to heavy overproduction in European dairy – known as “butter mountains” – as well as in Russian aluminium and Australian wool. Those surpluses depressed global prices and spread economic damage far beyond the sponsoring countries.

Analysis from Project Blue, a consultancy, indicates that the current wave of Western investment is already on track to push some rare earth elements – a group of 17 metals – into surplus in the coming years. However, David Merriman of Project Blue said he does not anticipate major, long-lasting gluts if governments adjust their support mechanisms in time.

“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.

Current Stockpiles Seen as Limited

For now, existing inventories are not viewed as a destabilizing force. On May 6, Lynas Rare Earths CEO Amanda Lacaze, whose company is the largest rare earths producer outside China, said that stockpiles do not currently pose a threat to market balance.

“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 authorities also stress that their approach differs from earlier missteps in other sectors. Australian Minister for Resources Madeleine King told Reuters earlier this year that the country’s backing for a critical minerals reserve is structured differently from previous support for wool.

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

Emerging Efforts at Global Coordination

Some cross-border policy coordination is starting to emerge. The Group of Seven nations are in discussions to establish a permanent secretariat focused on critical minerals strategies, according to five sources familiar with the talks. The goal would be to ensure that plans to expand supply are maintained and aligned beyond the G7’s rotating presidencies.

Policy Experiments in the DRC and Indonesia

Recent moves by major resource holders underscore both the potential benefits and the risks of assertive government intervention.

The Democratic Republic of Congo (DRC) has used stockpiling and export quotas on cobalt to support state revenues. In the short term, those measures helped lift global prices and bolstered government income, said Geraud-Christian Neema, Africa editor at the China Global South Project, a non-profit tracking China’s activity in emerging markets.

However, Neema warned that maintaining restrictions for too long could push consumers toward alternative materials and more dependable supply sources.

Authorities in the DRC now face a difficult choice, he said: relaxing quotas could unleash a rush of exports, including from producers such as China’s CMOC, potentially erasing price gains. Keeping restrictions tight, on the other hand, risks shrinking long-term demand.

The DRC’s strategy builds on a path previously taken by Indonesia, which implemented a nickel ore export ban in 2020 to force domestic processing and capture more value from its resources. Within three years of that move, Indonesian nickel output had tripled, cementing its role as the dominant global producer.

But rapid expansion also brought challenges. Indonesia has since tightened mining quotas to curb overproduction and falling prices, and last week announced plans to centralize oversight of commodity exports.

Mitigating Oversupply With Byproduct Strategies

One approach to lowering oversupply risks is to integrate new critical minerals output into existing operations, rather than building stand-alone projects that respond purely to price signals, said Huw McKay, a visiting fellow at The Australian National University and former chief economist at BHP.

Under this model, additional processing capacity is added to current mines or plants, enabling recovery of target metals as byproducts. This is already being applied in Western Australia, where Alcoa and Japan’s Sojitz – with backing from the Japanese, Australian and U.S. governments – are installing a facility to produce gallium from Alcoa’s alumina operations near Perth.

In a similar move, Trafigura has initiated efforts to extract antimony from its Nyrstar lead smelter in South Australia.

Given the sizable capital requirements of major mining projects, McKay characterized the current role of Western public funding as relatively small-scale.

He said Western government investments were “more like seed funding.”