Overcapacity alarm constantly sounding: Western giants investing in key minerals, fearing a repeat of the mistakes made in the "Butter Mountain" and "Aluminium Flood"?

Currently, several Western countries are investing billions of dollars in key mineral resources in an attempt to reduce their reliance on overseas supplies. However, multiple industry insiders warn that policies supporting the bulk commodity industry often backfire, leading to a potential return to an oversupply crisis in the market. Brett Bennett, a partner at the private equity firm Resource Capital Funds specializing in the mining sector, stated, "When Western governments implement policies to incentivize new production capacity, they must collaborate with each other." The firm, through its subsidiary Global Advanced Metals, supplies niobium and tantalum to the US government. He added, "The biggest risk is each country acting independently. If countries increase production, total output will far exceed global actual demand, resulting in severe oversupply and causing significant damage to the industry." The US has allocated over $200 billion through various programs and financing tools to support the domestic critical mineral industry, with $100 billion specifically designated for the "Strategic Minerals Reserve" project. Australia has also introduced at least five support schemes, allocating at least A$13 billion (equivalent to $9.42 billion) to develop key mineral resources and establish its own mineral reserves. According to data from the International Energy Agency, the global market for critical minerals is valued at $320 billion, with the market expected to double by 2040. Rare earths are just one category in this market, which can be used to manufacture high-performance permanent magnets for defense technology, high-end manufacturing, and medical equipment. The global rare earth market is estimated to be around $6.4 billion in 2024. Based on Reuters' calculations, the total support funding pledged by the US, EU, Australia, and Japan for global rare earth projects has already exceeded the market value. Beware of oversupply: Avoid the mistakes of "butter mountains" and "aluminum flood" In the 1980s and early 1990s, Europe heavily subsidized its dairy industry with low-cost energy and price support policies, leading to the accumulation of "butter mountains". Uncontrolled expansion of aluminum capacity in Russia flooded the global market with aluminum products, while Australia faced a severe oversupply of wool. These products flooded the global market, leading to a sharp decline in prices and negative impacts spreading to multiple countries worldwide. David Merriman, an analyst at the consulting firm Project Blue, believes that due to the influx of Western capital, some rare earth (17 metal elements in total) categories may face oversupply in the coming years. However, he also believes that governments can adjust support policies to avoid a situation of massive oversupply. He stated, "Government-led reserve projects can pause purchases to balance the market. Currently, the scale of production that relies on government guaranteed purchases is still limited." On May 6th, the CEO of the world's largest non-China Rare Earth Resources and Technology producer Lynas Rare Earths, Amanda Lacaze, stated that there is currently no risk of market impact from the mineral reserves of various countries. "I have been closely monitoring rare earth reserves around the world, and the overall reserve volume is not significant," she said. Earlier this year, Australia's Resources Minister Madeleine King stated that Australia's mineral reserve planning differs fundamentally from the oversupply situation in the wool industry in the past. She said, "We are implementing targeted, project-based investment aimed at tangible projects, to build a secure supply chain for Australia's domestic manufacturing industry, as well as for neighboring friendly nations and like-minded partners." International cooperation is gradually expanding. Five insiders revealed that the Group of Seven (G7) is discussing the establishment of a permanent secretariat to ensure that plans to increase production of critical minerals can be implemented in the long term without being affected by rotating chairmanship countries. Learn from history: Lessons from policy interventions in Congo (Kinshasa) and Indonesia Some countries use administrative intervention to manipulate resource markets, garnering short-term gains but resulting in more complex market aftermath. Congo (Kinshasa) is a typical case: the country has reserved cobalt mines and set export quotas to increase mining revenue. Analysis from Hoturo Christian Nema, an Africa editor at the non-profit organization China Global South Project, suggests that, in the short term, this policy has pushed up global prices and helped enrich government revenue, but long-term policy restrictions may force buyers to seek alternative raw materials. He points out that Congo (Kinshasa) is now in a dilemma: if export quotas are relaxed, other companies' exports would significantly increase, erasing the early price gains; if strict restrictions are maintained, long-term market demand will continue to be eroded. Indonesia has also taken a similar path. In 2020, Indonesia implemented a ban on nickel ore exports to promote local nickel processing and increase resource income. In just three years, the country's nickel production tripled, consolidating its position as a major global producer. However, issues of oversupply and price decline followed, leading Indonesia to tighten mining quotas. Just last week, the country announced new regulations planning to implement centralized control over commodity exports. Hugh McKay, a visiting scholar at the Australian National University and former Chief Economist of BHP Group Ltd Sponsored American Depositary Receipt Repr 2 Shs, suggests that one way to avoid oversupply is to expand processing lines on existing production facilities, producing the target minerals as by-products rather than blindly expanding production to chase market prices. Currently, Alcoa Corporation and Sumitomo Corporation of Japan are implementing this model in Western Australia, with projects receiving support from the governments of Japan, Australia, and the US. The two companies plan to build a new production line for gallium at an alumina refinery near Perth. Additionally, the Tocque Group is undertaking antimony extraction operations at its Nyrstar lead smelter in South Australia. Mckay states that considering the massive capital expenditure of large mining companies, the relevant investments by Western countries are more like seed capital. Unafraid of oversupply risks, "hard assets" become the new darling of capital Although the risk of oversupply is looming, key mineral-related targets remain popular among investors, given the political disturbances at GEO Group Inc and the resonance of the AI revolution. Global funds are pouring into hard assets. Data from the research firm ETFGI shows that as of March 31, assets under management in mining exchange-traded funds (ETFs) more than doubled to $87.4 billion, up from $37 billion a year ago. Evy Hambro, a portfolio manager at BlackRock, Inc., predicts that the commodity supercycle is entering its early stages. With a significant increase in capital investment in grid infrastructure, data centers, electric vehicles, and charging stations, the metal content in GDP is rising. Market enthusiasm is reflected in the share prices of the two global mining giants, BHP Group Ltd Sponsored American Depositary Receipt Repr 2 Shs (BHP.US) and Rio Tinto plc Sponsored ADR (RIO.US), which have recently hit record highs. Industry professionals like Anix Vyas, a portfolio manager at Harding Loevner, point out that these diversified mining giants covering copper, aluminum, and other high-demand commodities are benefiting deeply from the resonance of demand across multiple sectors, fully tapping into the growth dividends of data centers and the industrial sector. It should be noted that the metal market is relatively small in size and has limited liquidity. Massive inflows of funds may amplify price fluctuations, further exacerbating inflationary pressures and posing potential risks to global economic recovery.