New shift rattles rare earth sectors

By setting up shop inside China, where 95 per cent of the world’s rare earths are produced, manufacturers can obtain the metals at a lower price and then export the finished products outside the quota system. Such a shift in production, which companies are only beginning to explore, could leave miners who are developing new sources of rare earths outside China scrambling for customers.

Analysts also say the move could lead to a leak of the technology used in strategic Japanese high-technology products, particularly sophisticated magnets used in hybrid cars, produced by only three companies in Japan. A move into China could topple Japan’s technological supremacy and further damage its manufacturing sector. Japan, grappling with the strong yen, a high corporate tax rate, a power shortage and a shrinking population, has already seen some of its manufacturing sector shift output abroad.

At the same time, a crippling of the nascent rare earth sector outside China could jeopardise the long-term supply of the group of 17 metals. Rare earths are used to make magnets that are smaller and more powerful than traditional magnets, making them crucial to streamlined products like smartphones and tablet computers.

The main ingredient in these magnets is neodymium oxide, which costs $217 per kilogram, or $98 per pound, in China and $370 per kilogram in the restof the world. Neodymium oxide sold for $27 per kilogram on average in 2008. Rare earth prices have skyrocketed as China has repeatedly slashed quotas, cutting exports to 30,184 tons in 2011, from 60,000 tons in 2007. That has prompted Hitachi Metals, the world’s top maker of high-powered magnets, to contemplate moving production of its neodymium-based magnets to China and the United States, where a big rare earth mine is set to reopen in 2012.

Neo Material Technologies, a Canadian rare earth company that operates in China, has started a venture inside China with one of its Japanese customers to produce a rare-earth-based glass product. Showa Denko, a top producer of rare earth alloys, has announced that it will increase output at its Chinese joint venture by 50 percent to 3,000 tons a year.The company said it would continue to produce its premium magnets, used in hybrid cars, in Japan.

With the demand for rare earths set to grow rapidly in the next few years as sales of electric cars, wind turbines and smartphones increase, China is expected to keep a tight grip on its supply, raising the ire of Japan. In July, China expanded the scope of its export quotas to include low-grade rare earth alloys. Although higher-end processed alloys remained outside the export quota system, there is specular tion that those alloys are next.

In an effort to keep technology manufacturers in the domestic market, the Japanese trade ministry is spending ¥54 billion, or $704 million, to encourage companies that use rare earths to set up supply chains and develop recycling technologies.

But with no significant production of rare earths expected outside China before 2013, analysts say the production move by Hitachi and Showa Denko could indicate the beginning of a mass exodus of technology manufacturers from Japan. At the Mountain Pass mine in the Mojave Desert of California, construction is under way on the modernisation of an old rare earth project.

Molycorp, the US company that owns the project, plans to have the mine and new processing facilities operating by 2012. It plans eventually to produce items including separated rare earth oxides and high-powered magnets.

In order to compete with miners in China, Western rare earth producers need to make supplies available quickly and sign deals with Asian companies to gain the critical knowledge about how to process the rare earths to the specifications required by buyers, analysts said. on Friday, Hitachi Metals announced that it had reached a supply deal with Molycorp on materials for its neodymium-based magnets but said it would not pursue a venture with the U.S. company to produce rare earth magnet alloys.

The other big hurdle for would-be miners is price. The Japanese rare earth market is expected to shrink 30 percent this year because of the flight to China. The trend is expected to continue until prices outside China drop.