China's rare earths export cut spurs trade concerns

A worker waters the site of a rare earth metals mine at Nancheng county, Jiangxi province December 29, 2010.

SYDNEY (Reuters) - China's move to slash export quotas on rare earth minerals -- vital in a slew of high-tech products -- has raised fresh international trade concerns, and Japan's Sony Corp vowed on Wednesday to reduce its reliance on the minerals.

China, which produces about 97 percent of the global supply of rare earth minerals, cut its export quotas by 35 percent for the first half of 2011 versus a year ago, saying it wanted to preserve ample reserves. It also cautioned that it has not decided on the quotas for the second half of the year.

The little-known class of 17 related elements is used in numerous electronic devices and clean energy technology.

A European Commission spokesman said the European Union "notes the latest quota figures and expects China to respect its recent assurance of a guarantee of rare earth supplies to Europe." The United States, which earlier this month threatened possible World Trade Organisation action over Chinese rare earth export restraints, voiced concern on Tuesday as well.

While Japanese giant Sony said China's move represented a hindrance to free trade, for other companies the Chinese action provided a boost.

Shares of Lynas Corp, which owns the world's richest known non-Chinese deposit of rare earth minerals, jumped more than 10 percent even though it will be at least a year before it is capable of mining any material from a new lode in Australia.

Other rare earth companies, including China Rare Earth Holding Ltd, Arafura Resources, Alkane Resources and Greenland Minerals and Energy Ltd, also gained between 8 percent and 10 percent.

Shares in Colorado-based Molycorp closed Wednesday's session on the New York Stock Exchange up 6.76 percent at $49.30 (£31.80). That was its second-highest close ever and represented a nearly 400 percent jump from the company's initial public offering price of $14 in July.

Molycorp owns a rare earth mine in Mountain Pass, California, which is scheduled to resume production next year after a 10-year hiatus.

"Any reductions China makes in its 2011 exports versus 2010 levels will only exacerbate the global supply shortfall of rare earths we can expect in 2011," Molycorp CEO Mark Smith said in a statement.

U.S. makers of high-tech products such as Apple Inc's iPads and various Japanese companies have been scrambling to secure reliable supplies of the minerals outside of China as Beijing steadily reduces export allocations.

While Sony does not import or buy rare earth elements directly, the minerals are crucial for the production of components used in its finished products. These include magnets, condensers, and abrasives for polishing LCD glass, company spokeswoman Ayano Iguchi said.

SONY MULLS OPTIONS

Sony, maker of Bravia brand flat TVs, Vaio PCs and the PlayStation 3 videogame console, will look for ways to cut its use of rare earth elements, including developing alternative materials, Iguchi said.

"We cannot welcome rare earth export controls or any restrictions that hinder the system of free trade," Sony said in an e-mail statement in response to questions by Reuters.

"At this point in time there is no direct impact on our company. But further restrictions could lead to a shortage of supply or rise in costs for related parts and materials," Sony said. "We will watch the situation carefully."

Wind turbines and hybrid cars are among the biggest users of rare earth minerals, which analysts say are facing a global supply crunch as demand swells. The minerals also are used in some weapons systems.

"The growth in the Chinese domestic market coupled with a decrease in production of rare earths in China is a likely cause for the tightening of export regulations," Lynas Executive Chairman Nick Curtis said in a statement.

Lynas aims to start production in about a year and has already forged supply contracts with Japanese traders.

World demand for rare earth minerals at present is about 110,000 tonnes a year, with China accounting for about 75 percent of total demand with the remainder split between Japan, the United States and Europe, in descending order.

"With global demand outside of China expected to rise further to between 55,000 and 60,000 tonnes in 2011, the rare earth shortages we saw in 2010 are likely to occur again in 2011 and may be even more pronounced," Molycorp's Smith said.

Demand is set to more than double to 250,000 tonnes by 2015, according to industry estimates.

China's export quota cut for rare earth minerals for the first half of 2011 was initially reported on Tuesday as about 11 percent of quotas for the first half of 2010. But clarifications from China's government on Wednesday showed it was a 35 percent cut from the year-earlier period.

"Concerned parties should not estimate full-year quotas for rare earth minerals just by looking at the first set of quotas," China's Ministry of Commerce said.

Final quotas will take into account domestic production and demand both at home and abroad, according to the ministry.

Prices have surged for these minerals since authorities in Beijing slashed their rare earth exports by 40 percent this summer, saying China needed them for its economic development.

(Additional reporting by Nathan Layne and Kiyoshi Takenaka in Tokyo, Tom Miles and Niu Shuping in Beijing, Hyun Joo Jin and Ju-min Park in Seoul, Peter Harrison in Brussels and James Kelleher in Chicago; Editing by Will Dunham and Bill Trott)