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Commodities

China crackdown could curb rare earths outflow

Japan businesses, burned by high prices in past, on alert for supply crunch

A rare-earth metal mine in China.

TOKYO -- The Chinese government has stepped up enforcement of environmental rules at rare-earth metal plants, as well as illegal mining and smuggling of the key industrial materials.

Japanese users are feeling nervous about possible fallout, with memories still fresh of the hardship they encountered when Beijing abruptly halted rare-earths exports to Japan in 2010.

Tightening grip

"Some rare-earth metals are still mostly produced in China. Their prices will swing wildly depending on what happens there," an executive at a Japanese magnet maker said.

Dysprosium, a rare-earth metal that is used in high-performance magnets to boost heat resistance, now changes hands at less than a tenth of what it fetched during its peak in 2011. Many market players believe that the price is bottoming out and will start to climb because the Chinese government began making serious efforts into reducing rare earths supplies and exports.

Beijing carried out a series of spot inspections on environmental measures at factories over a month or so last summer. Teams of experts from the capital tested wastewater and examined pollution-reduction measures at rare-earths smelting and separation plants. Operations at facilities that did not meet standards were suspended.

Those inspections covered a total of eight provinces and regions, such as Inner Mongolia, Heilongjiang and Jiangsu.

"It appears that inspectors have found lots of regulation violations all over the place," said Yoshikazu Watanabe, president of Tsukushi Shigen Consul, a natural resources consultancy. "Some people were even arrested, apparently," Watanabe said. 

Protecting domestic businesses

The Chinese government is believed to be aiming to support domestic businesses by shoring up rare-earths market conditions. Many of the metals continue to trade at low prices because magnet makers from Japan and elsewhere have cut down the use of the materials, having been hit by high prices.

The government has managed the flow of rare earths by building up stockpiles in the public and private sectors and consolidating suppliers into six groups. However, the efforts have not produced sufficient impact because it is taking longer to sort out small and midsize players.

Beijing's stepped-up efforts to strengthen its control over rare-earths companies also comes from its desire to hold down the outflow of the metals from the country and nurture related industries within its borders. Some of the Chinese-made products that use rare earths are said to have improved to the point that their quality is now close to comparable products made in Japan.

"Demand for rare earth metals is firm in China," said Shigeo Nakamura, president of Advanced Material Japan, a Tokyo rare-earths trading company.

Lessons learned

Hitachi Metals is looking to begin mass-producing neodymium magnets for electric-vehicle and industrial-use motors in March through a production and sales joint venture in China. Expectations that local joint ventures likely will be able to avoid negative impact even if the Chinese government decides to reduce rare-earths exports were a major motivator for the company's decision to set up shop in China.

Because Beijing's actions are highly unpredictable, businesses that deal with rare-earth metals cannot afford to become complacent. When tensions between Japan and China flared up over disputed islands in the East China Sea in 2010, Beijing suspended rare-earths exports to Japan.

This temporarily affected production of motor magnets and other items, prompting Japanese rare-earths-related companies to diversify procurement sources and develop products that use less of the metals.

Having gone through the experience, some Japanese companies are already preparing for a possible supply crunch, as seen in the case of Hitachi Metals.

(Nikkei)

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