LYC Lynas Rare Earths Limited

China cut its quotas on first-half exports of rare-earth metals around 35%, a move likely to exacerbate concerns among global buyers of the minerals after an even deeper cut late this year.

China supplies around 95% of the global market for rare earths, metals that are used in high-tech batteries, televisions, mobile phones and defense products. Its decision to cut export quotas by 72% for the second half of 2010 met with worldwide criticism that it was taking undue advantage of its market-dominant position to engineer a rise in rare-earth prices. That would leave high-tech industries little choice but to locate to China.

A supply crunch would have its deepest impact on Japanese technology manufacturers such as Hitachi Ltd. (HIT). But it's not uniquely a Japanese problem, notes Hallgarten & Co. strategist Christopher Ecclestone. Japanese manufacturers use some of what they receive from China, but Sumitomo Corp. (8053.TO, SSUMY) and others convert and re-export the minerals, he said. U.K.-based Dyson's vacuum motors contain magnets made of neodymium, a rare-earth element, while aerospace companies like Boeing (BA) and Lockheed Martin (LMT) use these materials for guidance systems.

China's decision to cut export quotas is stoking trade tensions with the U.S. less than a month before President Hu Jintao arrives for a visit with President Barack Obama.

"We are very concerned about Chian's export restraints on rare-earth materials," said a spokeswoman from the U.S. Trade Representative's office, adding "we have raised our concerns with China and we are continuing to work closely on the issue with stakeholders."

For its part, China has maintained that the cuts are in line with sustainable development, citing concerns over environmental degradation associated with mining the metals.

First-half 2011 quotas total 14,508 metric tons, down about 35% compared with the same period this year, according to data from the Ministry of Commerce Tuesday.

The cuts depart from comments by Commerce Minister Chen Deming, who said earlier this month that China will largely leave quotas for the rare minerals unchanged in 2011. China could still raise its second-half 2011 quotas, leaving next year's exports roughly equivalent to 2010.

Rare earths burst into the limelight in September, when Japanese importers claimed China had suspended shipments of the metals after Japan detained a Chinese fishing boat captain whose trawler collided with Japanese patrol vessels near islands both countries claim.

In response to China's increasingly strict regulation of its domestic rare-earth industry and soaring prices, major importers like Japan and the U.S. are seeking out alternative suppliers, including Australia, Mongolia and Thailand.

Two big producers are already ramping up: Lynas Corp. (LYSDY) in Australia and Molycorp Inc. (MCP) in the U.S., which just this week began blasting in an open-pit mine in the California desert that had been a major rare-earths producer before mining stopped in 2002.

Chinese officials have welcomed the trend, saying it is irrational for China to supply the whole world's rare-earth needs with just 30% of global reserves.

"Every country that has reserves should start to exploit their resources instead of relying on China," the country's Chamber of Minerals, Metals and Chemicals Importers & Exporters President Xu Xu said Tuesday at a rare-earth conference in Beijing.

Xu also predicted that rare-earth prices will inevitably increase, in line with most commodity prices, including copper, oil and iron ore.

But China's dominance won't be easily eroded, said Wang Caifeng, a former senior official with Ministry of Industry & Information Technology's raw material department.

"I am confident that China will hold its bellwether position in the global rare-earth industry in the long term," he said.

Meanwhile, annual demand for rare earths will keep rising--to around 200,000-250,000 tons by 2015, Wang said without providing a comparative figure for 2010.

-Yajun Zhang contributed to this article, Dow Jones Newswires; (86 10) 8400-7712; yajun.zhang@dowjones.com

--James Areddy, Chuin-Wei Yap, Caitlin Nish, Tatyana Shumsky and Tom Barkley contributed to this article

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