China has taken new measures to restrict supply of rare earth elements, raising the spectre of a trade dispute and putting even more pressure on Western countries to develop new sources of supply.

Rare earth elements, which include tough-to pronounce metals like dysprosium, gadolinium and neodymium, have become a big issue over the last couple of years because they are needed for many green technology and consumer electronics applications. The problem is that more than 90% of global production comes from China, and the Chinese government is determined to keep much of it for domestic use.

Late last week, the government announced it is cutting its rare earth export quotas by a staggering 72% for the second half of 2010. Shipments will be capped at 7,976 metric tonnes, down from 28,417 tonnes in the same period a year ago. This follows previous quotas the government introduced in the past.

The export limits are part of a broader plan in China to bring more oversight to the industry. The government appears to want to push prices higher, cut down on smuggling and limit the intense price competition between domestic producers.

“I believe that what’s being created here will be a very dysfunctional cartel,” said John Kaiser, publisher of the Kaiser Bottom Fish Online report.

The new quotas have major implications for the rest of the world.

“It underlines the whole issue of long-term security of supply and the need for new supply sources to emerge outside of China,” said Don Bubar, chief executive of Toronto-based Avalon Rare Metals Inc.

Mr. Kaiser said the key question is what the make-up of the exported metals will be under China’s new limits. There are 17 rare earth metals, classified as either “light” or “heavy.” The heavy rare earths (which number 63 to 71 on the periodic table) are much more scarce, and they are needed for a lot of sophisticated electronics manufacturing.

China’s move to cut rare earth supply could raise the ire of the United States and other countries that depend on it. Last year, the U.S. and the European Union complained about China’s export quotas to the World Trade Organization (WTO), and a recent report suggested the U.S. is gathering evidence in order to potentially bring a formal case to the WTO.

Some experts suggested that China may repeal new export quotas if there is a major international backlash, as it has in the past.

While there are many known rare earth deposits around the world, China gained almost total control of the market by producing the metals very cheaply and undercutting competitors on price.

Now that prices are likely to rise because of increasing demand, new supply sources will likely be developed. Two of the key ones are in Canada: Avalon’s Thor Lake project in the Northwest Territories, and Quest Rare Minerals Ltd.’s Strange Lake project in Quebec. Additionally, a company called Molycorp Inc. is re-opening the Mountain Pass mine in California, which used to be a major source of rare earth elements.

Financial Post

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