China Hurts Foreign Tech Producers by Cutting Rare-Earth Exports

China’s cuts to its rare-earth exports are giving a cost advantage to firms that manufacture a long list of hi-tech products in China while shoring up slumping prices due to sluggish overseas demand.

Only 10,546 tons of rare earths will be allowed to be exported in the first half of 2012, a 27% reduction from the quota for the first half of 2011. The export restrictions implemented in 2011 had already drawn sharp criticism from the US, EU, Japan and other governments. But actual overseas demand has fallen even faster than the cuts in export quotas due to flagging economic growth in the EU and the US.

China’s actual rare earth exports in 2011 totaled 14,750 tons for the first 11 months of 2011, only about 49% of the total annual quota, suggesting unusually weak demand, according to the Commerce Ministry.

Demand for rare earths have fallen so much that China ordered its biggest producers to suspend production in October to help shore up export prices.

Still the export quotas have made rare earth prices rise faster abroad than in China, giving local producers a cost edge. That creates an incentive for makers of products like cell phones, wind turbines, electric-car engines, solar panels and other hi-tech products to move production to China.

To help it exercise tighter control China has cut down the number of firms licensed to export rare earths from 26 firms in the first half of 2011 to just 11 in 2012.

Currently China produces about 97% of the world’s supply of rare earths which are 17 elements including cerium, dysprosium and lanthanum which are actually not so rare but are very labor intensive and environmentally degrading to extract and refine. That’s why the US, Canada, Australia and other nations that once had large rare-earth mines were forced to exit the industry during the 1990s the face of low-cost exports from China.

But the supply insecurities triggered by China’s move to tighten exports have prompted firms in California, Canada, India, Malaysia, Russia and other nations to begin reopening or developing rare earths mines. Most aren’t expected to start producing significant quantities for at least two or three more years, however, putting many tech industries at the mercy of China’s export restrictions.

For now, however, the restrictions haven’t done much to shore up prices in China. Since August prices fell 45% for neodymium oxide, 33% for terbium oxide and 31% for lanthanum oxide, according to Australian producer Lynas Corp.

But prices overseas have become far higher, with lanthanum oxide selling on world markets at three times the level in China, and neodymium at over twice. This differential, combined with labor cost advantages, are pressuring more Japanese producers to shift production to China.