China now dominates global production of rare earths, supplying more than 97 percent of the world’s demand.  With a position this dominant, the world’s current supply is almost entirely dependent on the rare earth materials that China chooses to make available for export.

In recent years, China’s growing economy -- and its rapidly growing manufacturing sector -- have increased the demand for its own rare earths.  That has led to a steady reduction in its rare earth exports.

This trend should come as no surprise.  As an increasing share of China’s more than 1.3 billion people improve their standards of living and move up into the middle class, their demand for products like cell phones, computers, automobiles and the like has increased.  All of these products require rare earths.

As a result, China’s internal rare earth consumption has accelerated, and its exports have been reduced sharply.  For example, prior to 2010, China had consistently reduced its rare earth exports at a rate of about six percent per year.  However, in 2010, its export quotas were tightened dramatically – a full 40 percent reduction from 2009 levels.  This created shortages of some rare earths in 2010, and forced prices to increase dramatically.

In 2011, those export quotas were tightened yet again.  And, like last year, we are once again faced with global rare earth shortages.  This is a critical issue for some manufacturers whose products or technologies require rare earths.  There are some companies today that cannot purchase sufficient quantities of the rare earth materials they need at any price.

Another critical trend that we are witnessing is China’s efforts to exercise much tighter control over its internal production of rare earths.  For example:

• The Chinese government has forced major consolidation of its domestic rare earth industry in the past year.  It is estimated that more than 250 individual rare earth producers have been forced to consolidate into just a handful of major players.
   
• China is now beginning to enforce in-country production quotas.  It recently announced a halt to mining operations at three large mines, and has ordered some major rare earth processors to stop operations.
   
• The Chinese government is imposing tougher environmental regulations on the industry.  In particular, they are tightening water discharge requirements.  This is causing some processing facilities to shut down, at least temporarily, until improvements can be made.  Chinese processors need more revenue to pay for these improvements, which will increase upward pressure on prices.
   
• The Chinese government has imposed new taxes on its domestic rare earth producers.  The owners and operators of these facilities are becoming vocal about this and want either the taxes voided or prices to go up.  From all indications, it will be the latter.
   
• Earlier this year, China announced a ban on approvals of any new rare earth separation projects for the next five years.
   
• China is successfully cracking down on illegal rare earth mining and exports, which have been estimated to amount to as much as 30,000 to 40,000 tons of product per year.

All of these steps will negatively impact China’s rare earth production.  That will further restrict their export capabilities.  This will almost certainly exacerbate the current global shortages of rare earths, at least until non-Chinese producers like Molycorp increase production.