China Baotou to Halt Rare Earth Operations for One Month

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China Baotou to Halt Rare Earth Operations for One Month

BEIJING—China's largest rare-earth producer said Tuesday that it would suspend smelting and separation work for a month starting Wednesday to use its market power to rally falling rare earth prices.

Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech, which accounts for nearly half of the world's light rare-earth production, said in a filing with the Shanghai Stock Exchange that the move was aimed at "balancing supply and demand."

Rare earths—which comprise 17 metallic elements used in many important technological products including missile systems and hybrid cars—soared in price beginning in 2009, spurring worries about China's grip on the industry. China dominates the global market with about 95% of the world's rare-earth output, though it exercises weaker control over its fragmented domestic producers.

But prices of some rare earth oxides have fallen sharply in recent months amid global growth jitters and as some segments of Japanese manufacturing pared rare-earth demand after a devastating tsunami threw production into disarray earlier this year. Chinese prices of neodymium oxide have fallen 35% since June; praseodymium oxide has shed 17% and lanthanum oxide 21% in the period, according to data from Australian rare earth producer Lynas Corp.

The move is a test of Baotou's market clout. A monthlong suspension would remove about 5,000 metric tons of output from the global market this year, RBS estimated.

"We would expect a monthlong shutdown from the largest producer in the world to impact prices reasonably quickly," said RBS rare earth analyst Sam Berridge. "Rare earth production is quite consolidated and the market is quite small, so one of the majors could influence the supply-demand balance quite easily."

Baotou has previously tried to influence prices of rare earths, a collective term for 17 metallic elements used in many important technological products including missile systems and hybrid cars.

Last month, the company said it would pay up to 900,000 yuan/ton ($141,000/ton) for praseodymium-neodymium oxide, at that time about 6% higher than market price, to "improve market order."

Its shares fell nearly 6%, or 2.9 yuan, to 47.51 yuan on Tuesday.

Its premium offer came a month after Beijing's renewed crackdown on illegal rare earth mining and production, which included confiscating unapproved stockpiles, in a move that it attributed to environmental concerns. In August, the Ministry of Land and Resources also issued new rules to designate rare-earth reserve areas closed to mining, tracking movement of the minerals and slashing the number of companies mining them.

Baotou's latest move isn't likely to contribute to easing tensions with China's trading partners in strategic metals. U.S. businesses have called for the U.S. Trade Representative to take action against China's restrictions on exports of rare earths, including potential action at the World Trade Organization, calling China's trade policy in this sector a play for technology transfer.

Major Japanese technology producers that depend on Chinese rare earth supply, including Hitachi Ltd. and Showa Denko K.K., have moved or are considering moves to boost their production bases in China.

China has been able to retain control over global prices because alternative supply is still years away from becoming viable. The U.S. was once a major rare-earth producer and processor, but its supply role ended when the minerals became cheaper to import from China.

Still, China may also be trying to soothe tensions even as it tightens control over domestic production.

The Ministry of Commerce has kept its rare earth export quota largely steady this year compared to 2010, though it widened the types of rare earths that would trigger quota requirements. The standstill on the export quota ended years of drastic reductions in these export quotas, including a cut of about 40% in its 2010 quota.

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