Halt in output of rare earths set to hit Japan

Japanese carmakers are bracing for price fluctuations in rare-earth materials as mainland producers come under pressure by the government to suspend production.

State-owned rare-earth trader China Minmetals issued an official statement on Tuesday to urge all mainland firms to stop production 'immediately' starting from the beginning of August in order to abide by the national quota. While it does not operate any mines of its own, Minmetals had already halted operations at its processing plants.

It urged companies not to exceed the production quota imposed by the government, and minimise the environmental impact in their production process, which can produce large amounts of industrial waste.

Robin Bhar, senior metals analyst with Credit Agricole, said suspending production could rattle Japanese manufacturers of automobiles and electronics, including computers and televisions, who are the main industrial consumers of rare earths.

'Manufacturers may have to pay more. They may have to cut down on production as their profit margins are being squeezed,' said Bhar, who added that he expected spikes in rare-earth prices.

He said Japanese manufacturers were unlikely to raise prices in the short term as they wanted to remain competitive in the global market.

Tadashi Usui, Tokyo-based senior analyst with Moody's, said the three major carmakers in Japan - Toyota, Honda and Nissan - had already been preparing themselves for fluctuations in the supply of rare-earth materials. They rely on the minerals to produce hybrid and next- generation electric vehicles.

Moody's had earlier downgraded Toyota's credit rating from Aa2 to Aa3, but maintained its A1 rating of Honda. It had upgraded Nissan from Baa2 to Baa1.

Usui said further downgrades of these three companies would be unlikely in the near future, although there could be pressure on their businesses if the yen continued to strengthen against the US dollar.

Japan consumes two-thirds of China's rare-earth exports for industrial use, according to a report by Moody's released last year.

The Japanese government had warned its industrial sectors about the low overall stocks at the end of last year, when China announced it would slash its exports of rare-earth minerals this year by 30 per cent.

China accounts for 97 per cent of global rare earths production. Other governments have accused Beijing of deliberately withholding supplies in order to push up prices and improve its own competitive edge in products that use rare earth materials, such as wind turbines and hybrid vehicles.

In March, the mainland set a 2011 production quota of 93,800 tonnes of rare-earth oxides in order to reduce pollution from the production process. It also issued total export quotas of 30,184 tonnes this year, slightly lower than the 30,258 tonnes issued last year.

But Chinese media suggested rare-earth companies had already hit the production ceiling this year.

The China Rare Earth Society had suggested that the actual output figures in 2010 had far exceeded the government quota of 89,200 tonnes.