Prices of rare earth metals, a group of minerals used by the electronics- and clean-energy industries, are expected to remain high in the next few years after a substantial correction in this year's second half.
Reduced exports from China, long lead times for new overseas supply to come on-stream, and rising demand drove prices up by between 1.2- and 14-fold last year amid speculation of export quota cuts in China.
Mainland prices surged between 20 and 125 per cent and continued to rise by a further 1.5- to 9-fold between January and July, before diving by between 25 and 75 per cent in the past four months as traders and users made fewer purchases and ran down their inventories.
'There is serious concern that demand for some rare earth elements might exceed present supply within a few years,' the Institute for Applied Ecology (IAE), a German sustainable development research centre, said in a report last January.
'Even if China imposes no export restrictions it is to be expected that the increasing demand up to 2014 can only be met if further mines, in addition to the two planned mines in Australia and the US, are opened.'
Overall, the demand-supply dynamics have not changed since the report's release. Demand for rare earth minerals outpaced supply last year and the imbalance is expected to remain until 2014, according to Mark Smith, chief executive of Molycorp Minerals, at a recent rare earths conference in Hong Kong.
United States-based Molycorp is the largest rare earth oxides producer outside of China.
Rare earth elements are a set of 17 chemical elements, which despite their collective name, are relatively abundant. However, they are normally dispersed, so there are few deposits with sufficiently high levels of concentration to allow for economical mining and processing.
Some of the better-known rare earth metals include lanthanum, used as a catalyst in oil refineries and the production of batteries; cerium, used in glass and ceramic production; and neodymium, used in the production of magnets.
Neodymium magnets are about seven to 12 times stronger than aluminium and iron-based magnets. They are used in earphones, hard disks, electric vehicles, and some wind turbine generators. The price surge of rare earth metals has led to many global media headlines, partly because of politics, as China's export reduction in recent years was seen as a political bargaining chip against Japan and the US.
China used about 70 per cent of global rare earth output last year, up from 23 per cent a decade earlier, according to Judith Chegwidden, director of Roskill Information Services, a Britain-based international metals and minerals research firm.
According to the United States Geological Survey (USGS), China produced about 120,000 tonnes of rare earth oxides in 2009, or 97 per cent of the global total, while the balance was largely produced by India, Brazil and Malaysia.
In terms of economically exploitable reserves, China accounted for 36 per cent of the estimated 99-million-tonne global total, followed by 19 per cent in the former Soviet Republic countries, 13 per cent in the US, and 5 per cent in Australia, the USGS said.
While expecting prices and volumes to be under pressure in the next few quarters, Constantine Karayannopoulos, chief executive of Neo Material Technologies, a Canada-based rare earth metals producer and processor, said at the conference that concerns that Beijing might cut export quotas again next year could see another supply crunch.
Neo has processing plants in and outside of China, and while Roskills projected this year's non-China demand to be 58,000 tonnes, Karayannopoulos said the actual figure could be less than 40,000 tonnes.
Traders, who collectively hold about a third of the quotas, had cut back on their usage earlier this year, betting they could make more profit by exporting at higher prices later.
Some were caught by surprise by subsequent declines in purchases, he said.
Unused quotas could become the basis for Beijing to cut quotas, as a current year's quota is largely determined by the preceding year's actual export volume.
Beijing has gradually cut export quotas from 65,609 tonnes in 2005, to 30,184 tonnes this year. Beijing said in 2009 that it would stop issuing new rare earth mining licences until 2015.
Despite the quotas, some estimates place the annual amount of rare earth oxides smuggled out of China at between 10,000 and 20,000 tonnes, according to the IAE. To curb illegal production and sales, Beijing said early this month it planned to launch a new specialised invoicing system.
Beijing has also ordered an industry-wide review of environmental protection standards, and said next year's export quotas would only be awarded to producers that pass the review. Some of the biggest producers have stopped operations to undergo the review.
China's rare earth minerals export peaked in 2006 at 57,400 tonnes, and gradually fell to 39,813 tonnes last year.
Beijing said in its industry development draft plan for 2009 to 2015 that it wanted annual exports to be capped at 35,000 tonnes. That's in a bid to preserve mineral resources, protect the environment, and to guarantee supply to meet the rapidly rising domestic demand.
Meanwhile, rare earth producers and users are working hard to enhance the efficiency at which they are using the rare earth metals.
Molycorp's Smith said his firm had deployed technologies in its new production plants that would use less than half the ore it currently needed to produce the same amount of product.
Neo Material's Karayannopoulos said the petrochemical and glass-polishing industries had either moved their operations to China to access cheaper rare earth resources, or were working on reducing their usage and replacing it with substitutes.
'It's unavoidable on the demand side of the equation because of what happened to prices and availability. People are forced to change, and they are changing, so this will lead to a very different landscape in terms of demand and supply,' he said.
Molycorp's projected annual rare earth oxide output capacity, in tonnes, by mid-2013, up from the current 5,000 tonnes