China's rare earth blockage taking a toll on businesses

Only two of 30 Japanese importers have received rare earth material shipments from China since late last month, prompting concerns that the continued export blockage could put Japanese companies out of business.

Chinese suppliers of the materials have unilaterally told many Japanese companies that they intend to terminate contracts for dealing of the minerals, according to trade ministry officials.

The Chinese companies said new customs procedures, requiring thorough inspections of all shipments and the submission of paperwork in Chinese, have made it virtually impossible to ship the materials, which are crucial in the production of hybrid vehicles and other advanced products.

The customs procedures were introduced after a halt of exports was supposedly lifted last month following Japan's release of a Chinese trawler skipper detained over an incident near the disputed Senkaku Islands in the East China Sea.

The Chinese companies said they wanted to terminate the contracts so that they could redirect their rare earth shipments to businesses in other countries, sources said.

Officials at a Japanese trading company that deals in rare earth minerals said it asked its Chinese supplier to reroute the shipments through South Korea.

However, the Chinese side declined, citing concerns about repercussions that could arise if authorities found out the shipments were destined for Japan.

The Chinese supplier rescinded the contract with the trading company.

"While some businesses have somehow managed to import (the materials), the situation is likely to worsen as contracts are rescinded," said a senior official at the Ministry of Economy, Trade and Industry.

One official at a liquid crystal-related business said if "imports cannot be secured by early November, we will have to terminate operations."

A glass manufacturer is considering moving production to China so that it can work around the export bottleneck.

China, which currently accounts for 97 percent of the world's rare earth output, had been restricting exports of the materials even before the embargo and latest customs procedures. Export quotas were tightened in the name of curbing environmental damage.

The export quota for Japan this year is 30,000 tons, about 40 percent less than in 2009.

But Japan's total demand for rare earth metals is expected to reach 32,000 tons next year, according to an estimate by trading house Sojitz Corp., a major importer of the materials.

If Japan continues to rely on China for almost all of its rare earth supply, it will secure only 21,800 tons, 10,000 tons short of the needed amount, according to Sojitz.

The tight controls in China have led to soaring commodity prices.

"If manufacturers are unable to shift the increased costs to the prices of their products, they will face serious consequences," said an official of a major trading house in charge of rare earth imports.

Meanwhile, Beijing said it was "investigating facts" of a report in The New York Times' online edition that said China was also halting exports of rare earth materials to the United States and Europe.

A Chinese Commerce Ministry official described as "totally groundless" an earlier report in the state-run China Daily that said export quotas would be cut by 30 percent in 2011.

The official said China's "restrictions on the excavation, production and export of rare earth metals will continue in order to protect limited natural resources and ensure sustainable development. These measures do not violate rules set by the World Trade Organization."

The China Daily had quoted a ministry official as saying that the government intended to curb exports because China's "stockpiles will expire in 15 to 20 years at the current pace."