When Barack Obama's BlackBerry buzzes in his pocket, it wouldn't be a surprise if his mind turns to a big trade dispute with China. The super-powerful, super-small magnets that make many smartphones vibrate these days are made from neodymium, one of 17 "rare earth" metals whose production is the subject of a World Trade Organisation (WTO) complaint launched last week.

The outcome of the case could have a significant impact on how much your buzzing phones will cost in the future, and where they are made. It could affect the development of a slew of "green technologies", from wind power to electric cars. And it could help tide the world over while companies and governments tee up new production of these vital ingredients of the modern world.

The issue of rare earth metals has moved up the political and business agendas in recent years because China has been limiting supply at the same time as demand has been exploding, threatening shortages.

Elements such as europium, terbium and yttrium are used in LCD screens on the ever-increasing number of gadgets in our hands and in our homes. Samarium and dysprosium are vital in making magnets that can withstand high temperatures, of the kind that are needed in guided missiles, for example.


Catalytic converters and wind turbine generators and batteries for electric cars all often require rare earth metals. In the West, business and environmental groups have been crying out for governments to spur recycling of old electronics, so that components can be recovered and shortages eased.

Despite their name, there is nothing particularly scarce about rare earth metals. Some are more common than copper or gold. However, they are dispersed and therefore difficult and expensive to mine, and their production can be among the most environmentally destructive of all mining activities.

For most of the last decade, the biggest US rare earth mine, in Mountain Pass, California, lay dormant following a string of water pollution scandals, and the West effectively ceded production to low-cost miners in China.

Now, China produces around 95 per cent of the world's supply. Which is why diktats from the Communist authorities there have sent shivers through the technology industry everywhere.

According to the US Congressional Research service, world demand for rare earth elements is estimated at 136,000 tons per year, with production around 133,600 tons in 2010. The difference was covered by depleting stockpiles of previously mined material. World demand is projected to rise to at least 185,000 tons annually by 2015, and to top 200,000 well before the end of the decade.

The result has been soaring world prices. Some of the more prized rare earths trade at more than six times their 2009 prices on the global markets, and more than double domestic Chinese prices, according to data published by an Australian miner, Lynas Corp.

In an unprecedented show of solidarity, the US got together with the European Union and Japan to claim that Beijing is illegally restricting exports of rare earth metals, and demand it be censured by the WTO.

Through a combination of constantly tightening export quotas, tariffs and environmental restrictions, it is alleged, China is deliberately creating a scarcity of the metals and forcing manufacturers to shift production into the country.

The authorities also appear to be trying to promote consolidation in the rare earth mining industry, with the possibility that a few government-backed companies could restrict supply and push up prices further in the future.

"We want our companies building those products right here in America," President Obama said at the White House last week. "But to do that, American manufacturers need to have access to rare earth materials which China supplies - Our competitors should be on notice: you will not get away with skirting the rules."

China responded that its policy of managing the export of raw materials is justified and in line with WTO rules, since it aims to protect the environment and resources and is not intended to limit free trade, or distort trade for the protection of domestic industries.

The US decided to move against China on this issue after another WTO ruling last year when Beijing was ordered to remove similar systems of quotas and tariffs on exports of nine other industrial raw materials.

The case, however, could take years to resolve, and a slew of mining companies have decided that the rise in rare earth metals prices presents a big opportunity for profit from reviving the industry outside China.

According to Technology Metals Research, an Illinois-based consultancy, there are at least 426 rare-earth projects under development by some 259 different companies in 36 different countries. Likely sources of new production can be found in Malaysia, Russia, Brazil and India - and at that old Mountain Pass mine in California.

Molycorp, which bought Mountain Pass from Chevron in 2008, went from a standing start to bringing in revenues of $US397m last year, mainly from processing existing stockpiles. The company is restarting mining activity and says it will be producing at an annual rate of 19,050 metric tons of rare earth oxide by the end of September.

David Abraham, a Jakarta-based resource analyst speaking to Reuters yesterday, said adding new global capacity was the only real way out of the impasse, WTO or no WTO.

"The world still faces a critical shortfall of certain rare earth elements," he said. "That's not a China problem, that's a global one."