Top China Rare Earth Producer to Build Stockpile

HONG KONG, Aug. 30 -- China's top rare earth producer, Inner Mongolia Baotou Steel Rare-Earth (600111.SS), is likely to use 9 percent of this year's production to build a stockpile that could grow to up to 200,000 tonnes.

The firm is expected to produce about 55,000 tonnes of rare earth oxides this year, flat from last year.

But the regional government of Inner Mongolia has allowed it to supply just 50,000 tonnes to market, as part of Beijing's effort to preserve the resource used in high-tech industries, a source familiar with the matter said on Friday.

"You can assume the extra output of 5,000 tonnes will be put into the stockpile," the source, who did not want to be named for lack of authorisation to speak to the media, told Reuters.

Baotou Steel Rare-Earth did not comment. But in February the firm said it had been approved to build facilities to store 200,000 tonnes of rare earth oxides and the city government of Baotou.

Baotou Steel Rare-Earth's stock-building plan will support Chinese and global prices, said Lan Ke, analyst at Southwest Securities' assets management division in Beijing.

Strong Chinese domestic prices could discourage producers from exporting the rare earths, of which China is the world's dominant supplier with more than 90 percent of the global market.

Rare earths are a group of 17 metals used in a wide range of new technologies from hybrid cars to wind turbines.

China has been reining in exports of rare earths to feed strong domestic demand, in a move that is already stoking supply worries in the international market. The Ministry of Commerce issued 30,258 tonnes of export quotas by the end of July, or about 40 percent less than in 2009.

Beijing is also studying whether to build state rare earth stocks, Southwest's Lan said, adding that if this is approved, the State Reserves Bureau may buy part or all of Baotou Steel Rare-Earth's stocks.

The top rare earth producer is a subsidiary of steel mill Baotou Steel Group, which mines iron ores that contain rare earths.

After extracting iron from the ores, the parent provides the subsidiary with the residues, a strategy that makes it tough for Baotou Steel Rare-Earth to control annual production, Lan said.

China has raised to 89,200 tonnes this year its mining limit on rare earth, including Baotou Steel Rare-Earth's 50,000 tonnes, an increase of about 8 percent from last year's 82,320 tonnes.

Rare earth oxides contain an average of 83 percent of metal in China.