I find it concerning that the author simply regurgitates the views of vested interests without the slightest critical analysis. Lets take a closer look at some of the claims.

The first, the comment from Zhang Zhong, a manager at a rare earth mining company.

The article doesn't mention that this is a state-owned company. Zhang fills the dual role of government bureaucrat and businessman. The bureaucrat wishes to keep his superiors happy, the businessman wants to keep investment in his industry looking attractive. Neither are likely to say anything other than 'all is well'.

"Despite fears of Western capitalists, Beijing apparently has no immediate plans to curtail supplies."

Impressive. The author has a direct line to the machinations of the standing committee of the Chinese Communist Party politburo. That's astounding. It also seems he doesn't need to supply any background information, which seems odd, given that Beijing has frequently tightened supply.

I imagine the Japanese have a few issues with that blanket statement. From October last year:

http://online.wsj.com/article/SB10001424052748704049904575553792429346772.html

"Japanese companies have faced sharp cuts in imports of what are known as rare-earth metals from China since July, a situation that has deteriorated sharply since the two nations became embroiled in a thorny bilateral spat following a ship collision in disputed waters in the East China Sea last month."

China's been willing to use commercial issues as a sledgehammer against those who disagree diplomatically. With China's many state-owned enterprises, it's something they have the luxury of doing whilst the governments of developed capitalist nations don't have the same level of control over companies based in their territory.

The author states:

"What is perhaps most interesting is that Western analysts fear covert potential malevolent motives dictating Chinese policy on RRE exports when, in fact, up to now Beijing has behaved as a responsible member of the global economic community."

Spoken like a loyal party member. I'll leave readers to make up their own mind as to whether Beijing has been a 'responsible member of the global economic community'. The examples to the contrary have been numerous, glaring and educational.

Free market economics suggests that sustained high prices will elicit a supply side response. This aspect is mentioned in part with the emergence of production in Inner Mongolia. However, it is also true that western resource entrepreneurs have also noted the high prices and there is a bit of a rare earth rush on in Australia and elsewhere.

However, the rare earth industry has some features that suggest that the many hopefuls are likely to struggle, even if the high prices can be sustained.

In the first place, the rare earth market, while growing rapidly, is quite small. New producers will generally require economies of scale to enable what look like attractive economics. However, each increment of new production is likely to be quite large, and thus likely to pressure pricing if developed.

Second, the rare earths industry has very high barriers to entry. The technology to extract the minerals is somewhat specialised and complex. Most of the rare earth elements occur as mixes of co-products and the pricing and demand for each may not match the mix in the resource. This, and the relatively small volumes involved, also means that established rare earth producers are likely to be carrying substantial inventories of partly processed feedstocks and finished products.

The point of that is that there is a lot of capacity for existing producers to engage in competitive responses to new production.

I will continue my comments in a second post.

Third, most of the established producers have substantial resources/reserves compared with the market demand. They thus are generally well positioned to expand supply by making relatively small incremental investments, in contrast to greenfields hopefuls.

Fourth, another factor is that, as the Chinese producers have no doubt realised, the cost of the rare earth elements is usually a relatively small factor in the total cost of the products that they are contained in. This means that price resistance from customers is likely to be relatively restrained.

Another factor is that some rare earth supplies come as by-products from the mineral sands industry - monazite and xenotime for example - which means that those materials are sold, almost irrespective of market conditions. Good for mineral sands producers who have them. But not good for new greenfields aspirants.

To keep this short, I will summarise that the nature of the rare earth industry is such that the established players are in a very strong position to manage sustained high prices and to engage in competitive responses that will make it difficult for new producers to emerge.

In such a scenario, it is likely that the most rapid path to production for hopefuls will be to engage with established rare earth industry players. However, the characteristics described suggest that it will be difficult for them to achieve attractive terms

> Despite fears of Western capitalists, Beijing apparently has no immediate plans to curtail supplies.

From http://hothardware.com/News/Chinese-Rare-Earth-Restrictions-To-Raise-Hard-Drive-Prices/ Friday, August 19, 2011:

"Multiple manufacturers in the IT industry have been keeping a wary eye on China's decision to cut back on rare earth exports and the impact it may have on component prices."

All I can say is: go China! Since they command 97% of the worlds production they are obviously charging far too little for it. We did the same thing with Tantalum. You only get to mine it once: then its gone. And the odd thing is the longer you leave it in the ground, the more it's worth. Pricing it so low that rest of the planet gives up on mining it is just plain dumb.