Hong Kong: China is set to tighten its hammerlock on the market for some of the world’s most obscure but valuable minerals.

Alarm bells: Coal miners in China. In each of the last three years, China has reduced the amount of rare earth elements that can be exported. Natalie Behring / Bloomberg

Deng Xiaoping once observed that West Asia had oil, but China had rare earth elements. As the Organization of the Petroleum Exporting Countries has done with oil, China is now starting to flex its muscle.

Even tighter limits on production and exports, part of a plan from the ministry of industry and information technology, would ensure China has the supply for its own technological and economic needs, and force more manufacturers to make their wares here in order to have access to the minerals.

In each of the last three years, China has reduced the amount of rare earths that can be exported. This year’s export quotas are on track to be the smallest yet. But what is really starting to alarm Western governments and multinationals alike is the possibility that exports will be further restricted.

Chinese officials will almost certainly be pressed to address the issue at a conference on Thursday in Beijing. What they say could influence whether Australian regulators next week approve a deal by a Chinese company to acquire a majority stake in Australia’s main rare-earth mine.

The detention of executives from the British-Australian mining giant Rio Tinto has already increased tensions.

China’s ministry of industry and information technology has drafted a six-year plan for rare earth production and submitted it to the state council, the equivalent of the cabinet, according to four mining industry officials who have discussed the plan with Chinese officials. A few, often contradictory, details of the plan have leaked out, but it appears to suggest tighter restrictions on exports, and strict curbs on environmentally damaging mines.

Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China.

“Rare earth usage in China will be increasingly greater than exports," said Zhang Peichen, the deputy director of the government-linked Baotou Rare Earth Research Institute.

Some of the minerals crucial to green technologies are extracted in China using methods that inflict serious damage on the local environment. China dominates global rare earth production partly because of its willingness until now to tolerate highly polluting, low-cost mining.

The ministry did not respond to repeated requests for comment in the last eight days. Jia Yinsong, a director general at the ministry, is to speak about China’s intentions on Thursday at the Minor Metals and Rare Earths 2009 conference in Beijing.

Until spring, it seemed that China’s stranglehold on production of rare earths might weaken in the next three years—two Australian mines are opening with combined production equal to a quarter of global output.

But both companies developing mines—Lynas Corp. Ltd and smaller rival, Arafura Resources Ltd—lost their financing last winter because of the global financial crisis. Buyers deserted Lynas’ planned bond issue and Arafura’s initial public offering.

Mining companies wholly owned by the Chinese government swooped in last spring with the cash needed to finish the construction of both companies’ mines and ore processing factories. The Chinese companies reached agreements to buy 51.7% of Lynas and 25% of Arafura. The Arafura deal has already been approved by Australian regulators and is subject to final approval by shareholders on 17 September. The regulators have postponed twice a decision on Lynas, and now face a deadline of next Monday to act.

Matthew James, an executive vice-president of Lynas, said that the company’s would-be acquirer had agreed not to direct the day-to-day operations of the company, but would have four seats on an eight-member board.

Expectations of tightening Chinese restrictions have produced a surge in the last two weeks in the share prices of the few non-Chinese producers that are publicly traded. In addition to the two Australian mines, Avalon Rare Metals Inc. of Toronto is trying to open a mine in north-west Australia, and Molycorp Minerals Llc is trying to reopen a mine in Mountain Pass, California.

Unocal Corp. used to own the Mountain Pass mine, which suspended mining in 2002 because of weak demand and a delay in an environmental review. State-owned oil company CNOOC Ltd of China almost acquired the mine in 2005 with its unsuccessful bid for Unocal, which was bought instead by Chevron Corp.; Chinese buyers tried to persuade Chevron to sell the mine to them in 2007, but Chevron sold it to Molycorp Minerals, a private US group.

A single mine in Baotou, in China’s Inner Mongolia, produces half of the world’s rare earths. Much of the rest—particularly some of the rarest elements most needed for products from wind turbines to Prius cars made by Toyota Motor Corp.—comes from small, often unlicensed mines in southern China.

China produces over 99% of dysprosium and terbium and 95% of neodymium. These are vital to many green energy technologies, including high-strength, lightweight magnets used in wind turbines, as well as military applications.

To get at the materials, powerful acid is pumped down bore holes. There it dissolves some of the rare earths, and the slurry is then pumped into leaky artificial ponds with earthen dams, according to mining specialists.

The ministry of industry and information technology has cut China’s target output from rare earth mines by 8.1% this year and is forcing mergers of mining companies in a bid to improve technical standards, according to the China Mining Association, a government-led trade group.

General Motors Corp. and the US Air Force played leading roles in the development of rare-earth magnets. The magnets are still used in the electric motors that control the guidance vanes on the sides of missiles, said Jack Lifton, a chemist who helped develop some of the early magnets.

But demand is surging now because of wind turbines and hybrid vehicles.

China is increasingly manufacturing high-performance electric motors, not just the magnets.

“The people who are making these products outside China are at a huge disadvantage, and that is why more and more of that manufacturing is moving to China," said Dudley Kingsnorth, a consultant in Perth, Australia.