Hi-tech industries in disarray as China rations vital minerals

China has struck fear into Western governments and electronics giants by slashing exports of a highly sought-after array of metals which are crucial for electronics products ranging from iPads and X-ray systems, to low-energy lightbulbs and hybrid cars.

In a sign of its growing industrial and political clout, China has cut its export quotas for rare earth elements (REEs) by 35 per cent for the first six months of 2011, threatening to extend a global shortage of the minerals and intensifying a scramble to find alternative sources.

Mines in China supply 97 per cent of the world's rare earths, 17 obscure metals which possess various qualities, such as conductivity and magnetism, that make them an essential component in many modern applications such as smartphones, computers and lasers.

Instead of last year's 22,282 metric tons, China's Ministry of Commerce revealed the total for the first six months of next year would be 14,446 tons, split among 31 domestic and foreign-invested companies.

Commentators said the announcement was probably designed to limit the environmental damage caused by the mines while ensuring its manufacturers were able to meet growing domestic and international demand.

However the announcement caused dismay among Western governments, which have belatedly begun to appreciate that China's stranglehold on elements such as lanthanum, used for batteries in hybrid cars, and neodymium, for permanent magnets in wind turbines, give it immense economic and political power.

The US Trade Representative's office, which advises President Barack Obama, said it had raised concerns with China over the export restraints. Britain, which previously said it was monitoring whether China's stance on REEs broke World Trade Organisation rules, reiterated its commitment to "free, fair and open markets". A spokesman for the Department for Business said: "Competitive markets are essential to achieving long-term sustainable growth, which is why the UK supports the need to cut red tape and resist protectionism."

Electronics companies could be hard hit by rising prices caused by the export cut, which was predicted by The Independent in January. The consumer electronics giant Sony described the move as an obstacle to free trade. "At this point in time there is no direct impact on our company. But further restrictions could lead to a shortage of supply or rise in costs for related parts and materials. We will watch the situation carefully," a Sony spokesman said.

Other manufacturers, such as Apple, whose iPad uses rare earths, declined to comment.

REEs lie near the surface in only a few, usually inhospitable, areas. During the past 20 years, China has rapidly increased production from a single mine near the city of Baotou, in Inner Mongolia, leading to the closure of mines in the US and elsewhere unable to compete with the low prices.

However, a global shortfall now looms because worldwide demand for REEs has almost tripled from 40,000 tons to 110,000 tons in the past 10 years, while China – which accounts for about 75 per cent of usage with the remainder divided between Japan, the US and Europe – has begun to scale back exports, from 48,500 tons a year to 14,446 tons for the first half of 2011. The move has the potential to damage the industries reliant on rare earths, which are estimated to be worth £3 trillion, or 5 per cent of global GDP.

The US rare earth mining company Molycorp aims to reopen a mine in the Mojave Desert at the end of this year, which will produce 20,000 tons a year, or about 25 per cent of current Western imports from China, by mid-2012. Deposits are also found in Greenland, opening the prospect of its wilderness being scarred by environmentally damaging mining.

"Export quotas continue to be a tool for the Chinese government to limit the export of its strategic resource," said Nick Curtis, the chief executive of Lynas, which is opening a new mine in Australia and whose share price shot up by 10 per cent on news of China's move.

A global scramble for rare earths has now begun, according to Gareth Hatch, an analyst at Technology Metals Research, in Illinois. "We have a race against time: we've found the materials we know where they are, now we have to develop them," he said.

"There has been some discussion in some quarters that China has been using the quotas to control or manipulate what's going on in the West," he said in an interview with the BBC. "I don't share that view, but the fact is the environmental issues associated with some of the mines historically used by the Chinese to produce these materials have been in terrible shape, and there is a genuine concern that they need to get that sorted out and meet this demand internally in China which is growing. But... you don't really want to rely on a single geographic location for your material.

"It doesn't really make sense – and yet we find ourselves in that situation," he added.