Analysis: Rare earths give China an edge in Japan ties

（Reuters） - Supplies of a brick-red polishing powder crucial for Japan's electronics industry could run out soon and the shortage may persist even if Japan sidesteps a Chinese embargo on the main ingredient, a metal called cerium.

Even before Japan's latest diplomatic spat with the producer of 97 percent of the world's rare earth metals, concern about China's ability to disrupt global supply chains had surged as the country slashed shipments of a score of the exotic metals.

The cuts, which translated into a squeeze of 40 percent for cerium, the most critical metal, are still in place and there is a chance of more next year, said Toshio Nagayama, a general manager at AGC Seimi Chemicals in Chigasaki, a town near Tokyo.

But even without further supply interruptions, makers of flat panel TVs and hard disk drives, in particular, could face critical shortages as soon as next month, besides soaring prices.

"Companies don't have enough abrasive in stock to see them through," said Nagayama, whose firm is one of three Japanese companies that make 80 percent of world supplies of the abrasive. "The serious pinch in supply will be in November and December."

The prospect is worrying Japanese firms, which take 56 percent of China's rare earth exports. They face a further cut of as much as 30 percent in supply next year, according to Chinese media, although the country's commerce ministry has denied the claim.

Cerium is a dull silver malleable ingredient of the abrasive powder used to polish sheets of glass as thin as credit cards, between which television makers sandwich drops of liquid crystal to make flat panel displays.

It is also used by makers of the glass hard disk drives that are rapidly displacing less robust aluminum drives in devices designed to stand up to the rigors of mobile computing.

China issued export quotas for only 30,258 tonnes of cerium by the end of July, down 40 percent from last year, saying it was a necessary step to protect the country's environment.

CHINA'S EDGE IN WOOING TECH FIRMS

China's squeeze gives it an edge in attracting technology companies hungry for its ready supplies of rare earths.

Nagayama's employer, AGC Seimi, and its two Japanese rivals, Showa Denko and Mitsui Mining and Smelting, are scrabbling for supplies.

Together, the three companies make around 12,000 tonnes of the cerium abrasive a year, or four-fifths of global output, an industry source said.

Scared their abrasive will run out, customers are asking for five times more than usual and prices have soared, Nagayama said.

Japan says cerium costs up to $80 a kg, a jump of 16 times in less than a decade. AGC Seimi is promising existing customers regular shipments at a higher price. New buyers are turned away.

Companies will just have to get used to the heftier expense, Nagayama said.

"It is a serious concern and a burden to our customers," Sadao Senda, president of rival Mitsui Mining, told a news briefing in Tokyo in September.

Senda, who also chairs a Japanese mining industry body, said he was consulting with customers but did not say how he would guarantee supplies.

Much of AGC Seimi's output, according to the industry source, goes to its parent company, Asahi Glass, which turns out a quarter of the world's LCD glass sheets.

Another chunk ends up at leading glass hard disk drive maker Hoya Corp.

The shadow they cast across the component supply chain means any production cut caused by a cerium abrasive shortage will spread to the United States and Europe.

Both Asahi Glass and Hoya declined to comment on whether the squeeze would force output cuts, as did Sharp Corp, Japan's leading maker of flat panels, and Sony Corp, which are one step along in the supply chain.

Panasonic spokesman Akira Kadota said his company had no plan to cut production of TV sets.

Alternatives include recycling, made viable by the price jump, and cerium sources outside China, officials of Asahi Glass and other firms said. Despite its name, cerium is not scarce and is as common as copper or zinc.

There is a mine at Sillamae in Estonia and another at Mountain Pass, California in the United States. Others are planned in Vietnam, Kazakhstan, India and even Mongolia.

The challenge, however, is not finding deposits but having the equipment to dig it up and ship it to cerium-famished Japan, says Joji Sakurai, head of Mitsubishi Corporation Unimetals, a unit of Japan's No.1 trading company, Mitsubishi Corp.

That snag will not be overcome in time to relieve the imminent pinch in supply, he added.

"There is no alternative source readily available," Sakurai said at his firm in Tokyo. "It's the worst I've seen it in more than 30 years working."

And even when those shipments start, China will remain the dominant source of the rare earth elements.

Molycorp Inc, operator of Mountain Pass, sees global demand of some 220,000 tonnes by 2015, from less than 150,000 tonnes now.

Nine-tenths of that will still be dug up in China, leaving Japanese firms at the sharp end of China's whims for years to come.