China rare earths quota spurs Japan The Japanese government is usually concerned about the hollowing-out of the country's industrial sector, but when Shin-Etsu Chemical said in January it would build a rare earth recycling plant in Vietnam instead of upgrading its domestic facilities, the trade ministry had no objections. Tokyo has urged companies to accelerate efforts to secure supplies of rare earths, and find ways to reduce consumption, since 2010 when China announced big cuts to its export quota for the metals, which are used in products from weapons to hybrid cars. The new Shin-Etsu plant, which could recycle up to 1,000 tonnes of rare earths a year from discarded appliances, ticked both boxes. "Chinese export restrictions made our sourcing unstable," says Tetsuya Koishikawa, head of investor relations at Shin-Etsu Chemical, the world's second-largest producer of rare earth magnets. When Japan joined the US and European Union last week in bringing a trade case against China at the World Trade Organisation - its first complaint against its neighbour - it was a symptom of its deep anxiety. Japan, which has no domestic source of rare earths, relies on China, which accounts for more than 95 per cent of global production. Japanese companies consume 25,000 to 27,000 tonnes of rare earths a year, but China has said its total rare earths export quota for 2012 will be 30,000 tonnes, unchanged from last year. Sustained supply shortages could jeopardise Japan's leadership in production of metallic components used in hybrid and electric cars, energy-efficient home appliances and windpower generators, says Norihiko Saeki, a senior official at the Japanese trade ministry. Companies are already trying to develop sources of rare earths. Japan Oil, Gas and Metals National Corporation, a state-run body in charge of ensuring a stable supply of mineral resources, is trying to fund mining prospects in Vietnam, Kazakhstan and India, but production - which could reach a combined 10,000 tonnes a year - is several years away. More immediate hopes are pinned on Lynas Corp, an Australian company that has undertaken to supply Japan with up to 9,000 tonnes of rare earths a year from early in 2013. "We're taking some of the uncertainty and the fear out of supply chains," says Nicholas Curtis, founder of Lynas. Lynas last year received a US$225m loan from Jogmec - in what was the Japanese corporation's first direct mine investment - to double its production of rare earths including dysprosium, an element used for making magnets. Japanese manufacturers are also taking steps to reduce demand. In the car industry, for example, companies such as Toyota and Nissan are tweaking motor designs and cutting back on excessive usage. This has cut consumption of some rare earth metals by a third over the past 18 months, and nearly closed the supply-demand gap in some cases, according to a person familiar with industry estimates. To spur development of technologies that cut down on or replace rare metals, Japan announced a $500m research fund last year. At a symposium hosted by Tokyo university last month, researchers presented papers on next-generation versions of everything from magnetic motors to petrol additives, in which rare metals would be replaced by other advanced materials. Few of the technologies will be ready for commercial introduction soon, however. In the meantime, Japan's private sector has stockpiled "between six months to a year" of supplies, according to Dai Yoshikawa, general manager of the metals trading unit of Mitsubishi Corp, Japan's biggest trading house. Mr Saeki of the trade ministry says Japanese companies do not have supply problems at the moment, "but next year, I don't know." If Japan, the US and Europe fail to unlock Chinese supplies through the WTO, government officials and executives worry that the only way around shortages would be to shift production plants to China. "The risk is that it won't be just the processors, but the magnet makers and the motor assemblers," says one official. Then technology secrets will leak, and we'll start to see knock-off Chinese Priuses.