Factbox-How China tightened its grip over its rare earth sector

(Reuters) -When China restricted rare earth exports to Japan in 2010 during a diplomatic spat, a wild west domestic industry undermined Beijing with rampant smuggling.

In a sharp shift that reflects how China has massively tightened control over the sector since then, when it imposed new restrictions in April this year, automakers worldwide faced shortages within two months leading some to pause production.

Through consolidation and quotas, Beijing has turned a once-unruly sector, responsible for 90% of rare earth processing capacity, into a powerful source of diplomatic leverage.

Here is a summary of how the world's number one rare earth producer has tightened its grip over the industry.

CONSOLIDATION

When China began its crackdown on the sector some fifteen years ago, there were hundreds of miners and processors. By 2013 ten producers controlled almost all mining. Today, there are just two state-owned giants: China Rare Earth Group and China Northern Rare Earth Group High-Tech.

The decade-plus process of consolidation gave Beijing greater oversight while also curbing some of the environmental damage caused by illegal and reckless mining, according to David Abraham, affiliate professor at Boise State University, in Idaho.

In the past an illegal supply chain of rogue miners delivered ore to unauthorised separation facilities, with the finished products then disguised and shipped abroad.

Roughly 40,000 metric tons of rare earth oxides were estimated to have been smuggled overseas in 2014, half as much again as official exports.

Magnet makers, however, have not consolidated in the same way as the upstream mining and refining sector, with dozens of producers and processors across China, including JL Mag Rare-Earth and Ningbo Yunsheng.

However, China introduced a tracking system for its rare earth magnet sector from June, requiring companies to submit information including customer details and transaction volumes. It ultimately aims to track the entire supply chain.

QUOTAS

In conjunction with consolidation, China has also used its production quota system, introduced in 2006, to control supply.

The quotas cover mining, smelting and separation. Typically issued twice a year, they are widely monitored as a barometer for global supply.

Beijing has gradually narrowed access to quotas and in 2024, only the two state-owned groups were eligible, compared to six previously.

China has dramatically slowed down supply growth from 2024 when the total mining output quota grew only 5.9% year-on-year, versus an annual rise of 21.4% in 2023.

Analysts and traders expect mining output quotas this year to either stay flat or rise by up to 5% from 2024's level.

Beijing also restricts exports of technology. The tools and means to extract and separate rare earths have long been banned. In late 2023 it extended that ban to the technology used to make rare earth magnets.

(Reporting by Reuters staff; Editing by Lewis Jackson and Sonali Paul)