TAIPEI, Taiwan ( TheStreet) -- It's just a token, even if the token might be made from dysprosium. China's Ministry of Commerce said last week it would raise the maximum amount of rare earth element exports by 2.7% this year. That means more shipments of prized industrial-use chemicals that are ensconced in China's subsurface rocks and are hard to separate out. The higher export quota equals 30,996 metric tons of rare earth materials, a term that refers to 17 different elements that are hard to find or process outside China. In theory, manufacturers from defense to electric vehicles should cheer the news, as China had set off a panic by restricting rare earth exports earlier. The industry and foreign trade reps viewed China's curbs from 2005 as a move to protect its reserves. Countries such as the U.S. have complained to the World Trade Organization that China is hoarding rare earth elements. End users may find it easier to get those elements (Beijing will even hold prices stable, analysts believe), but the kinder export quota will make little impact over the next two to eight years as offshore competitors -- potentially solid investments -- have already started to develop better processing technology. Today China not only produces most of the world's rare earth materials, estimated at 95% of the total, it also operates the most advanced machinery to separate those elements from the earth itself and to process them. Automakers in Japan including Toyota Motor ( TM) should gain from Beijing's export quota increase as they need the materials to produce hybrid vehicles. A handful of importers in France and Germany may welcome China's move for the same reason. But those buyers may ultimately turn to foreign firms that are developing cleaner, more cost-effective means to separate rare earth elements, refine them or use them in the production of metals. Although China's technology leads today in these departments, players in Australia, Germany and the U.S. are catching up. Jack Lifton, co-founding principal of U.S. market intelligence firm Technology Metals Research, has become a rare expert in the small but fast-changing field. After China made its announcement last week, Lifton wrote this to me in an email: "The Chinese 'increase' in export quantities is trivial and unimportant to the most important rare earth 'processors' and refiners or metal makers outside of China."
Rare earths are elements found in rocks and minerals, but aren't necessarily rare, Lifton explains. They occur in North America, for example. It just costs a lot to separate and purify those elements, while a small market size limits total rare earth production compared to base metals. These conditions are steering companies outside China to think up new ways for separating, refining and processing those chemicals with a steady market demand. China currently has the most advanced large-scale processing but that is likely to be made obsolete soon by these offshore competitors. In the U.S., for example, Ucore Rare Metals ( UURAF) has spearheaded a rare-earth separation technology that could reduce the use of traditional solvent extraction technology in the long term. In an April news release, Ucore calls its new method "an efficient and economical alternative" to solvent exchange methodologies used in China. Fellow American firm Rare Element Resources ( REE) is going for volume by processing local ore to push out more than 100 million metric tons per year of the rare earth element dysprosium by 2020. The U.S. government is unlikely to stand in anyone's way, as the House of Representatives passed an act two years ago calling for more rare-earth R&D. Also, in Canada, Orbite Aluminae (ORT:Toronto) will use a high purity alumina to get a byproduct of rare technology metals in excess of 50 million metric tons per year by the end of 2014, Lifton predicts. Lynas ( LYSCF) is starting up a plant in Malaysia to process concentrates from a mine from its home base Australia. Following a visit to the Malaysia site, Lifton calls LAMP "the most modern solvent extraction plant in the world." Share prices of the three North American firms have dropped more than 55% since April 2011 due to cyclically falling prices. The LAMP factory in Malaysia stands to help Lynas share prices after a 70% drop since April 2011. China's top processor, Baotou Steel Rare Earth in the country's arid but mineral-rich northwest, is listed only in Shanghai (600111.SS), not offshore. What was China thinking when it raised the export quota? It could do without another fight against trade reps from abroad, saving that blowtorch for issues regarding its core exports.
More strategically, China has postured as friendly toward the developing world and cooperative toward the U.S. Officials in Beijing generally try to avoid actions that cast China instead as nationalist, mercantilist or paranoid about outside competitors. "The Chinese are preparing for any unfavorable (WTO) rulings," speculates Frank Tang, a Beijing-based analyst at North Square Blue Oak investment bank. "They wanted to keep the export quota relatively stable to alleviate pressure from the international community." Lifton argues that the country is running short of heavy rare earth elements and using obsolete separation technology. Might China then look some day at joint ventures, direct investments or other links with the industry in foreign countries? If so, more reasons not to soil relations -- and to leave space in the portfolio for whatever company takes a lead in the industry. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.