In the race to build hybrid cars and wind turbines to feed growing demand for green technology, China has one clear advantage: it holds the world's largest reserves of rare-earth metals and dominates global production.
Wind turbines, made by No. 2 wind turbine maker Xinjiang Goldwind Science and Technology, and hybrid cars, being developed by Warren Buffett-backed , are among the biggest guzzlers of , which analysts say are facing a global supply crunch as demand swells.
This little-known class of 17 related elements is also used for a vast array of electronic devices ranging from Apple's iPhone to flat-screen TVs, all of which are competing for the 120,000 tons of annual global supply.
China controls 97 percent of.
"Rare earth for China is like oil to the Middle East," said Yuanta Securities analyst Min Li.
Worldwide demand for rare earth is expected to exceed supply by some 30,000 to 50,000 tons by 2012 unless major new production sources are developed, say officials at Australian rare-earth mining company Arafura Resources.
China has curbed exports of the mineral since 2005 through quotas and duties, saying it needs additional supplies to develop its domestic clean-energy and high-tech sectors. On Wednesday, it said it would cut export quotas in 2010 by 40 percent.
"Export restrictions may provide an advantage to Chinese turbine makers, again because of the cost advantage," said CIMB analyst Keith Li.
He said Chinese green companies would have priority in securing supply of the metals over international peers and their proximity to sources of the minerals ensures quicker and cheaper long-term supply.
China's domestic consumption of the metals poses the biggest threat to global supply. The country, which holds a third of the world's reserves, eats up to 60 percent of global rare-earth supply for a wide range of applications from consumer gadgets and medical equipment to defense weapons.
China's trading partners have grown increasingly vocal about its move to cut its export quotas, but Beijing is determined to control the rare-earth market.
"Foreign companies could be facing some material supply risks, unless they decide to move production to China," warned Yuanta's Min Li.
Window of opportunity
But while China may ensure its first-tier green companies are given access to the rare elements, analysts agree this alone is unlikely to guarantee success for the Chinese clean-tech firms.
New technologies free of rare-earth elements could emerge that may undermine China's advantage, while further cuts in rare-earth quotas could trigger a political backlash which could force the nation to keep supply open for its trading partners.
"Chinese technology needs to develop quickly enough to make full use of that advantage," said CIMB's Li. "That window closes if its existing technologies fail to evolve."
Still China will have the upper hand in the global rare-earth market for a while yet.
There are currently many new mine projects outside of China in the pipeline but few will be able to compete with it on price unless governments offer production subsidies.
Low prices for rare-earth metals from China have undermined production and led to closure of several mines overseas. Lax environmental rules and cheap labor also allow China to sell rare earth metals at low prices.
Also, the development of new rare-earth mines could take as many as 10 years.
China's leading rare-earth company, Inner Mongolia Baotou Steel Rare Earth Hi-Tech, is building 200,000 tons in rare-earth oxide reserves, and state media reported that the company is joining forces with Jiangxi Copper to set unified prices for rare-earth metals.
If supply becomes extremely tight as experts suggest, Chinese green companies may take upon themselves to secure the mineral by getting involved in the actual process of making rare-earth products, analysts said.
BYD is scouting for new, an important ingredient for its high-performance batteries.
Like that of rare-earth metals, lithium supply is expected to be tight by 2050, according to a European Commission study on critical raw materials. That is assuming most consumers would ditch their oil-guzzling cars for new-generation vehicles.
"BYD is looking for new supply of raw materials all over China, not just in Sichuan," said company spokesman Paul Lin in response to an inquiry about rumors that the company is buying lithium assets in the Chinese province known for its rich reserves of lithium and other materials. The company declined to make further comments about the rumored deal.
A sister company of rival Toyota has secured a lithium supply deal in Argentina, while Toshiba also plans to set up a rare-metals joint venture with Kazakhstan state-owned firm Kazatomprom.
Toyota, which makes the top-selling hybrid car Prius, and Nissan, maker of, as well as General Motors, which designed plug-in hybrid , are most vulnerable to a rare-earth supply crunch, analysts say.
A car like the Prius requires 1 kilogram (2.2 pounds) of neodymium. And each Prius battery uses 10 to 15 kilograms of another rare earth, lanthanum, said Jack Lifton, a commodities analyst and leading authority on rare metals.
Siemens and General Electric, which are investing in the development of direct-drive turbines for offshore wind generation, could also be facing risks in securing supply of the rare earth, they said.