A gravity-defying leap in the price of Chinese rare earth metals has triggered fears that the cost of components used in a range of goods from mobile phones to hybrid cars could soar.
The three to fivefold jump in prices since January comes after China, the world's biggest producer of rare earths, has clamped down on domestic output.
The implications could be far-reaching. Although annual consumption of the metals is small relative to that of other commodities, rare earths are found in everything from fluorescent lights to wind turbines. They are very difficult, if not impossible, to substitute.
Industrial buyers are in shock after witnessing the price of rare earths such as cerium oxide jumping 475 per cent in just five months, amid falling supplies.
"I've never seen anything like it," says one U.S.-based purchaser of rare earths. "People are trying to wriggle out of using rare earths in any way they can, whether by developing new products or finding substitutes."
Rare earths came under the spotlight after China, which produces more than 90 per cent of the world's total output, started to reduce export quotas two years ago. Beijing's influence aroused concern when exports of rare earths to Japan were temporarily suspended after a diplomatic dispute.
Following that de facto embargo, governments around the world, particularly Washington and Tokyo, have stepped up their efforts to develop other sources of supply. But those efforts will take years. In the meantime, Beijing has tightened regulations on its own polluting rare earths sector as part of a program to clean up Chinese mines. Many expect China's rare earth production to fall as a result.
As China cuts further export quotas - this year's overseas sales licence is 4.5 per cent lower on an annualized basis than last year's and more than 40 per cent below the 2009 quota - global demand for the metals has been growing.
Beijing has also clamped down on smuggling, which at one point accounted for about one-fifth of total sales, further squeezing the global market.
Statistics collected in Hong Kong show exports of rare earth metals have halved over the past year to reach just 1,819 tonnes last month. At the same time, the value of exports has soared to more than $121,000 (U.S.) per tonne, a 10-fold increase from a year ago.
Traders say that Chinese customs officials are policing exports and require that sales contracts match an internal price list, known by some as the "secret price." They say sales of rare earths are quicker, but that offers are withdrawn more often because of rapid price moves.
Li Miaoling, general manager of China Metallurgical Import and Export Group, a Guangdong company, says: "Since the end of year, customs has been adjusting their price list every week. We've had to add a clause to our contract stating that if customs raises prices, we will have to adjust."
The cost of neodymium oxide, which is used in permanent magnets and wind turbines, has risen more than threefold this year, hitting 850,000 renminbi ($130,950) per tonne, according to Antaike, the Beijing-based commodities consultancy.
Dysprosium oxide, used in lasers, has jumped 338 per cent since January to 4,700 renminbi a kilogram, an all-time record. Even prices for the most common rare earths, such as lanthanum, used in hybrid car batteries, have risen sharply.
Users have been scrambling to find alternatives. Hybrid car makers are accelerating the development of lithium ion batteries. Toyota, for example, is developing an induction motor for electric cars that uses fewer rare earth magnets.
Chemical companies, also big consumers of rare earths, have been developing alternatives. Albemarle, the U.S.-based chemical company, recently introduced a new line of low rare earth fuel catalysts, citing a 1,500 per cent increase in the cost of lanthanum in the last 12 months.
With China planning to reduce output, manufacturers are braced for a sustained period of high prices. In February, Premier Wen Jiabao outlined a "five-year plan" for rare earths that included increased state oversight, raising environmental standards, a crackdown on smuggling, the closure of illegal mines and consolidation of rare earth producers. A new environmental code for rare earths mines will come into effect in October and Beijing has halted issuing new licences for the mines.
"China has been rectifying the rare earth industry, taking environmental protection and other things into account," Lin Donglu, secretary general of the Chinese Society of Rare Earths, says. "Rare earth output will definitely be reduced."
Yin Jianhua, rare earth analyst at Antaike, says: "Over the next five years China will probably continue reducing exports."
This shift in policy follows similar policy changes on other commodities. Beijing has launched an industry-wide "consolidation" process for coal over the last two years, which has dampened output and forced China, once an exporter, to import large amounts of coal, pushing up prices.
China has also purged illegal and environmentally damaging mining of antimony, a metal used in fireproofing goods. The crackdown on antimony has pushed the cost of the commodity to a record high.
In the face of concern from industry and from global capitals, China has insisted that it will continue to be a reliable supplier of rare earths. However, rising prices fit neatly with China's ambition to end its role as supplier of cheap rare earths to the world. As Mr. Lin of the Rare Earths Society says: "Prices of gold, oil and other commodities are all high. Why should the cost of rare earths not be high, too?"