Islands dispute: Why China won't use rare earths against Japan

China's People's Daily  on Tuesday weighed in on the current stand-off with Japan over the Diaoyu islands – the Japanese calls them the Senkaku islands – and how it could affect the rare earth industry.

The paper is the mouthpiece of China's ruling communist party and what it publishes is usually aligned with official policy which gives the article added significance.

With the dispute over who owns the four uninhabited islets escalating to the point where several  Japanese retailers and manufacturing plants  in China have shut down, some observers are not ruling out a full-scale trade war.

The paper says speculation inside China is rife that the country may use its dominance of rare earth production – it is responsible for more than 90% of global supply –against Japan.

Public opinion in China holds that Japan's hi-tech, green and automotive industries could be devastated if REE supply is cut off.

It's happened before: China suspended its exports of rare earths to Japan in September 2010; also over a spat concerning the Diaoyus.

But rare earths are much less of a trade weapon in Chinese hands than in the past.

Japan's imports of rare earths from China fell 50% to 3,007 tonnes in the first half of 2012. Before 2009, China accounted for at least 90% of Japan's rare earth imports. Today the island nation sources less than half of its REE requirements from China.

And that figure is set to fall again as new supply from Australia, the US and Africa come on stream and the country's manufacturers  step up the use of alternatives.

On top of that, notes the paper, despite greater government control of the sector, China's REE producers have not focused on upgrading its processing technology or improving supply chain management, reducing the country's competitiveness.

Image is of the frontpage of the Baidu search engine, the Chinese equivalent of Google, using an image of the islands to voice support for the Chinese cause.  Via China Realtime Report.