A World Trade Organisation ruling against China's restrictions on raw material exports could force changes to some of its rare earth policies but is unlikely to yield the boost in exports of the metals that consumers want to see.

A WTO panel on Monday said China violated global trading rules by restricting exports of raw materials like bauxite, coke, magnesium, manganese and zinc, which inflated prices and gave domestic Chinese firms an unfair competitive advantage.

Rare earth metals were not part of Monday's ruling, but users of the crucial group of 17 elements used in the renewables and high-tech sectors hope that China will also scrap export limits on these commodities, leading to higher volume and lower prices.

They are likely to be disappointed.

It is still too early to say what the impact will be but I can't see it having a big impact on prices -- the main issue will still be supply and demand, said Vivian Pang, an analyst with the Asian Metal consultancy in Beijing.

The reason, say analysts, is that even if China removes export quotas, it is unlikely to lift its production limits, which are meant to limit environmental damage from rare earths mining and keep prices -- and profits -- high.

China, which produces about 95 percent of global rare earth supplies, capped production at 93,800 tonnes in 2011, up only 5 percent compared with the year before despite soaring demand. It began a nationwide inspection at the end of August to stop rare earth miners from breaking the cap.

While the ruling could be a setback for China in its efforts to clean up and cash in on its rare earth reserves, its overall strategy need not change, said Tu Xinquan, associate director of the China Institute of WTO Studies.

There are other ways it can meet its objectives, he said, referring to the output limits.


A number of U.S. lawmakers urged the United States to use the WTO decision to launch a new case to force China to lift its rare earth export restrictions.

Some producers said they were optimistic the action would change Chinese policy.

The decision of the appellate body is a huge victory for the United States, said Michael Silver, chief executive of American Elements, a U.S.-based rare earth processor.

It confirms the existence of the two-tiered price structure that has caused so much concern.

EU Trade Commissioner Karel De Gucht said the decision would force China to drop export restrictions for the materials mentioned in the case and for rare earths.

The United States, European Union and Mexico had all launched WTO legal cases in 2009, challenging China's right to restrict raw material exports and force prices to rise.

China's control over supplies means that it is in a strong position to disregard WTO rulings, but industry figures say it is unlikely to do so.

The question is whether China will actually stop or at least reduce export taxes, said Silver. I expect they will, so they remain WTO members in good standing.

China's Ministry of Commerce said on Monday it deeply regrets the ruling but would comply.


WTO provisions allow a country to limit trade on health and environmental grounds, but it said on Monday that China had been unable to demonstrate that its restrictions helped conserve resources, cut pollution or improve public health.

Beijing has said that unregulated rare earth exploitation had caused untold damage in big producing regions like Inner Mongolia. It has also said it should not have to bear so much of the global output burden, especially as domestic demand grows.

China is likely to continue to play up the environmental impact of extracting rare earths, but the issue is whether it can convince the WTO that its policies are applied equally to foreign and domestic firms.

That helps explain China's attention to the domestic output cap, which is not subject to global trade rules.

China successfully used a similar strategy in 2004 when imposing quotas on coking coal exports. Despite the threat of WTO action, exports have dwindled from 10 million tonnes a decade ago to 3.6 million tonnes last year, and it is now a huge net importer.

In the last few years, China has banned dozens of unlicensed rare earth miners and raised entry thresholds. It has also imposed strict export limits and cracked down on smuggling.

It issued export quotas amounting to 30,184 tonnes in 2011, and said the figure for 2012 would remain unchanged in order to guarantee international demand. Exporters used just 56 percent of their allocations last year.

China has rejected claims that domestic firms have gained an unfair advantage, saying nationwide output caps -- which are compliant with WTO rules -- have also raised domestic prices and forced local users to scale back operations.

The question for the WTO is whether or not Chinese firms gain an unfair advantage from their government's policies, but even if China is forced to make changes, there is nothing foreign buyers can do to stop Chinese producers from selling to domestic consumers at a cheaper price, said Tu.

I don't know if domestic firms get cheaper supplies but if it is just enterprises setting prices, rather than the government, there is nothing anyone can say about it.

(Editing by Don Durfee and Robert Birsel)