The Mountain Pass rare earth facility
Molycorp's Mountain Pass rare earth mining facility (pictured) once supplied most of the world’s rare earth elements and is now re-emerging to become a major global supplier.

Another month, another rare earth supply scare.

Last week the Chinese government released its first official report into its domestic rare earth element (REE) industry, and for many it made very uncomfortable reading.

China, which according to various estimates produces between 90 to 98 percent of the world's rare earth supplies, warned that a decline in its rare earth resources was accelerating.

After more than 50 years of excessive mining, China's rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing, the paper said.

In Baotou [the largest rare earth industrial base in China] only one-third of the original volume of rare earth resources is available in the main mining areas.

For China's biggest rare earth importers (the U.S., Japan and Europe) the report was nothing more than an excuse to justify rare earth export quotas imposed by Beijing in March last year.

So-called rare earths (they are in fact not so rare, just very hard and environmentally risky to mine) are a group of 17 elements essential for the manufacture of most hi-tech gadgets, military hardware and renewable energy equipment.

Their super durable and highly conductive properties make them indispensable in a range of applications including, for instance, the lining of jet fighter engine manifolds, flat screen TVs and the magnets used in wind turbines.

China maintains that the quotas are not intended to hurt other nations, and are only in place to protect the environment and conserve its supplies.

Regardless, they have had a huge effect on the price of these essential elements.

Shortly after last year's export squeeze, dysprosium oxide -- used in magnets, lasers and nuclear reactors -- rose to about $1,470 a kilogram from $700 to $740 in just one month, Bloomberg reported.

Faced with potential supply bottlenecks and costly price hikes, in March the U.S., along with the EU and Japan took China to the World Trade Organization (WTO) in a bid to force Beijing into dropping the rare earth quotas.

The U.S. has been particularly vocal in its opposition to Chinese rare earth policy, with President Barack Obama telling reporters in March he expected China to play fair when it comes to international trade.

We want our companies building those products right here in America, Obama said.

But to do that, American manufacturers need to have access to rare earth materials which China supplies. Now, if China would simply let the market work on its own, we'd have no objections.

The White House's anger is echoed by U.S. industry bodies and particularly the Department of Defense, who fear future supply cuts could affect their ability to purchase and maintain everything from fighter aircraft to night vision goggles.

According to a 2011 DOD report, the U.S. military has been carefully monitoring the situation, and recommended a re-evaluation of the U.S. position regarding rare earths.

China supplies approximately 97 percent of the world's RE, the report said.

It is essential that a stable non-Chinese source of REO be established so that the U.S. RE supply chain is no longer solely dependent on China's RE exports.

The paper calls for a re-establishment of the Critical Minerals Program, abandoned in the 1990s, which kept Congress abreast of potential supply shortages and impending materials shocks.

The report also suggests stockpiling key rare earth elements to increase the security of the domestic U.S. supply for rare earths, and funding more research into the processing and handling of rare earths.

Congress has been even more vocal in its concerns, with three senators writing to the Secretary of Defense Robert Gates in January last year saying that the current rare earth supply chain represents a serious vulnerability to our national security.

Yet early indications are the DOD has dismissed the severity of the situation to date, the letter continued.

But in spite of the hyperbole emanating from Washington, the same DOD report notes: As Capital investment plans for additional non-Chinese capacity become a reality, prices should significantly trend downward on a similar path as in the 1988-1933 period, when market dynamics were very similar to what they are today.

The Chinese, meanwhile, have also been at pains to downplay their own dominance of the market. Last week's official report took an almost mocking tone towards what it said was an unnecessary fear from the U.S. and other worried nations.

For some time now, some countries have been particularly fretful about the situation of China's rare earth industry and related policies, doing a lot of guesswork and conjuring up many stories, the report stated.

And according to Dr. Karl Gschneidner, the founding Director of the Rare-earth Information Center and an expert who has testified before Congress on the issue of rare earth supply, China may just be right.

The industry in terms of supply is not perfect yet, but it is slowly coming together, he said.

We can see the light at the end of the tunnel, and domestic suppliers, such as MolyCorp [NYSE:MCP] are going as fast as they can to make up supplies.

Molycorp, who own the Mountain Pass rare earth mine in California - which once supplied the majority of the world's rare earth elements - are just one of a growing number of North American mine operators aiming to break the Chinese stranglehold on rare earths.

The company's $781 million 'Project Phoenix' expansion of the Mountain Pass facility is due to come on-line later this year, boosting annual production up to 10,000 tons.

Elsewhere in North America, drilling at Rare Element Resources' Wyoming-based Bear Lodge Project also got underway in June. Bear Lodge contains one of the largest disseminated rare earth element deposits in North America.

There's always going to be some competition with China, Gschneidner added.

The main problem is we don't have enough experts, but I think they are going to start coming back in.

For the U.S. it's a matter of time working it out. It's not over, but I'm not worried China is going to dominate this country [using REEs].

In June, advisory body Technology Metals Research also pointed out that China could be about to lose its REE monopoly, citing 35 rare earth mining projects in various stages of development or production in other countries.

It's possible that 15-20 percent of rare earth minerals could be mined outside of China by the end of 2020, added supply expert Paul Martyn in a piece for Forbes magazine earlier this month.

Even the DOD report cited Molycorp and others as examples of how, in the not too distant future, America will be free of its overreliance on China for its supplies of rare earths.

As if on cue, Friday saw Japan announce it had found a massive deposit of rare earth minerals in its Pacific seabed.

According to reports, the 6.8 million ton discovery is enough to supply Japanese industry for the next 200 years, according to Tokyo University professor Yasuhiro Kato.

Specifically on dysprosium, I estimate at least 400 years worth of Japan's current consumption is in the deposits, Agence-France Presse reported Kato as saying.

We can start drilling in the mud, using oil extraction technology, within three years at the earliest and start producing rare earth minerals within five years, he said.

Added to this, the statistics that critics base their arguments on can be misleading to say the least.

According to Beijing's figures, China holds 23 percent of the world's rare earths reserves.

On the other hand, the United States Geographical Survey (USGS) puts this figure at 36 percent, while a congressional report released earlier this month warned China's share of world reserves was as high as 50 percent.

That's a difference of 27 percent.

Reserves are wild guestimates, said Professor Andre Geim from the University of Manchester in the U.K.

36 percent is certainly a too accurate a number to be believable.

In addition, rare earth materials are nothing like oil. The reserves are not limited to a certain depth: the deeper you dig the more you find, becoming more and more expensive.