The Baotou Steel Rare-Earth Hi-Tech Co in Baotou. General Manager Zhang Zhong said that the company plans to have 300,000 tons of capacity within two years. [Photo / China Daily]

Baotou, Inner Mongolia - Rare earth prices will remain bullish in the second half of this year, but won't be higher than the first half's level, as companies in downstream activities halt production due to expected high operating costs, industry insiders said on Monday.

Six government agencies started a crackdown on illegal production and sales of rare earths from Aug 1 to Dec 31, the Ministry of Industry and Information Technology said on its website on Monday.

Gan Yong, vice-head of the China Academy of Engineering, who is also expected to be chairman of the planned Rare-Earth Industry Association, said at a rare earth forum in Baotou that the average prices in the second half of the year will not be higher than the level seen in the first half, after they hit a record in June.

He said China should establish a rare earth index such as the iron ore index to accurately reflect the market.

The index should be based on different sources and comprehensive elements.

Zhang Zhong, general manager of the world's largest rare earth producer, Baotou Steel Rare-Earth Hi-Tech Co, said rare earth prices will remain at a high level in the second half of this year due to tight supply, as the government had kicked into action strict policies that serve as guidelines to sustainable development of the over-exploited industry.

"Surging rare earth prices will accelerate the elimination of the low value-added downstream companies, and propel the high-tech development in the rare earth industry," he said.

An example is neodymium iron boron, one of the rare earth elements used in many fields including permanent magnet engines and electronic engines.

Most Chinese downstream companies have been producing low value-added products such as loudspeaker components.

From a long-term perspective, Zhang said these companies will naturally fade away and the entire industry will move up in the value-chain.

Baotou Rare-Earth plans to reach 300,000 tons of capacity within two years, he added.

Industry insiders said rare earth downstream companies such as wind turbine makers and permanent magnet electronic engine producers have halted or cut production due to surging prices of raw materials.

"One third of downstream companies using neodymium iron boron had stopped production as the raw material prices rocketed too high to cover the cost," said Wei Chishan, an analyst with Shanghai Metals Market website, a service provider in China's nonferrous metal markets.

The current price is around 1.4 million yuan ($214,000) per ton, down 20 percent from the highest record in June. The price of neodymium iron boron surpassed downstream companies' bottom line.

Based on research into 200 companies across China, Wei said: "That's why companies in Zhejiang, Guangdong and Fujian provinces either stopped or slashed production."

Prices of most rare earth products have risen by three to five times this year since China started consolidating the industry. However, prices started to ease over the course of July, with rare earth cerium oxide, for instance, down 20 percent.