The SMH has a look at Australia's entrant into the rare earths industry and the problems facing its Malaysian processing plant - The global race is on for rare earths and Lynas.

WHEN a Chinese trawler fishing in disputed waters collided with Japanese coastguard patrol boats early on September 7, the global supply of rare earths - crucial for producing smartphones, flatscreen televisions, hybrid cars and iPads - was plunged into turmoil, even if it was not immediately apparent.

And Australia's crucial role in the lucrative trade was also to be thrust firmly into the international spotlight.

The errant vessel's skipper was arrested and detained, calls for his release went unheeded, and a diplomatic row, seeded by a long-standing territorial feud, erupted between the two Asian nations. For two weeks, tensions worsened with no resolution in sight - until China decided to hit Japan where it hurt.

On September 22, Chinese Premier Wen Jiabao banned rare-earth exports to Japan, and threatened ''further action'' if the fisherman was not released. Two days later, the man was set free.

''In order to further grow our mutually beneficial relationship based on strategic interests, I believe it is necessary for Japan and China to handle matters calmly,'' Japanese Prime Minister Naoto Kan said at the time.

The export ban was swiftly revoked, but the world had received a nasty wake-up call. China has a stranglehold on the rare-earths market, accounting for 97 per cent of worldwide production. And it was clear it was prepared to use that dominance for political, as well as economic, gain.

Japan, in particular, had to find alternative sources of rare earths, or risk whole industries being affected.

New applications for rare earths are being discovered all the time. The 17 closely related elements have remarkable magnetivity and help make phones smaller, TVs bigger and display panels brighter. They also represent our best-known chance to make energy-efficient technologies, such as electric vehicles, wind turbines and solar cells financially viable.

''We are as addicted to rare earths as we are to oil, we just don't know it,'' says Nicholas Curtis, chief executive of Australian rare-earths miner Lynas Corporation.

Even before the diplomatic incident, China had begun to restrict exports of rare earths, to ensure it could meet the demand from its local industry. Shipments have been cut from 67,500 tonnes in 2005 to 30,250 tonnes last year. With prices of some rare earths having soared up to five times since the start of the year, the worldwide race to break China's stranglehold is officially on. ''I think the situation has become more acute more rapidly than anybody would have ever predicted,'' Curtis says. ''The crisis in the supply of rare earths in the last year or so has resulted from a combination of events that came together and created this perfect storm - and that focused policymakers very heavily on the strategic implications on rare earths.''

With California-based Molycorp also in the mix, Australia's Lynas is widely considered to be leading the pack. Much like Andrew Forrest's Fortescue Metals in its infancy, Lynas has rocketed from a penny-dreadful stock to a company worth $3 billion almost on expectation alone - it has yet to start production.

The Business Spectator has a look at a new rare earth producer in Australia - Australia's rare earth potential.

About 97 per cent of the world’s rare earth capacity is in China, including the essential refineries which western countries have tended to shun because of environmental objections.

China’s internal usage of rare earths has been rising and it now uses about two thirds of its capacity internally and it plans to cut exports. This will lock in vast numbers of manufacturing industries to China.

When the Japanese arrested the Chinese fishing boat captain, the Chinese cut off exports of rare earths to Japan. The captain was quickly returned but there is still the issue of apology.

As things now stand, China controls the growth of its competitors in so many industries.

Presumably 'sustainable' means that China does not want to run down its reserves too fast and that the price will be increased to fulfil the predictions of Deng Xiaoping.

When someone uses the word 'sustainable' they are often making a political statement to suit their own ends. So in the rare earths context, if you want rare earths you must be nice to China. The Japanese fishing affair showed the power of this weapon.

Europe and the US are pressing China to revalue its currency and the US has some nasty measures before the House of Representatives. As I explained yesterday (China's currency powder-keg, October 7), revaluing the Chinese currency presents problems for China which at this stage it does not want to tackle. If the US wants to press the currency issue, they only have to see what China did to Japan to work out China’s reaction – there will be a declaration that exporting rare earths to the US is 'not sustainable'. It may bring the US to heel just as it did to Japan.

But dominance may not last forever. That’s where Australia comes in.

There are a number of major rare earth deposits outside China, including one in WA owned by Lynas. Stephen Bartholomeusz told the remarkable Lynas story (Lynas' Chinese gift, September 23). But for intervention by the Foreign Investment Review Board, Lynas would now be controlled by China.

Instead, the Lynas Mount Weld concentrate will be processed at Lynas’ facility in Malaysia, the first to be built outside China for decades. Australia will be a player in this market.

But that’s some years off. Meanwhile, the word 'sustainable' is not innocuous when it comes to rare earths.