EU watching rare earths closely: trade chief

Ren Limin, a worker at the Jinyuan Company's smelting workshop, prepares to pour the rare earth metal Lanthanum into a mould near the town of Damao in China's Inner Mongolia Autonomous Region October 31, 2010.

DAVOS, Switzerland (Reuters) - The European Union is watching the market for rare earth minerals closely and is determined to secure supplies from China and alternative sources, its top trade official said on Thursday.

EU Trade Commissioner Karel De Gucht declined to say whether Brussels would challenge China at the World Trade Organization over the elements, used in many high-tech goods.

"We are following very closely what is happening with rare earths," he told Reuters in an interview, describing the issue as being of huge geo-strategic importance.

Rare earths are used in electronics such as smartphones and hybrid cars as well as a number of defense applications.

European officials are consulting with affected business groups and raised the question of rare earth supplies at the highest level in China during the high-level economic dialogue held between the world's two biggest exporters last month.

China, which produces 97 percent of the global supply of the minerals, cut export quotas by 40 percent last year, leading to a fall in exports of one tenth in 2010 and alarming its trading partners.

The cut-back, which China argues was taken for environmental reasons, rang alarm bells in the United States, Japan and the EU, particularly Germany where sophisticated industries are highly reliant on imported raw materials.

De Gucht said the EU was pursuing a solution with two elements. On the one hand it would try to ensure that China did not cut-off supplies but respected acceptable export quotas.

But despite a near monopoly of supply, China has only about 35 percent of rare earth resources, he noted, meaning there was potential to develop alternative supplies.

"We should do something to broaden the market ourselves," he said.

The EU is also concerned about export duties imposed by China on the minerals that create dual pricing putting Chinese manufacturers at an advantage over foreign users of the elements.

This issue is the subject of an earlier dispute with China at the WTO, in which the EU, U.S. and Mexico are challenging Beijing's export restrictions and duties on other raw materials.

De Gucht said the EU Commission would issue a strategy document on raw materials policy next week.

According to a draft seen by Reuters, the EU will consider stockpiling raw materials and confront any country that restricts supplies.

(Editing by Mike Peacock)