* China’s top 6 miners to produce 10 pct less in 2015
* Illegal mining estimated at a quarter of total output
* Prices seen stabilising after heavy losses since 2011
By Eric Onstad
LONDON, Nov 6 (Reuters) - An output cut by six top rare-earth producers in China has spurred a modest rise in prices and is helping to steady a hard-hit market, but a continued glut of illegal output will likely cap any rebound.
Prices of 17 rare-earth elements used in high-tech sectors such as electronics, defence and renewable energy have been sliding over the past four years, hit by heavy oversupply.
Last month, the country’s top producer China Northern Rare Earth High Tech Corp and five other main suppliers said that due to weak prices, they would produce around 10 percent less than their 2015 government-set output targets.
China is the world’s dominant producer of rare earths, accounting for 90 percent of global supplies.
“The cuts caused a short-term bump (in prices), but the real problem is that it’s only a small drop in the ocean,” said David Merriman, senior analyst at consultancy Roskill Information Services in London.
“The amount of illegal production that is still being produced is strong enough to keep downward pressure on pricing.”
An index compiled by the Association of China Rare Earth Industry, based on the value of all rare earths produced in China, has increased by about 12 percent over the last four to six weeks, but has levelled off. (bit.ly/1LUB2d2)
The rare earths market is still recovering from a boom in 2010-2011 that unleashed a glut of supply and a subsequent collapse in prices, which are down around a fifth this year.
The weak prices spurred Molycorp Inc, the only U.S. supplier of rare earths, to file for bankruptcy protection earlier this year and suspend production at its flagship Mountain Pass facility in California.
The Chinese government has been struggling to dismantle an illegal supply chain for several years that includes many small-scale mines that often result in environmental damage.
The government hoped that the country’s small miners and processors could be consolidated into the six top state-owned companies.
“The decision to reduce output is encouraging and a sign that consolidation of China’s industry into six large groups will help encourage production discipline,” said Amsterdam-based consultant Ryan Castilloux, founding director of Adamas Intelligence.
“That said - it will take more than just a 10 percent reduction in 2015 to remedy the structural imbalance in China’s industry.”
Roskill estimates that illegal Chinese production this year will be 45,000 tonnes of rare earth oxides, accounting for about a quarter of global output of 172,000 tonnes, with black market output falling a couple thousand tonnes next year.
“I think the government has accepted the fact that it will take a long time to control (the black market) and that it’s not just a quick fix,” Merriman said.
“Things are steadying, however. I think prices will remain relatively stable throughout the first half of next year.”
Jon Hykawy, president of Toronto-based consulting firm Stormcrow Capital, said production cuts were not the best option since users outside of China were concerned about volatile prices and supply security.
“What would alleviate those concerns would be available long-term contracts at reasonable prices, with some guarantee on future deliveries owing to the source of supply,” he said. (Reporting by Eric Onstad; Editing by Dale Hudson)