China's rare earth industry suffered a sharp drop in profits in 2013 despite modest revenue growth, a report said.

Industry revenue was close to 77 billion yuan (12.6 billion US dollars) last year, up 7.9 percent, but profits fell 28.1 percent to 7.7 billion yuan, mainly due to falling prices, according to the Ministry of Information and Technology (MIIT).

A silver lining for the industry is progress in restructuring and that market order keeps improving, the report said.

China is the world's largest rare earth producer and exporter, but the industry is beset by problems, such as illegal mining, smuggling and a lack of competitiveness due to weak research and development. Excessive exploration has also caused environmental damage.

The government has been at pains to consolidate the rare earth industry through measures ranging from encouraging mergers to fighting smuggling.

In early January, MIIT Vice Minister Su Bo, said China would promote mergers led by 6 major producers, including the Inner Mongolia Baotou Iron & Steel (Group) Co., Ltd., China Minmetals Corporation and the Aluminum Corporation of China.

Su said the government will better regulate the industry.