The cost of many rare earth elements has defied analysts’ predictions with steep price increases since the beginning of the month. For instance in the last week, the price of dysprosium has risen from around $700 per kilogram up to $1,470. Bloomberg’s Jason Scott also reported on June 16th that the price of europium “has risen to as much as $3,400 a kilogram from between $1,260 and $1,300 [per kilogram].”

Numerous changes to Chinese mining and trade policies are being attributed to price rise. The changes revolve around the consolidation of rare earth producers in China. Chinese officials have stated their plans to consolidate the industry in an attempt reduce pollution, as well as illegal smuggling of the metals attributed to small artisanal mining firms.

In March, the Chinese government set tough emission standards that smaller firms may be unable to achieve. “The rules will drive the small and medium rare earth enterprises out of the industry or to be merged with big players and thus promote the industry consolidation,” said Lin Donglu, secretary general of the Chinese Society of Rare Earths. Larger firms such as Inner Mongolia Baotou Steel Rare Earth Group will acquire the smaller companies in the field that are unable meet the stringent regulations. In fact, consolidation of the industry has already started.

According to China Daily, Baotou Steel Rare Earth plans to consolidate 35 local rare earth miners, shut down 31 separation companies, as well as acquire four other separation companies licensed by the autonomous region’s government. This follows the announcement that Baotou will set up the ‘Baotou Rare-Earth Products Exchange,’ which was covered on Rare Earth Investing News on May, 31.

The unpredictable price hikes have affected companies producing end products containing rare earth elements. Both Hitachi Metals and Shin-Etsu Chemical Company have changed pricing policies, and are passing the cost on to consumers.

“The price of neodymium has risen 2.5 times compared to its price in summer of last year… There is also a possibility that China will further strengthen its export restrictions in the future, and there seems to be no prospect of a settling down of the upward trend of the prices of these elements,” stated the press release from Shin-Etsu Chemical Co.

Further upward price pressure will come from the creation of a strategic reserve of heavy rare earth elements. While the plan has yet to receive governmental approval, it would closely resemble the light rare earth strategic stockpile which was approved in 2009. The added demand created by the buildup of the stockpile may have serious implications.

“[S]tockpiles can be viewed as purchased inventory, then this means that the virtual demand for all of the rare earths in China will skyrocket… by 2015 at the latest, there will be virtually no HREEs available outside of Chinese control,” stated Jack Lifton, for Tech Metals Research.

If production levels in China remain unchanged, the combination of industry consolidation, environmental cleanup, and the buildup of strategic reserves will keep the price of rare earth elements on their upward trajectory. It is a matter of pure supply and demand fundamentals.