Reuters reported that Japan's imports of rare earths from China fell 3% in May from April, the first MoM drop in 3 months as the price of the metal surged though demand could pick up later in the year as the country continues to recover from a massive earthquake.

China, which produces 97% of global rare earth supplies, has been tightening trade in the strategic metal which is used in high tech electronics, magnets and batteries causing concerns globally about supply and triggering prices to jump.

An official from a Tokyo trading house said that but despite the surge in prices, orders for July to September from end users of rare earths have picked up as Japanese manufacturers recover from disrupted supply chains which resulted in suspended production in the wake of the March 11 quake.

Finance ministry data showed that Japanese imports of rare earths from China stood at 1,592 tonnes in May down from 1,646 tonnes in April. China accounted for 79% of Japan's rare earth imports in May with Kazakhstan making up 4.5%, the United States 4% and Vietnam 3%.

The trading house official said that the drop in May imports may be due to high prices. But with a fast recovery in production, parts suppliers are receiving orders from auto makers and Japanese buyers have been flocking to China since mid June to seal contracts for the July to September quarter.

If prices keep rising on strong demand for rare earths, Japanese makers must eventually decide whether to shift factories to China unless they can do away with using the material. But given the risk of prices slumping, as the rapid pace of rises in prices could dampen imports his company has not stocked up on imports of rare earths.

Japanese imports of rare earths in May were still well below December's 4,080 tonnes when trade resumed after Beijing halted shipments for two months from late September. China reduced export quotas for the H1 of 2011 by 35% compared to a year earlier and has capped total output of rare earth oxides at 93,800 tonnes for 2011 while cracking down on illegal production.

China has also sought to increase its pricing power over rare earth metals, announcing that it would create a state owned monopoly in Inner Mongolia, where the bulk of production is concentrated.

Japanese firms consume about 30,000 tonnes a year of rare earths. Japan has stepped up diversifying supply sources while the government said Japan aims to cut rare earth consumption by a third within a few years and reduce its reliance on China, by providing subsidies for recycling and investing in new ways to limit their use.

A former Chinese government official and future rare earth group chief said recently that China's global share of rare earth output will drop steeply in the next two years as other countries ramp up production to compensate for domestic curbs on mining the minerals.