As the world's largest rare earths producer and exporter, China adopted a series of policies for the industry this year to balance environmental protection needs and industrial demands, including stricter emission limits on miners, cuts in export quota and a resources tax.
China supplies more than 90 percent of the global rare earth demand. However, its reserves account for about one-third of the world's total.
"Not only rare earth processing companies rushed to buy raw materials, investors with a great amount of speculative capital also chased after the minerals thanks to the wide expectation of price hikes," said Heng Kun, a chief analyst with Essence Securities.
Heng said the huge influx of money into the rare earth industry to hoard raw materials has caused a supply shortage in the country and pushed up prices further, which again drew the attention of speculators that bet on hikes amid the country's new industry policies this year.
Starting April 1, every tonne of mined light rare earths in China will be taxed 60 yuan while each tonne of medium and heavy rare earths will be taxed 30 yuan.
The newly introduced tax will increase production costs for rare earth miners like Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., the country's leading rare earth producer. The company expected its production costs to rise by about 720 million yuan this year.
A rare earth processing company manager, who is also reluctant to be named, said players inside the industry consider the current price level "pretty scary" but speculators outside the industry expect the upsurge to continue.
The manager said it's very difficult to get rare earths directly from the spot market now and many processing companies are reducing their output due to the current price levels.
Share prices of rare earth producing companies were, however, boosted by the exuberant demand.
Shares of Baotou Steel Rare-Earth Hi-Tech Co. rose 2.24 percent to 84.1 yuan apiece in the morning session Wednesday, while those of Rising Nonferrous Metals Share Co., Ltd. jumped more than 7 percent. Shares of China Gengsheng Minerals Corp., which got listed at New York Stock Exchange, surged 14.63 percent to 3.37 U.S. dollars apiece Tuesday.
With the inflow of speculative funds in the rare earth market, the current prices are gradually coming out of their normal levies and forming price bubbles, Heng said.
"Ultimately, the price hikes will pass on the costs to downstream enterprises and risk the entire industry if they can't afford such hikes," Heng added.