A major rare earth industry regulator in China has issued a document prohibiting rare earth mining and smelting without its permission.

The Ministry of Industry and Information Technology said further activity in the industry would depend on the issuing of a permit from the ministry.

Violators will be severely punished, but the ministry did not specify what forms the penalties would take.

In addition, companies granted permits will also have to comply with production quotas.

Those who exceed their quota will be punished with a reduced quota the next year, according to the ministry.

The document took effect on June 13 but was not published until Thursday.

Shanghai Securities Daily said this latest measure could drive the majority of companies out of the industry, and the subsequent drop in supply could lead to a rally in rare earth prices.

But industry experts told China Daily that weak global demand means a recovery in prices is unlikely, and whether the supply will drop depends on the enforcement of the policy.

"I see little hope of a price rebound in the third and fourth quarters," said Wei Yishan, an analyst from Shanghai Metal Market, an industry information provider.

"A drop in supply would only take place if the policy is strictly implemented."

In fact, the market did not respond to the news on Friday. Rare earth prices dipped and few transactions were recorded, according to Shanghai Metal Market.

Previous surge in players in this field led to excess capacity. Combined with lackluster demand from the West, rare earth prices plunged in the first quarter of this year and have remained flat ever since.

"Lured by the prospect of high profits, many small companies swarmed into this industry. Previous regulations and quotas were in practice virtually ignored by enterprises," said Chen Zhanheng, director of the research department of China Rare Earth Institute.

As a result of the industry's severe environmental impact, since 2007, China has toughened its rare earth production regulations, replacing guidelines with directives.

Last May, the State Council substantially increased environment protection standards in the rare earth mining and smelting sector, and set a limit on exports.

The State Council also ordered local governments to accelerate the pace of industry concentration by closing or merging small rare earth mining, smelting and separation enterprises.

In Baotou, Inner Mongolia autonomous region, a major rare earth production center, 13 companies have been closed, and more closures and mergers are planned, according to Chen.

But He Guoxin, a director of Hunan Nonferrous Metals Holding Group, said there are still large number of small companies, mostly private, in the industry, and this will make the enforcement of the regulation very difficult.

WTO dispute

China on Friday reiterated that the country's rare earth policies are aimed at protecting environmental resources and achieving sustainable development in the industry.

"We have no intention of protecting our domestic industry through means that will distort foreign trade," said Ministry of Commerce spokesman Shen Danyang.

On Wednesday, the European Union, the United States and Japan formally sent a request to the World Trade Organization's dispute settlement body asking for a resolution regarding China's export restrictions on three types of raw materials - rare earth metals, tungsten and molybdenum.

Rare earth metals are vital for manufacturing an array of high-tech products, including cell phones, wind turbines, electric car batteries and missiles.

China accounts for more than 90 percent of global rare earth supplies, but has only 23 percent of global reserves.

China will study the request from the EU, the US and Japan for the WTO to form a panel to resolve the dispute, Shen said.

Contact the writer at zhengyangpeng@chinadaily.com.cn