Japan is the main importer of rare earth oxides, accounting for about 17 percent of the market, while China mines and produces more than 90 percent of the world's supply, and uses 51 percent internally.
Currently, only a few facilities process rare earth oxides outside China - accounting for less than 10 percent of the market.
The trade spat, which was triggered by the detention of a Chinese fishing boat captain whose trawler collided with a Japanese patrol boat, will likely fast-track projects by Molycorp (MCP.N), Lynas (LYC.AX), Great Western Minerals (GWG.V) and other non-Chinese companies.
"Whether (the ban) is real or not, it indicates that China is willing to use the supply of rare earths as one of the hammers that they wield to make other governments behave as they see fit," said Byron Capital Markets analyst John Hykawy.
"It's going to convince many investors in the market that they need to look at rare earth supplies outside of China."
Rare earth-based metals, magnets and alloys are used in smartphone and computer motors, in LCD screens and in powering electric vehicles, among other applications. A ready supply of is crucial to manufacturing industries such as electronics and automobiles that keep Western economies ticking.
On Thursday, reports surfaced that China had banned all exports of rare earth products to Japan, with the Japanese government confirming a halt to shipments.
But Beijing told Tokyo there was no official embargo.
Either way, the most tangible outcome of the incident is likely to be a further emphasis on securing alternative supply as quickly as possible, analysts say.
"I think that what they've done is a game changer," said rare earth consultant Dudley Kingsnorth, referring to the Chinese export cuts.
"I do believe, that as a result of this, there will be more non-Chinese projects brought to market than I thought there would have been three or four months ago."
The issue has been percolating all summer. In August, China cut general exports of rare earths for the second half of 2010 by 70 percent. For the full year, that represents a 40 percent reduction compared with the 2009 quota.
That immediately pushed up prices on the individual oxides, as companies that depend on rare earths scrambled to secure supply.
"When you've got uncertainty, people want to move toward certainty," Hykawy said. "The easiest way to have certainty in this space is to make sure there's supply of rare earths outside of China."
Well before the summer, China's monopoly on the sector had pushed mining companies in Australia, Canada and the United States to start work on bringing new rare earth mines to market.
Since the beginning of August, shares of Molycorp have risen over 112 percent, while Great Western's shares are up almost 90 percent and Lynas has jumped more than 68 percent. Avalon Rare Metals (AVL.TO) shares are up 35 percent in the same period, while Rare Element Resources (RES.V) has soared 174 percent.
To be sure, you can't build a mine and rare earth separation facility overnight. Even with three or four projects moving forward, it will still take at least two years before producers outside China have much impact on the market.
"It takes a woman nine months to have a baby, if you put three women on the job, you still can't do it in three months," Kingsnorth said.
MADE IN THE USA
While bureaucrats in China are busy denying there is any ban, 10,000 miles away in California, production is rolling forward at Molycorp's Mountain Pass facility.
The Denver-based company, which mined rare earth from 1952 until the late 1990s, currently produces about 3,000 metric tons of rare earth oxides a year from old concentrate.
Since the quotas were introduced in July, Molycorp has pushed to increase production to 5,000 metric tons by January 2011, and then to 20,000 metric tons annually by the end of 2012.
"The faster we can accomplish this build-out, the sooner the U.S. will move to a position of greater security with regard to the supply of these critical materials for defense systems, clean energy technologies and many high-tech products," said Molycorp Chief Executive Mark Smith.
The Mountain Pass mine shut down in 2002 as the Chinese moved into the sector, heavily undercutting prices and flooding the market with cheap rare earths.
But with prices of rare earth oxides like praseodymium soaring 400 percent this year alone, the old mine is suddenly looking profitable again.
Smith is quick to point out he is not banking on high oxide prices alone.
"We're bullish on prices into the future, but do I think the prices of today are going to last? Probably not," he said.
While it is apparent that more suppliers of rare earths are needed, analysts are confident that the most recent battle between the two Asian superpowers will resolve itself before consumers buying smartphones feel the pinch.
"This is not a substantial dispute," Hykawy said. "It's one fishing captain that should have known where he was."
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