Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-tech Co, the rare earth listed unit of Baotou Iron & Steel Group, said its international trading unit received a nod from the autonomous region's government to build a strategic reserve of rare earth elements.

The company, which holds a 67 percent stake in the unit, was authorized by the Inner Mongolian government to set up the reserve in the autonomous region, it said in a statement to the Shanghai Stock Exchange yesterday.

Following an almost 10 percent surge on Tuesday, the company's shares sank 1.55 percent to end at 24.1 yuan yesterday. This compares with the benchmark Shanghai Composite Index's gain of 1.14 percent.

The regional and Baotou municipal governments are subsidizing the reserve to the tune of 20 million yuan. The rest will be raised by Baotou Steel Rare-Earth, the announcement said.

The company is the world's largest producer of rare earth elements. They are widely used in the production of mobile phone batteries, missiles and aviation engines. It manufactured 53,997 tons of rare earth oxides, making up 43.5 percent of global production in 2008, according to Le Yukun, an analyst at Bank of China International Securities Co.

China has a virtual global monopoly of the minerals, supplying around 95 percent of them. It has imposed export quotas on them for three years to meet the country's ambition of boosting high-technology industries.

The Ministry of Industry and Information Technology said last May that China would trim 2009 output quotas of rare earths by 8.1 percent from a year earlier to 119,500 tons, the fifth straight year it has imposed such a cut.

In addition, the country will also stop issuing licenses to run rare earth element businesses amid more stringent export controls of such minerals.

Long-term exploitation of the minerals created great waste and producers suffered losses, said Zhu Lida, a non-ferrous analyst from Northeast Securities based in Shanghai.

Baotou Steel Rare-Earth projected a net profit decline for the second consecutive year. Last year its business declined 70 percent as global demand shrank on the back of the financial crisis. It made 169 million yuan in profits in 2008.

"The reserve move will contribute very little to the company's earnings over 2010 as the demand recovery is still fragile," said Yu Lei, an analyst at Southeast Securities.

"However, when China develops sophisticated smelting techniques for rare earth minerals, instead of simply holding the raw material, we'll see the firm's stocks soar in the long run."

The company's shares have accumulatively dropped by 22 percent in three months, while the major index sank 6.17 percent.