The environment pays a heavy toll amid boom in demand for China's precious metals in the global market. Gao Changxin reports from Inner Mongolia.

In a rundown suburban bungalow, Liu Yongqing and two employees with mud-splattered faces pour hot acid, ore and other chemicals into a couple of meter-tall machines.

From outside, this inconspicuous workshop looks like a roadside restaurant, although the standard fare here is rare earth, a group of 17 elements used in many high-tech sectors to make things like wind turbines, hybrid cars, missiles and mobile phones.

Working conditions inside are miserable - hot and humid with a smell strong enough to make most people faint - but Liu is in a good mood as the price of his products has almost doubled this year.

"We are working overtime now," said the co-owner of Weiming Rare Earth in Baotou, the Inner Mongolia autonomous region's "capital of rare earth".

"We plan to buy more equipment and employ more workers to catch up with orders," he said.

The price of rare earth skyrocketed this year to 20,000 yuan ($3,000) a ton, up from 8,500 yuan in 2008, following the government's decision to significantly trim its export quotas.

Liu refused to say how much money his company makes every month or the price of his products, revealing only that business is good "because we sell cheaper than the big companies".

Pointing at a rusted refining machine, the co-owner said that in his business, technology and skill are not important. "What is important is that you have access to rare earth mines and stable buyers," he added.

Weiming Rare Earth's boom days could soon come to an end, though, as the company is a prime target for Baotou government's latest crackdown on the unqualified mines and refineries that have plagued its rare earth industry for years.

Police have detained eight people involved in six illegal rare earth mining operations since August, while authorities have invested more than 6 million yuan in setting up patrols and electric fences around its mines.

The moves are the part of fresh efforts to consolidate the rare earth industry, which would ensure the rich resources receive a reasonable price and rein in the worsening pollution.

Wasting away

Baotou, which has a population of 2 million, is at the very heart of rare earth production and boasts the world's largest rare earth mine in Bayan Obo, which accounts for about 70 percent of China's total supply.

After city officials decided to base its economic development on rare earth in the 1980s, numerous refining and mining plants, both legal and illegal, emerged. While exporting the metals has helped in terms of fiscal growth, the highly polluting mining and refinery process has taken a heavy toll.

Twenty years ago, Xinguang village was a major vegetable production base, but today almost all 7,000 mu (467 hectares) of farmland is barren, a victim of pollution triggered by a string of refining plants about 2 kilometers away.

"The village has changed into a ghost town," said Hao Aiping, a gaunt-looking resident who gave his age as 38. "Most people here have gone into town, leaving only the old and sick."

His neighbor Hao Zengshan used to earn 30,000 yuan a year producing taro and cabbages on his 0.4 hectare of land; now all he can grow is the corn stacked under his windowsill.

Both villagers complained that every spring a wind blows an odorous mist from the refining plants into the village, stinging the eyes and skin. When the mist finally disappears, everything is covered with a film of brown dust and smells of coke.

Not far away from Xinguang is a reservoir called Weikuangba, which was built to contain the residue left by the city's rare earth refineries. Over the years, pollutants in the lake, which can hold 230 million cubic meters, have contaminated the underground water that feeds nearby wells used by villagers to water their crops and livestock.

Zhang Guang, 28, who works at one of the plants, said when the rainy reason arrives in July and August, the reservoir will flow to the Yellow River 10 km away. The river, the second longest in China, is a vital water source for northern regions.

Yet, for all the grave pollution, Baotou's residents have failed to see a decent return on its rare earth due to the cut-throat price wars and smuggling that are rampant in this fragmented and under-regulated industry.

Before the sudden hikes this year, the price of rare earth in China had risen by only about 20 percent between 1979 and 2008, excluding inflation.

In fact, because of the presence of small workshops like Weiming, the rare earth business in Baotou is actually running at a loss, according to An Sihu, assistant director of the Baotou Rare Earth High-Tech Zone and a former official with the city's development and reform commission.

"The money Baotou has earned by selling rare earth over the years is barely enough to cover its environmental protection bill," he said, explaining that the city has accumulatively spent more than 15 billion yuan in the last two decades on treating pollution caused by an industry with a turnover of just 2 billion yuan.

An blamed the low prices on smuggling by illegal miners and smelters. He estimated that more than 40,000 tons of rare earth was illegal shipped out of Baotou in 2009 - roughly the same as the country's official exports.

"For years, China's rare earth was sold cheaper than pork," said Ma Pengqi, managing director of the Chinese Society of Rare Earth and former member of State Council's rare earth leading group.

Consolidation efforts

China has about one-third of the world's rare earth reserves but accounts for 97 percent of the world's supply. The country shipped 32,200 tons of rare earth ore and products at an average price of $14,800 a ton between January to September this year, according to the Ministry of Commerce on Tuesday.

Only 32 companies have rare earth export certificates, including 10 foreign-owned firms.

Other countries with ample reserves, such as the United States, Russia and Australia sealed their mines out of consideration for environment production and labor costs.

The only rare earth mine in the US, the Molycorp complex at Mountain Pass in California, was at one time the leading producer. That was before it leaked faintly radioactive fluid into a nearby desert in the late 1990s. It was closed for good in 2002.

China's rare earth deposits dropped to 27 million tons by the end last year, compared to 43 million in 1996. Although the central government has banned rare earth green ore and 41 rare earth products from being used in processing trade, industry experts estimate the nation's reserves may still only last another 15 to 20 years.

In response, the central government has accelerated the speed and intensity of its efforts to consolidate the fragmented industry and has been cutting down the export quota for rare earth since 2005 to gain more clout with pricing.

As a result, some of the major rare earth oxides, such as neodymium, rallied 80 percent to 24,600 yuan a ton by the end of September.

The price hikes have, however, stirred unease among major trade partners, including Japan and the US, which accused China of manipulating the global market and threatened to raise the issue with the World Trade Organization.

"For a sustainable development model, China has more than enough reason to curb excessive mining and smuggling of its rare earth resources through industry consolidation," said Ma at the Chinese Society of Rare Earth. "The increase in price is reasonable and unavoidable as China can't afford to provide the world with cheap rare earth any more."

This year, Beijing has repeatedly indicated that it wants large companies to spearhead consolidation of the country's rare-earth sector to prevent the resource from being undervalued.

At the forefront of the ongoing industry shake-up is Inner Mongolia Baotou Steel Rare Earth High-Tech Co Ltd, which alone supplies 46 percent of the global market. After building a monopoly of rare earth mines in North China, the company is working with Jiangxi Copper Corp, which controls majority of rare earth mines in the region, to launch a unified pricing mechanism.

"A consolidated industry gives Chinese companies more bargaining power in international deals as it wipes out smuggling and reduces suppliers," said Zhang Rihui, secretary of Baotou Steel.

"I think consolidation and price increases are long-term trends in China's rare earth industry," he added.

An at the Baotou Rare Earth High-Tech Zone said higher prices will attract more foreign companies to open rare earth processing plants in the city, which will in turn help transform it from a resource base into a high-technology center.

About 30 projects are already operating in the zone, including France's Rhodia SA, while the Korea Development Bank recently signed a cooperation agreement to encourage South Korean electronics companies and automakers to establish processing plants there alone or with Chinese partners.

A total of 9 billion yuan has so far been invested in the zone and An expects that figure to reach 30 billion yuan by 2015, as China and Baotou obtains a bigger say in the international rare earth market.

"Industry upgrades based on a bigger say in pricing is the way out for Baotou and China's rare earth industry," said An. "It's a responsible and sustainable way to make use of China's rich resource. We have to think for our offspring and leave them with something."