Dozens of rare earth producers across China will be combined into two big groups this year as the boldest move of the industry's reshuffle, according to government and company sources.

Under a government plan, key rare earth firms in Jiangsu, Guangdong, Jiangxi and Hunan Provinces and Shanghai will be reorganized into a big shareholding group, named China Southern Rare Earth (Group) Corp, sources said.

Major rare earth companies in the Inner Mongolia Autonomous Region and Gansu, Shandong and Sichuan Provinces will be merged into the China Northern Rare Earth (Group) Corp, sources said.

State legal entities will have a controlling stake in both of the two big groups, sources said.

Aluminium Corporation of China (Chinalco) -- the nation's biggest aluminium maker -- and China National Metals and Minerals Import and Export Corp (Minmetal) will be the two largest shareholders in the southern rare earth group, a Chinalco executive told China Daily.

Both Chinalco and Minmetal, which are controlled by the central government, will have a 30 per cent stake in the southern rare earth group, the executive said.

"We are in the final preparations for the establishment of China Southern Rare Earth (Group) Corp, and it is expected to be officially launched during the first quarter of this year," he said.

"More than 20 local rare earth producers, as the first batch, will be banded into the southern group.''

China Northern Rare Earth (Group) Corp will be centred on the Baotou Steel and Rare Earth Co, the nation's biggest producer of the metal which is based in Baotou, Inner Mongolia, according to an official from the State-owned Assets Regulatory and Management Commission under the State Council.

There is not a specific timetable for the launch of the northern rare earth group.

The Baotou company and local parties will have 90 per cent of total rare earth reserves of the northern group, the official said.

The Baotou company runs a domestically-listed joint venture with a Hong Kong partner.

However, no financial details for the two new rare earth groups have been released.

"The establishment of the two big groups aims to prevent redundant and low-level rare earth mining capacity in China and put the market in order," the official said in an interview.

"A fundamental shake-up is badly needed for the fragmented rare earth industry to improve its overall competitiveness."

There are more than 130 rare earth companies within the government statistics in China.

Rare earth produces metals which are important for many sectors, such as machine building, metallurgical and high technology.

China is the world's No 1 rare earth producer and exporter.

In 2002, the nation produced 75,000 tons of rare earth, accounting for four-fifths of the world's total output. And half of its production were for exports.

The government will take a slew of measures to aid the two big rare earth groups, according to sources.

All rare earth ores produced by other miners in China will be supplied to the two groups, even if they are not merged in a short time.

The government will grant all rare earth export quotas to the two groups.

Domestic rare earth companies competed in fierce price wars to increase exports over the past years.

The government will also speed up efforts to ban rare earth plants without government-issued mining licences.

The government will not give new licences to any other companies within three years after the launch of the two big groups.

However, the road towards the industry reshuffle appears to be rocky, said Hong Feng, a senior rare earth analyst based in Beijing.

"The reshuffle should be carried out by rare earth producers voluntarily and the government should not have a finger in the pie," said Hong, a former government official in the industry.

"The diversified ownership of domestic rare earth producers, including State-run, privately owned and listed companies, and Sino-foreign joint ventures, makes the government-formed reshuffle hard to achieve in real terms," he told China Daily.

Some rare earth producers, such as Gansu Rare Earth Corp and China Rare Earth Holdings, which is based in Jiangsu Province and listed in Hong Kong, have grown into world-class competitors and are unwilling to join the two planned conglomerates, according to Hong.

"The industry is not so fragmented right now that the central government should push such a hasty shake-up," he said.

Chinalco, which has a subsidiary listed in Hong Kong and New York, said the launch of the southern rare earth group will be a critical step to develop its non-aluminium businesses.

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