Strategic rare earth minerals will only be mined by a few select State-owned enterprises (SOEs) as part of the government's bid to crack down on illegal exploitation and consolidate reserves, according to sources close to the matter.

The Ministry of Industry and Information Technology and the National Development and Reform Commission have sent the draft plan to the State Council for approval.

"Once approved, the Ministry of Land and Resources (MLR) will issue licenses and start allocating the resources to those companies," said a source, who refused to disclose names of the short-listed enterprises. "Private enterprises can only collaborate with the selected firms through shareholding." The restructuring will make the industry focus on more valuable ion-absorbed type rare earths in the southern parts of the country.

China produces 97 percent of global supply of rare earths that are composed of 17 elements and are indispensable in many high-tech arenas ranging from wind turbines and hybrid cars to missiles and mobile phones.

But the minerals' price rose by only a little more than 20 percent from 1979 to hit an average of $8,500 per ton in 2009 despite soaring demand that has tripled to 120,000 tons in the past decade.

"The mineral is very much undervalued because of over-exploitation and improper management. So the latest proposal is critical and will benefit the whole industry," said Zhang Anwen, deputy secretary-general of the Chinese Society of Rare Earths.

The MLR announced in March that production of rare earths will be capped at 89,200 tons in 2010, up 8.36 percent from 2009. The government has also stopped issuing new licenses for domestic exploitation of rare earths until June 30, 2011.

Analysts and industrial experts said that Inner Mongolia-based Baotou Steel Rare-Earth High-Tech Co is likely to monopolize reserves of light rare earth elements in the autonomous region. The company controls most of the rare earth resources in the northern parts of the country.

China Minmetals Co and Aluminum Corporation of China are likely to control the major reserves of middle and heavy rare earths in Jiangxi province, while Jiangxi Copper Corporation and China Nonferrous Metal Industry's Foreign Engineering & Construction Co are likely to control the reserves in Sichuan and Guangdong provinces respectively.

Figures from the US Geological Survey show that China's basic reserves of rare earths reached 89 million tons of REO (rare earth oxides) in 2008, accounting for 59.3 percent of the world's total.

Some developed countries, such as the United States, which holds 15 percent of the world's reserves, almost entirely depend on imports from China because they have long stopped exploitation. China's recent move to consolidate the industry to prevent excessive tapping of the strategic resource, which would lead to reduced exports, has sparked discontent in the West.

In a report prepared by the World Trade Organization (WTO) for China's two-yearly trade policy review that started on Monday, the global trade arbitrator questioned the legality of curbs on exports of some raw materials.

But Chinese experts said China's move does not violate WTO rules and is aimed at legally protecting its resources.

"WTO rules stipulate that its members can take measures to protect their raw materials from being exhausted, and China's measures are in line with them," said He Weiwen, managing director of the China Society for World Trade Organization Studies.

China's move is "proper" according to WTO rules, said Tong Zhiguang, former vice-minister of commerce and former chief WTO negotiator.