Reuters reported that Sumitomo Corporation is in talks with Molycorp on a rare earth supply deal and may take a stake in the US company the latest move by a Japanese firm to secure supplies of the crucial minerals outside China.

Japanese trading houses have been scrambling to secure new sources of rare earth vital for making auto parts and high-tech products in recent weeks after shipments from dominant producer China stalled, possibly due to diplomatic tensions or because its export quotas had run dry.

China, which produces 97% of the world's rare earths, set 2010 export quotas 40% lower than 2009 levels raising alarm among buyer nations about supplies.

A spokesman for Sumitomo said that various options were being discussed for a supply deal, which could lead to it taking a stake in Molycorp but he gave no further details.

Sumitomo plans to invest JPY 10 billion in Molycorp's expansion and is eyeing an equity stake in the company which has a market value of about USD 2.3 billion.

Mr Tomomichi Akuta senior economist at Mitsubishi UFJ Research and Consulting said that it meets the needs of the Japanese to diversify their sources of resources. By taking a stake in Molycorp, Sumitomo believes it can benefit from a rise in the value of its shares.

Sumitomo plans to import nearly 2,000 tons of rare earths next year including both new output and inventoried stock with shipments expected to grow to 3,000 tonnes in 2012 about 10% of current Japanese demand. It laso plans to import cerium, lanthanum and neodymium among other rare earths from Molycorp.

Molycorp shares have risen sharply since China lowered its export quotas. Shipments to Japan dried up in September due to longer customs inspections, prompting reports that Beijing was choking off supplies to Japan due to a spat over disputed islands in the East China Sea, sending prices of the minerals soaring. China denied it had imposed any embargo.

(Sourced from Reuters)