WASHINGTON, Dec 17 (Reuters) - The 2011 scare about Chinese control of rare earth elements critical for defense manufacturing has faded, with market forces boosting production outside China and prompting a shift to alternative substances, according to a new Pentagon report.
China, Japan and the United States are the biggest consumers of rare earth elements, which are used in everything from wind turbines, hybrid vehicles and earphones and computer hard drives to television sets and energy-efficient lamps.
A jump in prices for rare earth elements in 2011, 95 percent of which came from China, led to Pentagon concerns that the supply of rare earths for defense manufacturing might dry up.
But an annual report sent to Congress in recent weeks said, "Global market forces are leading to positive change in rare earth supply chains, and a sufficient supply of most of these materials likely will be available to the defense industrial base."
The report, dated October 2013 but not yet released publicly, said there was a "significant reversal" in the situation with rare earth elements between 2011 and 2012, with one expert projecting a 20 percent drop in global demand.
The decline in demand, in part due to increasing use of alternatives, has resulted in a 60 percent slide in the prices of most rare earth oxides and metals from their peaks in the summer of 2011, according to the annual industrial capabilities report.
"The private sector's reaction to market forces has been to increase exploration for rare earth materials and development of downstream processing capabilities," the report said, adding that one expert said over 400 rare earth projects were under review globally.
The report said the Pentagon remained concerned about the availability of some heavy rare earth elements and the ability to produce related high-purity oxides and alloys.
"In general, the domestic supply chain for all of these exists, but it is thin," the report said.
It said the United States still has no domestic production of sintered neodymium-iron-boron magnets, which are used in computer hard disks, electrical motors and magnetic resonance imaging.
The report said a U.S. plant was under construction and should begin production by the end of the year, but the main source of the magnets would remain Japan and China.
Since 2010, Beijing has been trying to exert more control over the rare earth elements sector, where unauthorized production, environmental pollution and smuggling have been rife. It launched another campaign in early August aimed at cracking down on illegal activities.
Its efforts to cut output and impose strict export quotas have been criticized by foreign governments concerned about China's chokehold over supplies.
The United States, Japan and the European Union have complained to the World Trade Organization about Beijing's efforts to control the sector, saying China is trying to use its stranglehold over supplies to drive up prices and gain a competitive advantage.
But China has repeatedly said rampant overmining has caused untold ecological damage and that it no longer wants to pay the environmental costs of supplying the vast bulk of the world's rare earths.
(Reporting by David Alexander; Editing by Leslie Adler)