Over the weekend, China began its plan to consolidate all production from its rare earths industry into the hands of a single, government-controlled operation, Inner Mongolia Baotou Steel Rare Earth Group. The move gives the producer a 51% stake in nine regional mining firms at no cost.

Despite producing 90% of the world's rare earths supply, China is slowly losing its grip on control and pricing due to a combination of illegal mining, growing external supplies, and a pursuit of alternatives.

Just a few years ago, China had a virtual monopoly on the stuff, but because it implemented willful export controls that sent the price rare earth elements soaring into the stratosphere, it encouraged not only companies like Molycorp (NYSE: MCP) and Lynas to develop their deposits in earnest, but also created something of a cottage industry in illegal mining that, according to China's Ministry of Industry and Information Technology, produced 40,000 tons of rare earths in 2012. Considering China's legal production over the first six months of 2013 was 41,000 tons, that's a pretty significant amount and perhaps partially explains why prices collapsed again in the aftermath of the export controls it implemented.

Yet the price spike also spurred the development of alternatives to the metals. Toyota (TM -1.08%), for example, began manufacturing cars with induction motors rather than with those using rare earth magnets, as did General Motors (GM -0.47%), which noted that although they're slightly less efficient, they're also a heckuva lot cheaper to make and buy. General Electric (GE -0.69%) began developing wind turbine generators that relied less upon permanent-magnet machines and W.R. Grace (GRA) offered fluid catalytic cracking catalysts, which oil refiners use to produce gasoline and diesel, that contained less lanthanum. 

Having let the genie out of the bottle, China has been hard-pressed to stuff it back in. The ham-handed attempt it's trying now was hatched several years ago in its earlier bid to dictate pricing when it ordered 31 private processors to shut down for three months to ostensibly address pollution problems. In doing so, it moved to create a single government-controlled monopoly responsible for rare earths in northern China, where two-thirds of China's output comes from. Four other companies were forced into mergers with Bao Gang Rare Earth, a group that was subsequently subsumed by Baotao Steel.

This latest effort is just a continuation of the move begun in 2011. Having cracked down on illegal miners, China has been powerless to halt the rest of the world from developing greater resources. Lynas and Molycorp supply the bulk of rare earth minerals outside of China, with the latter recently climbing back to full production at its Mountain Pass mine. SRE Minerals also says it will be developing what could be the world's largest deposit of rare-earth elements ever seen, one so large, in fact, that it would more than double the current known deposits of rare-earth-element oxides, which are estimated at 110 million tonnes. Yet because of its location in North Korea I'm left doubtful about the veracity of the reports.

Still, just as gripping a handful of sand too tightly allows more to fall through, China is seeing the grains of rare earths slip through its fingers and the effort to further monopolize production indicates the industry is about to break open.