On October 16 China’s Ministry of Commerce said that the country could run out of medium and heavy rare earth reserves in 15 to 20 years at the current rate of production.

Could this be true? Or is it simply justification for the country’s decision to cut export quotas by 72% in the second half of 2010 and to slap a de facto ban on rare earth exports to Japan in protest over that country’s seizure of a Chinese fishing boat. A New York Times story today says that Chinese customs officials have also started to stop rare earth shipments destined for Europe and the United States.

I’d vote Both are true.

China is using its current near monopoly in rare earth production to throw its weight around. It’s no coincidence that the clamp down on shipments to the United States comes just days after the United States announced that it would begin an investigation into charges that China is dumping alternative energy products at below cost. Saying “We’re running out” is great cover.

But I think there’s likely to be some truth to this announcement too. Look carefully at the language the Ministry of Commerce is using. It’s not saying that China is running out of all rare earth elements. That would pretty clearly be untrue given the extent of China’s supply of the more common light earths. China’s emphasis on medium and heavy rare earths gives the ministry’s statement some credibility given what we know of the relative abundance of different types of rare earth minerals in the earth’s crust.

Yes, Virginia, there are different kinds of rare earths; they have very different uses; and they’re not interchangeable.

Here, for example, is the distribution of rare earths in the huge Mt. Weld rare earth deposit owned by Australia’s Lynas (LYSCF): Cerium Oxide (47% of rare earths at Mt. Weld), Lanthanum Oxide (26% of rare earths at Mt. Weld), Neodymium Oxide (19%), Praseodymium Oxide (5%), Samarium Oxide (2%), Europium Oxide (0.44%) Dysprosium Oxide (0.12%), and Terbium Oxide (0.07%). Europium Oxide (Data from Lynas.)

Not surprisingly the price of these rare earth elements tracks their relative abundance very closely (although I should note that not every rare earth deposit has the same distribution as Mt. Weld.) For example, on October 18 Cerium Oxide, relatively abundant at Mt. Weld and elsewhere, was selling for $40 a kilo. Dysprosium, relatively rare at Mt. Weld, went for $286 a kilo. Terbium, extremely rare at Mt. Weld, sold for $65.

In general the lighter rare earth elements down near Lanthanum (Atomic weight 57) and Cerium (Atomic weight 58) are more abundant in most deposits than the heavier rare earth elements such as Dysprosium (Atomic weight 66) and Erbium (Atomic weight 68.)

But price and relative distribution don’t matter a whole lot to the technology companies who need these elements.

For example, cathode-ray tubes (ask your parents what those are) and liquid crystal displays (LCDs) use the rare earth europium (Atomic weight 63) as the red phosphor. No replacement is presently known. Because of low abundance and high demand, europium prices have ranged between $324 and $605 a kilo between 2007 and now.

So yes, China could be running low on reserves of medium and heavy rare earths just as the ministry claims.

What doesn’t ring true—what makes me give the Chinese statement a big “maybe”–is that given what we know of Chinese rare earth deposits, they are relatively rich in medium and heavy rare earth elements.

Remember that “relatively.”

What that means, for example, is that China’s reserves contain about 10 times as much Gadolinium (Atomic weight 64) as Molycorp’s (MCP) Mountain Pass deposit, but in absolute terms we’re talking about a distribution of 2% versus 0.2%.

Whether the Chinese statement is true or just positioning, it does tell investors where the action will be in rare earths over the next 10 years: The goal will be not just finding any deposit of rare earths but finding a deposit particularly rich in medium and heavy rare earth elements.

Right now, the publicly traded company with the best distribution in medium and heavy rare earths that I know is Australia’s Lynas. But watch out for new finds in Canada and Namibia.