Chinese rare earth demand is likely to soar by more than 50 percent in the next five years, putting pressure on authorities to relax tough production quotas that have spurred illegal mining and rampant smuggling.

Chen Zhanheng, vice-secretary general of the Association of China Rare Earth Industry, told a conference in Shanghai that domestic consumption was expected to rise nearly 9 percent this year to 97,700 tonnes, and would end the decade at nearly 150,000 tonnes, up from 90,000 tonnes in 2014.

With China expected to export at least 30,000 tonnes through official channels this year, the production cap of 105,000 tonnes is unlikely to satisfy total demand, meaning that there are still incentives for illegal producers.

"It is not very easy to close all illegal mining and it is very easy for illegal miners to steal from the mines. Costs are low, the mines are scattered and some local governments also protect illegal miners," said Chen.

China's controversial reform plans for the rare earth sector have included strict production and export quotas as well as a nationwide crackdown on illegal mining and processing. Plans to consolidate production in the hands of six state-owned conglomerates are also due to be completed by year-end.

China said the policies were designed to curb pollution, but overseas critics said its real aim was to dominate strategic downstream sectors like defence and renewable energy. Rare earths are used in a range of products from smartphones to military jet engines and hybrid vehicles.

While it has now been forced to ditch export quotas following a World Trade Organisation ruling, China has already encouraged overseas consumers to relocate to the country.

China not only produces around 90 percent of global rare earth supplies, but also consumes about 80 percent, according to industry estimates, and demand is set to continue rising.

Dudley Kingsnorth, executive director of the Industrial Minerals Company of Australia, said there will be a supply shortfall of 50,000 tonnes this year that is likely to be met by illegal production in China.

Illegal output and smuggling from China have helped drag global prices to their lowest level since 2011 and put foreign producers like Molycorp in jeopardy.

"This is the major issue facing the industry today, and unless this is controlled, it will bring catastrophe for a long time," said Kingsnorth.