The price of rare earths may fluctuate at high levels in the next months, according to a research note of China Merchant Securities.

Despite the government's efforts to crack down on financial speculation, supervise environmental protection and prohibit illegal mining, there is still strong demand in the market. With the supply of rare earths - especially light rare earths - unable to meet demand in the short term, prices still have room to rise, according to the report.

Until Sept 7, the average price of praseodymium-neodymium oxide, the iconic rare earth product, rose to 520,000 yuan ($ 80,280.36) per metric ton, a 6.1 percent increase over the price only a week ago, and double the price at this time last year, according to Baiinfo.com, a raw material information provider.

The price of neodymium oxide grew to 480,000 yuan per ton, up 2.1 percent than week-on-week, the provider data shows.

"The domestic supply of rare earths will be insufficient in the second half of the year, because of related policies such as total quantity control and combating illegal exploitation," said Ma Rongzhang, general secretary of the Association of China Rare Earth Industry at the Ninth China Baotou Rare Earth Industry Forum on August 28.

"The total amount of rare earth quota this year is only 105,000 tons, but the praseodymium nedymium sector needs at least 180,000 tons of rare earth production."

China's supply of rare earths accounts for around 80 percent of the global supply, so the country's output affects the international prices of the raw material. Both China and the world have produced an inadequate supply of rare earth this year.

In July, the national rare earth office announced its intent to normalize and institutionalize a crackdown on illegal exploitation and production.

Illegal production accounts for about 30 percent of the country's total rare earths output, and the regulators' control and supervision of illegal actions started several years ago.

"Illegal miners are trying to resume production with deregulation, regardless of the related policies," said Xu Ruoxu, an analyst at Shenwan Hongyuan Securities.

Rare earth mining and smelting are heavily polluting industries, so the China Merchants Securities believe that the strict environmental supervisions will also have a big affect on the rare earth industry.

The Chinese government is implementing more and more stringent environmental protection policies, so as to improve the current air pollution situation. Especially in smog-plagued Beijing and nearby cities, the Ministry of Environmental Protection has issued stricter emission standards and published regulations to reduce production of heavily polluting industries.

The 13th Five-year Plan ranks rare earths as one of sectors of capacity reduction along with other metals including steel and aluminum, requesting one third elimination of smelting and separation capacity to 200,000 tons annually by 2020.

Therefore, the market supply volume has been reduced and some upstream factories are closed, but the demand increased continuously.

"Rare earths are widely used in the information industry, new energy and intelligent terminals," which are developing rapidly, said Gan Yong, director of Association of China Rare Earth Industry, at the Ninth China Baotou Rare Earth Industry Forum, adding that the consumption demand of the raw material will surge in the future, with China's industry restructuring and upgrading.

Sales volume of China's new energy autos increased 58 percent year-on-year, in the first half of this year. Rare earth provides permanent magnet materials that are indispensable for electric cars.

However, Shenwan Hongyuan'Xu said this round of commodities speculation has already passed, which may result in short term price declines before demand pushes prices back up.

"In this case, the rare earth prices may have a slightly downward in the following days, and then rise back again, fluctuating at high levels," he added.