Over the past decade, demand has tripled to 125,000 metric tons a year and could exceed 200,000 tons by 2014, the BBC reported.
Prices for rare earth metals soared in 2010 after China slapped a temporary ban on exports in the middle of a trade dispute with the U.S. and Japan. China later dropped the ban in favor of cutting exports to 93,800 tons per year.
But China isn't just choking off supplies. It's also stoking its domestic mining industry with favorable pricing as a ploy to get Western manufacturers to move factories inside China, according to a study by Bloomberg Government.
The average Chinese export price of neodymium oxide – a key component in computers – was $321 per kilogram in the summer of 2011, 66% higher than the domestic price and a 563% increase compared with the same period in 2010, the study said.
The inflated prices have put Western manufacturers on the hunt for alternatives.
"You are seeing a lot of investment by high-tech firms on research to become less reliant on these materials," Matt Robinson of Moody's Analytics told the BBC.
Beijing has denied the allegations in the WTO case, saying that it enforces quotas to ensure there's no environmental damage from excessive mining.
The WTO's rules require China to hold talks with the U.S., the EU and Japan within two months. But the WTO cannot impose a solution, setting the stage for a protracted negotiation and perhaps even a trade war.
Meanwhile, mining companies have been watching the developments with an eye towards cashing in.
Australia's Arafura Resources Ltd. (ASX: ARU) is raising $1.05 billion for a rare earth project.
And Colorado-based Molycorp Inc. (NYSE: MCP) has restarted the largest U.S. rare earth mine in California, after it was shuttered in 2002 due to environmental issues.
Commodities expert Peter Krauth says the rare metals dispute is just another example of what's been going on for decades.
"Over the last 160 years, humanity has dug up, refined, processed, and consumed all the easy-to-get minerals. Economically viable supplies of much of the "stuff' we take for granted are being depleted at an exponential rate."
Krauth feels a succession of historic profit opportunities await those who know how to leverage this predicament.
In fact, soon virtually every substance vital to modern life will become enormously expensive and profitable for investors who know how to play it.
As commodities and mining expert Peter Krauth explains in his latest report, "today's scarcity and soaring costs could spur the biggest investment gains in history."
Don Miller is a contributing writer with Money Morning.