The Fitch Group unit says it's increasingly likely that China might use its near-monopoly (72% of the global rare earths market) as leverage over the coming months.
The US is highly dependent on Chinese imports to satisfy its demand for rare earth metals, with China having supplied up to 80% of the rare earths imported by the US between 2014 and 2017.
According to Fitch, historical precedence suggests the Chinese government will impose some form of restriction on rare earth exports to the US, unless there is sudden de-escalation of trade tensions, which it believes is unlikely.
There is a high risk of supply disruptions owing to the distinct lack of rare earth processing capacity outside of China, while rare earth prices are set to remain elevated in the next two-to-three years.
However, in the longer term, Fitch believes the US is unlikely to be significantly harmed by any potential Chinese restrictions on exports owing to an abundance of rare earth deposits globally, which will allow the US to build alternative supply chains.
Consequently, it expects to see a revival of the rare earths industry within the US and globally over the coming years as the US and its allies look to cut dependence on Chinese supply.
It is this supply uncertainty that will put upside pressure on prices. The most immediate consequences on any restriction on Chinese rare earth exports to the US will be higher rare earth prices, which will hurt industries and consumers in the US.
Fitch pointed out Brazil and Vietnam were two of the markets from which the US could potentially import rare earth metals in case of a Chinese supply crunch. Brazil hosts the second-largest rare earths deposit in the world, containing 22% of global resources.
Vietnam also has significant reserves and currently has one active rare earth mine.
Despite only holding 3.4% of global reserves, Australia had an active carbonite rare earth mine and had a pipeline of five exploration projects, Fitch said.
Several African countries, including Kenya, Malawi, Namibia, Madagascar and Tanzania, have carbonite and peralkaline rare earth projects that could come to fruition in the coming years.
A few other countries and regions, including Russia, India and Kazakhstan, also host considerable deposits and projects.
Likewise, the US also contains considerable deposits of rare earths, holding 1.4% of global reserves, which may potentially allow it to establish domestic supply chains.