As the trade dispute between the US and China escalates, it is increasingly likely that China will use its near-monopoly in the global supply of strategic rare earths as leverage over the coming months, says Fitch Solutions Macro Research, a unit of Fitch Group.
China currently holds a near-monopoly on the global supply of rare earth metals, with over 72% of global market share.
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.
Based on historical precedence, Fitch believes the Chinese government will impose some form of restriction on rare earth exports to the US, unless there is sudden de-escalation on trade tensions, which Fitch Solutions believes is unlikely.
Over the longer term, it is expected that the US is unlikely to be significantly harmed by any potential Chinese restrictions on exports owing to the abundance of rare earth deposits globally, which will allow the US to build alternative supply chains.
However, in a shorter two- to three-year time horizon, Fitch Solutions does foresee 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.
Consequently, it expects to witness a revival of the rare earths industry within the US and globally, excluding China, over the coming years as the US and its allies look to lower the risks associated with their dependence on Chinese supply.
Supply uncertainties are expected to 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.
RARE EARTH SOURCES
Meanwhile, Brazil and Vietnam are highlighted as two of the markets from which the US may potentially import rare earth metals. Brazil has the second-largest deposits of rare earths in the world – representing 22% of global resources.
Vietnam also has significant reserves and has one active rare earth mine.
Despite only holding 3.4% of global reserves, Australia contains an active carbonite rare earth mine and has a pipeline of five exploration projects.
Despite not holding the highest level of reserves, a number of African countries, including Kenya, Malawi, Namibia, Madagascar and Tanzania, have carbonite and peralkaline rare earth exploration projects that could come to fruition in the coming years.
A number of other countries and regions, including Russia, India and Kazakhstan, also host considerable deposits and projects.
Moreover, 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.