Pentagon plans AI-based program to estimate prices for critical minerals

Jervois Global

29/01/2024 10:00

By Ernest Scheyder
       Jan 29 (Reuters) - The U.S. Department of Defense plans
to develop a program to estimate prices and predict supplies of
nickel, cobalt and other critical minerals, a move aimed at
boosting market transparency but one that throws a new,
uncertain variable into global metals markets.
    The program, which received little attention after it was
announced on a Pentagon website in October, is part of
Washington's broader efforts to jumpstart U.S. production of
critical minerals used in weapons manufacturing and the energy
transition.
     U.S. output lags market leader China partly because
attempts to build new American mines can be heavily influenced
by commodity price swings. Jervois Global  JRV.AX , for example,
announced last year it would suspend construction of an Idaho
cobalt project due in part to low market prices, even while
Chinese cobalt miners - financially backed by Beijing - said
they would boost production of the battery metal in a bid for
greater market share.
    An official rubric by which Washington estimates how much a
specific metal should cost, though, could confuse metals markets
by creating dueling structures for determining price, according
to two sources who were not authorized to speak publicly.
    Traditionally, metals prices are set by futures markets and
pricing agencies and reflect what buyers are willing to pay and
sellers are willing to accept using supply, demand and other
factors.  
    The Pentagon's work is being run by its Defense Advanced
Research Projects Agency (DARPA) division, which was formed in
response to the Soviet Union's 1957 launch of the Sputnik 1
satellite and helped develop the Internet and the mRNA vaccine
for COVID-19.
    DARPA and the U.S. Geological Survey plan to hire one or
more private contractors to develop an artificial
intelligence-backed model that would construct a metal's
"structural price" based on where and when it is produced, as
well as labor, supply and other costs, according to documents
seen by Reuters that describe the program, including a slide
deck that DARPA presented last November to prospective
contractors.
    The DARPA program, known as Open Price Exploration for
National Security (OPEN), is intended to boost price
transparency for government agencies and commercial entities and
offset the risk Washington believes futures markets and pricing
agencies pose to national security, according to the documents. 
    The Pentagon believes commodity purchase transactions are
negotiated using "opaque and flawed pricing data" that pose
"substantial barriers to U.S. commercial competition," according
to the documents, which referenced both futures exchanges and
commercial pricing providers.
    In a statement to Reuters on Jan. 16, DARPA said its efforts
aim to "remove market opacity that can engender supply chain
disruptions" and that the data will be used by government
agencies and commercial entities. "The OPEN program is
fundamentally about transparency," a DARPA spokesperson said.
    The U.S. Geological Survey deferred comment to DARPA.
    The Pentagon's efforts are not intended to set an official
U.S. government metals price or replace the London Metal
Exchange (LME) and other futures markets, the sources said.
    However, the documents cited the LME's 2022 nickel pricing
fiasco as one of the "endogenous market dynamics and
anticompetitive practices  that  can make futures markets a poor
source of price information."     
    Financial information firm S&P Global  SPGI.N  and defense
contractor Lockheed Martin  LMT.N  are among the companies that
have applied, according the sources. S&P Global, which publishes
benchmark prices for metals and other commodities, did not
respond to requests for comment. Lockheed Martin deferred
comment to DARPA and the U.S. Geological Survey.
    Bids were submitted in late November and a decision on the
choice of one or more contractors could come as soon as this
month, according to one of the sources.
    The AI model will be rolled out in three phases over the
course of two years, according to the documents.
    OPEN also aims to predict how supply could be affected by
unexpected market shocks such as labor strikes, although the
contractors have been told not to predict natural disasters or
other specific market events, the documents showed.
    Market analysts typically estimate that roughly 5% of global
production of a metal could be disrupted each year by such
unexpected shocks.
    
    'REVOLUTIONIZE' PRICING 
    As part of their presentation to prospective contractors
last November, officials at DARPA's Arlington, Virginia,
headquarters described the program's goal: "Revolutionize the
construction and dissemination of price, supply, and demand
predictions and forecasts in critical materials markets."    
    Anticipating price swings and calculating what might be an
appropriate value for a metal could give Pentagon officials a
formula to time purchases for national stockpiles, one of the
sources said.
    The Pentagon this year, for example, plans to buy 1,300
metric tons of lanthanum, used in steel alloys, government
records show. But lanthanum, one of the 17 rare earths, is not
traded on futures exchanges and China's control of the sector
makes it difficult to determine whether prices offered reflect
market fundamentals.
    A 2021 spike in the price of coal caused a 200% jump in
prices for magnesium that the Pentagon document said "further
increased the opacity of the U.S. critical material supply
chain." Magnesium can be produced alongside coal and is used to
make missiles and other weaponry.
    It is not clear how a U.S. government metals price or supply
estimate would be received by mining companies, their customers,
and metals exchanges, all of whom have developed the existing
market structure over hundreds of years.
    Most metal is sold on long term contracts. Consumers,
producers and traders often sell their unwanted metal on
exchanges such as the LME, a market of last resort where prices
are lower than in the physical market. 
    In the physical market, buyers typically pay a premium that
takes into account costs such as those for transport, insurance
and import taxes, above the LME price used as a reference.
    Several lithium, rare earths, and graphite miners have begun
charging premium prices for metals produced outside of China,
but those terms are contractually negotiated and not influenced
by any government price schema.
    The LME said it expects the use of AI to analyze metals
supply and demand to grow, but noted that its own prices are
based "on real world transactions executed by market users
across the globe." 
    "The LME's traded contracts are settled through the physical
delivery of metals into our global warehouse network, ensuring
LME prices fully reflect any shifts in physical market
fundamentals," a LME spokesperson said in response to questions
from Reuters.
    Any concerns that a U.S. government "structural price" for a
metal could conflict with futures exchanges and pricing
providers is "beyond the scope" of OPEN's aims, a DARPA
spokesperson said.
    The White House referred requests for comment to DARPA. The
U.S. Treasury Department did not respond to requests for
comment.

 (Reporting by Ernest Scheyder; additional reporting by Pratima
Desai in London and Trevor Hunnicutt in Washington; Editing by
Veronica Brown and Claudia Parsons)
 ((ernest.scheyder@thomsonreuters.com; Twitter: @ErnestScheyder;
+1-713-210-8512; Reuters Messaging:
ernest.scheyder.thomsonreuters.com@reuters.net))