Pentagon's AI-Driven Critical Mineral Price Estimates
AI and Minerals: Pentagon's Vision for Pricing Accuracy
The US Department of Defense is embarking on a groundbreaking endeavor to develop an AI-driven program that will estimate prices and predict supplies of vital minerals such as nickel and cobalt. While this move aims to enhance market transparency, it introduces a new, uncertain factor into the global metals markets.
The Need for US Critical Mineral Production
The program's announcement, though it received little attention after being posted on a Pentagon website in October, is part of Washington's broader efforts to kickstart domestic production of critical minerals. These minerals are integral to the production of weapons and play a pivotal role in the ongoing energy transition.
The United States has lagged behind China, the global market leader, in terms of mineral output. One significant reason for this discrepancy is that attempts to establish new American mines can be significantly influenced by the volatile swings in commodity prices. For instance, Jervois Global suspended the construction of an Idaho cobalt project last year due in part to low market prices. In contrast, Chinese cobalt miners, financially backed by Beijing, expressed their intention to increase production, aiming for a greater market share.
The Challenge of Determining Metal Prices
However, the Pentagon's move to estimate specific metal costs could potentially create confusion in the metals markets. It might result in competing structures for determining prices, raising concerns among industry insiders and stakeholders. Traditionally, metal prices have been determined by futures markets and pricing agencies, reflecting the equilibrium between what buyers are willing to pay and what sellers are willing to accept, considering supply, demand, and other influencing factors.
DARPA Takes the Lead
The Pentagon has entrusted the Defense Advanced Research Projects Agency (DARPA) with this mission. DARPA, established in response to the Soviet Union's 1957 launch of Sputnik 1, is renowned for its pioneering work in developing technologies like the Internet and the mRNA vaccine for Covid-19. Collaborating with the US Geological Survey, DARPA aims to engage one or more private contractors in developing an artificial intelligence-backed model. This model will construct a metal's "structural price" by factoring in its place and time of production, labor, supply chain logistics, and other associated costs. This initiative, known as Open Price Exploration for National Security (OPEN), seeks to enhance price transparency for government agencies and commercial entities while mitigating the risks associated with futures markets and pricing agencies, which the Pentagon believes pose a threat to national security.
Fostering Transparency
In a statement to Reuters, DARPA emphasized that its efforts are geared towards removing market opacity that can lead to supply chain disruptions. The data generated by this program will be used both by government agencies and commercial entities. Essentially, the OPEN program is designed to promote transparency in the market.
However, it's important to note that the Pentagon's efforts do not intend to set an official US government metals price or replace established entities like the London Metal Exchange (LME) and other futures markets.
Bidding and Implementation
Several companies, including financial information firm S&P Global and defense contractor Lockheed Martin, have submitted bids for this ambitious project. The AI model is expected to be implemented in three phases over a span of two years, according to documents detailing the program. OPEN also seeks to predict how supply could be affected by unforeseen market shocks such as labor strikes. However, it's essential to clarify that the contractors have been advised not to predict natural disasters or other specific market events. Typically, market analysts estimate that approximately 5% of global metal production could be disrupted annually due to unexpected shocks.
Revolutionizing Pricing Strategies
The primary goal of this initiative, as outlined in DARPA's presentation to prospective contractors, is to revolutionize the construction and dissemination of price, supply, and demand predictions and forecasts in critical materials markets. By anticipating price fluctuations and calculating suitable values for metals, the Pentagon aims to refine its strategy for timing purchases for national stockpiles.
For example, the Pentagon plans to acquire 1,300 metric tons of lanthanum, a key ingredient in steel alloys, in the coming year. However, the absence of lanthanum trading on futures exchanges and China's stronghold on the sector make it challenging to gauge whether the offered prices accurately reflect market fundamentals.
The Challenge of Implementation
The potential impact of a US government metals price or supply estimate on mining companies, their customers, and metals exchanges remains uncertain. These entities have developed the existing market structure over centuries. Most metal is sold under long-term contracts, and prices in physical markets often include additional costs for transport, insurance, and import taxes above the LME reference price.
While some lithium, rare earths, and graphite miners have begun charging premium prices for metals produced outside of China, these terms are typically negotiated contracts and are not influenced by government pricing schemes.
The Perspective of Metals Exchanges
The London Metal Exchange (LME), a prominent player in the industry, anticipates the growing use of AI to analyze metals supply and demand. However, it emphasizes that its prices are based on real-world transactions executed by market participants worldwide. The LME's traded contracts are settled through physical metal delivery into its global warehouse network, ensuring that their prices accurately reflect shifts in physical market fundamentals.
Conclusion
The Pentagon's OPEN program represents a significant step towards enhancing transparency in the critical minerals market. While its implementation raises questions and uncertainties, it underscores the importance of addressing market opacity and securing the supply chain for critical materials. By harnessing AI and innovative pricing strategies, the United States aims to strengthen its position in the global metals market.