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The Pentagon. Picture: BLOOMBERG
The Pentagon. Picture: BLOOMBERG

Washington — The US department of defence 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 jump-start US production of critical minerals used in weapons manufacturing and the energy transition.

US output lags market leader China partly because attempts to build new American mines can be heavily influenced by commodity price swings. Jervois Global, for example, announced in 2023 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 will 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 duelling structures for determining price, according to two sources who were not authorised 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 Defence 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 US Geological Survey plan to hire one or more private contractors to develop an artificial intelligence (AI)-backed model that will construct a metal’s “structural price” based on where and when it is produced, as well as labour, supply and other costs, according to documents 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 US commercial competition,” according to the documents, which referenced both futures exchanges and commercial pricing providers.

In a statement on January 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 Pentagon’s efforts are not intended to set an official US government metals price or replace the London Metal Exchange and other futures markets, the sources said.

However, the documents cited the London Metal Exchange’s 2022 nickel pricing fiasco as one of the “endogenous market dynamics and anticompetitive practices can make futures markets a poor source of price information”.

Financial information firm S&P Global and defence contractor Lockheed Martin 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 US Geological Survey.

Bids were submitted in late November and a decision on the choice of one or more contractors could come as soon as January, 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 labour strikes, though the contractors have been told not to predict natural disasters or other specific market events, the documents showed.

Market analysts typically estimate that about 5% of global production of a metal could be disrupted each year by such unexpected shocks.

‘Revolutionise’ pricing

As part of their presentation to prospective contractors last November, officials at DARPA’s Arlington, Virginia, headquarters described the program’s goal: “Revolutionise 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 in 2024, for example, plans to buy 1,300 tonnes 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 US 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 US 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 London Metal Exchange, 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 London Metal Exchange price used as a reference.

Several lithium, rare earths, and graphite miners have begun charging premium prices for metals produced outside China, but those terms are contractually negotiated and not influenced by any government price schema.

The London Metal Exchange said it expects the use of AI to analyse 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 London Metal Exchange’s traded contracts are settled through the physical delivery of metals into our global warehouse network, ensuring prices fully reflect any shifts in physical market fundamentals,” a London Metal Exchange spokesperson said in response to questions.

Any concerns that a US 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.


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