The war in Ukraine - financial boom for European defense companies

Longer-term concerns about how Russia is acting not only on the front in Ukraine, but also in the Middle East and the Far East have led European NATO member states to embark on an extensive program to increase their own weapons stockpiles, fact that turned into a real financial boom for companies in the defense industry, according to Euronews and the BBC.

Thus, the British company BAE Systems has accounted for a significant increase in sales over the past three years, recording in the first half of 2024 revenues of 13.4 billion pounds, 13% higher than in the first half of last year, and an order backlog of 74.1 billion pounds, the highest ever recorded. The giants Lockheed Martin and General Dynamics from the USA, Rheinmetall from Germany, Saab from Sweden, Nexter and Thales from France also recorded substantial increases in income, and this is also observed in the FTSE All-Share Defense and Aerospace index, which increased by more than 50% in the last year, according to the cited sources.

For example, Rheinmetall shares quadrupled between February 2022 and February 2024, and representatives of this company claim that total sales will double by 2026 compared to 2023.

• Study: NATO member states have the necessary financial resources for the manufacture of armaments

Although manufacturing more weapons and increasing ammunition stockpiles are expensive, NATO member states have the financial resources to do so according to a recent report by the International Institute for Strategic Studies which states that "overall, total NATO spending increased by 11% in 2024 , compared to 3 percent in 2023," and that the increase was larger among NATO's European members, "which increased their combined military spending by 19 percent in real terms in 2024."

According to the cited sources, Stuart Dee, defense and security research leader at the Rand Europe think tank, states that the increase in military spending by NATO member states is unlikely to be a temporary phenomenon, given that after two years of conflict, what is happening in Ukraine does not seem to end in the short term, and "the security situation, which will emerge after the conflict in Ukraine, is increasingly unclear, with potential security challenges around the globe".

Against this backdrop, Europe's largest defense and aerospace companies will continue to record record levels of orders and cash flows as new arms orders from European governments increase. Thus, the French company Thales recently reported a 26% increase in orders registered in the first half of 2024, orders amounting to 10.8 billion euros, which took the company's order book to a new record: 47 billion euros. Moreover, the gross profit recorded by Thales increased by 10.4%, reaching over one billion euros in the first half, while sales increased by 8.9%, reaching 9.5 billion euros.

• Important orders in the arms market

In early May 2024, German arms manufacturer Rheinmetall announced that a NATO customer had placed a large order for several tens of thousands of artillery shells. The order, to be delivered in several stages between 2024 and 2028, also includes several hundred thousand weapons loading modules. Moreover, at the end of June, Rheimetall announced that it had registered orders worth 300 million euros.

Swedish defense company Saab also recently announced that it had received a naval combatant order for 10 boats from the government in Stockholm. The order is worth 400 million Swedish kroner (35.04 million euros), with the contract to start this year and deliveries to be made over the next few years.

Micael Johansson, president and CEO of Saab, said in the company's Q2 2024 earnings press release: "This quarter, Saab recorded a strong order intake of SEK 40 billion (3.51 billion euro), the second level of orders in the entire history of the company. Our portfolio is uniquely positioned and we are strengthening our market presence. We are also continuing to increase investments for the realization of new production capacities and focus on ensuring skills and increasing the workforce".

• The EIB announced that it intends to intensify its investments in European defense

The increase in European arms production comes as the European Investment Bank announced, as early as June 2024, according to Reuters, that it plans to step up its investment in European defense, such as drones, satellites and cyber security, with the aim of to inject another 6 billion euros ($6.4 billion) into this field.

Nadia Calvino, president of the EIB, told the quoted source at the time: "It is clear that we need to strengthen the European security industry and defense. We allocated 8 billion euros to invest in this field, of which only 2 billion have already been invested. We have established a dedicated office to accelerate the implementation of the 6 billion euros allocated to the European defense industry. We are actively engaging with European industry, so it is expected that more projects will be developed in the second part of the year."

In fact, the EIB has recently changed the rules underpinning its activity to allow it to lend to or indirectly invest in defense industry companies.

However, according to expert Tim Lawrenson from the International Institute for Strategic Studies, the 8 billion euros allocated by the EIB is a paltry amount compared to 476 billion euros - the value of European defense spending, or the 968 billion dollars spent for the same purpose by the USA.