Major weapon manufacturers reap dividends from war in Ukraine

The Spanish government has an offer on the table from the German company Rheinmetall to buy Expal, Spain’s main ammunition manufacturer. Expal produces aerial bombs, naval artillery, mortar ammunition and 155mm artillery howitzer like the ones Spain supplied to Ukraine last year and worth nearly $120 million. The company is part of the Maxam Group, a giant maker of civilian explosives that the Ukrainian president, Volodymir Zelenskiy, signaled last April due to its business dealings in Russia. Its owner, the US investment fund Rhône Capital, wants to cash in on its investment, and the conflict that broke out in February 2022 in Europe has provided a golden opportunity. The German offer is for around €1.2 billion, more than double what Expal was worth two years ago, according to sources familiar with the company.

One year after the invasion of Ukraine, who will win the war is anyone’s guess, but who is benefiting from it is pretty clear. The 10 largest arms companies in the US and Europe - the biggest in the world, excluding Chinese firms - increased their sales by 7.5% in the last quarter of 2022, a period when the impact of the conflict was already beginning to be felt in earnings reports.

If Rheinmetall’s bid is successful, it will bring to Spain one of Europe’s largest manufacturers of weapons and land combat vehicles, but it will also signal the disappearance of Spain’s last ammunition company after the factories in Granada and Palencia were acquired by the Slovak group MSM and the Norwegian firm Nammo, respectively. It will be very difficult for the Spanish government to close the door on the German offer, but it will also have to try to ensure that when the current boom ends, the new owner does not shut down its plants in Spain.

At the moment, arms companies have a rosy future ahead. Ukraine consumes more than 10,000 artillery shells a day — 400,000 a month, according to its Defense Minister Oleksii Reznikov — and Western factories cannot keep up. When NATO armies go to their companies in search of ammunition with which to replenish arsenals depleted by deliveries to Kiyv, they are told to get in line, because everything that will leave the production lines in the midterm has already been sold. The 900,000 155mm rounds delivered by Washington to Kyiv are equivalent to more than five years’ worth of production.

Like face masks in the pandemic

The ammunition market has become a free-for-all jungle similar to that of face masks in the first months of the Covid pandemic. For this reason, the European Commission has decided to repeat the scheme it applied with coronavirus vaccines: the joint purchase of supplies worth €2 billion, to prevent allies from competing with each other and further encouraging price escalation. The first billion euros will be used to finance the delivery of the remaining material and the rest, to address joint purchases.

The offer for Expal illustrates Rheinmetall’s desire to increase its production capacity. The Spanish firm is expected to end this year with sales of €400 million, but it has the potential to double that amount. According to its provisional accounts, Rheinmetall’s sales amounted to €6.4 billion last year, up 13% from 2021. Armin Papperger, CEO of the company, has announced that he is negotiating to build a Panther tank assembly plant in Ukraine . Other companies are being more cautious. It is one thing to multiply shifts and expand the workforce to up production, as the ammunition factory in Granada has done according to the specialized defense website Infodefensa website; it is quite another to invest in new production lines whose continuity is not guaranteed when the war ends.

Besides the companies that make fast consumption products such as ammunition, the benefits of the war are also starting to be felt by makers of ships, combat planes, satellites and radars, although in a slower way since these are long-term contracts with much longer execution times.

Stock market records

Last year, Lockheed Martin’s net sales amounted to $66 billion, 1.5% less than the previous year. The top manufacturer of military equipment in the world was one of the few that retreated compared to 2021: most of its competitors saw their sales grow by around 5%. Supply chains issues due to the Covid pandemic are behind this slow recovery, according to industry sources. But it was in the last quarter of 2022, more than half a year after the start of the invasion, when sales skyrocketed, with average increases of 7.5% and in many cases in the double digits. In the stock markets, the share price of arms manufacturers has reached historical levels.

Some of the military industry’s top 10 firms have benefited directly from the war in Ukraine. The American Raytheon has supplied Kyiv with Stinger anti-aircraft missiles worth $624 million and Nasams for $668 million; in partnership with Lockheed, it has also delivered Javelin anti-tank missiles worth $663 million and HIMARS multiple launchers for $95 million. Meanwhile, the British BAE Systems has received an additional order for 100 armored multipurpose vehicles (AMPVs) from the US army to replace the 200 armored M -113 delivered to Zelenskiy. Since the start of the invasion, the Joe Biden Administration has provided Kiyv with military equipment worth more than $30 billion, practically all of it made in the USA.

Boost to national defense budgets

But the truly big business lies in the general growth of national defense budgets. The invasion of Ukraine has sparked an arms race among European neighbors fearful of following the same fate. Allocating 2% of GDP for defense has gone from being a medium-term goal to being just the starting point, according to NATO Secretary General Jens Stoltenberg. At least 11 of the 30 Allied countries are already around or above that 2%. Spain, which ranks next-to-last on the list, has increased its military spending by 26%; and Germany, which has long been allergic to any hint of militarism because of historical reasons, has approved a special fund of €100 billion to modernize the Bundeswehr. Outside of NATO, the other great loser of World War II, Japan, has increased its military spending by 20% and expects to reach 2% in 2027.

Félix Arteaga, a researcher at the Elcano Royal Institute, Spain’s main think tank, believes that there is a “supply crisis” and that the war has revealed that European industry does not have the capacity to sustain a conflict of high intensity and long duration like the one in Ukraine. Nor is he optimistic about the possibility that the joint purchases will manage to stop the escalation of prices, since countries with arms manufacturers will prioritize domestic production and refuse to reveal the volume of their strategic reserves alleging security reasons. In any case, these reserves have proven to be much lower than what NATO was asking for.

Several governments have created temporary taxes on the extraordinary profits obtained by energy and financial companies as a result of the war, but none has considered imposing it on the arms industry, the most direct beneficiary of the conflict. Arteaga believes that it would not work. “They would end up passing it on to their clients, which are the States, the same ones that collect taxes,” he says.

To break the bottleneck, Arsuaga advocates opening the military industry’s access to credits from the European Investment Bank (EIB), which would facilitate new investments to increase production capacity. He also defends the need to save on everything that is not a priority. “It doesn’t make sense to keep the same projects as before the war as if nothing had changed, except that now there is money to buy them.”

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