Whether it is because of the need to replace equipment used in the Iran conflict, or the increasingly dangerous geopolitical situation, or European plans to build up defense capabilities less reliant on the U.S., the armaments sector seems set to rapidly expand for quite some time (at least — and this is a not insignificant at least — if stretched budgets can find room for it).
And so it’s worth noting comments by Roberto Cingolani, the CEO of Leonardo, a large, partly state-owned Italian defense company which is active supplying countries in the Gulf, including radar systems and ship-mounted cannons used to repel Iranian drone and missile attacks.
The Daily Telegraph quotes Cingolani as saying that demand was growing faster than the company’s capacity to meet it. He is not the first to point to the mismatch between the low cost of drones and the high cost of the missiles being used to shoot them down. There are other ways to tackle drones including guided rounds shot from conventional artillery, but the supply of these are under pressure too. Cingolani cites the example of Leonardo’s Vulcano guided rounds. Normally it produces these at a rate of 2,000 a year, but demand is running at ten thousand a month.
That’s not a gap that the company can currently fill, yet if it invests heavily in new production, there is a possibility that it would be stuck with overcapacity when (if?) things calm down. To reduce this risk, it is looking at licensing production in some of the Gulf States. That would fit neatly with those countries’ ambition to reduce their traditional reliance on imported weaponry, an ambition that must have been increased still further by the events of the last few weeks.
Another possible glimpse of the future in the same Telegraph article comes from reports that Aramco, the Saudi state oil company, is considering acquiring drones from Ukraine.
The Daily Telegraph notes that Leonardo’s market capitalization rose from €4.6bn in 2022 to about €34bn last year. It stands at about €37 billion now, and the stock has risen by some 13 percent over the past month. The company’s orders are up by almost 40 percent since 2022.
Meanwhile, Rheinmetall, Germany’s largest defense company, has reported that its sales increased by nearly 30 percent last year.
The company noted the contribution made by increasing demand in Europe due to the “necessary military build-up” there: “The tense security situation underpins the promising position of the Group, whose products are playing an increasingly important role for the increase in defense capabilities in Germany and its partner countries.”
In another sign of the way that German’s critical engineering sector is being transformed, with autos down and defense up, Rheinmetall has put its automotive division up for sale, leaving it free to concentrate solely on defense. Yet another sign: Rheinmetall’s market cap (€74 billion) comfortably exceeds Volkswagen’s (€49 billion).
Writing about Rheinmetall almost exactly a year ago, I noted that:
Grim as it is to put it this way, Russia’s war against Ukraine has been good for Rheinmetall, something reflected in its share price. This has now been supercharged by the growing rift between the U.S. and Europe. Rheinmetall’s stock was trading at just over EUR 600 at the beginning of the year, against over EUR 1,400 now. The day of the Russian invasion (February 24, 2022), the share price was EUR 100.
The Rheinmetall share closed at €1595 on Friday.