Europe’s arms spending on Ukraine boosts defense companies


London
CNN
 — 

After months of soaring stock prices, Europe’s defense companies hardly needed another boost. But a tentative €2 billion ($2.1 billion) European Union plan to procure ammunition for war-torn Ukraine may provide just that.

EU defense ministers wrapped up a two-day summit in Sweden this week. The outcome was a provisional agreement to jointly buy 155-millimeter artillery shells desperately needed by Kyiv, and send more artillery rounds to Ukraine from EU countries’ existing stockpiles.

Speaking in Stockholm Wednesday, Ukraine’s Defense Minister Oleksii Reznikov said his country needed one million rounds of ammunition “as soon as possible” to deter Russian forces.

A final decision is expected on March 20 when EU foreign and defense ministers meet in Brussels.

The Russia-Ukraine war marks the first time the European Union has supplied lethal weapons to a third country, underscoring the extent of the threat it believes Moscow poses to its security.

“I think that many countries have had a wake-up call, and need to replenish and increase their stocks,” Micael Johansson, chief executive of Swedish defense contractor Saab, told CNN.

“This will continue for a number of years to come.”

Investors have spotted the opportunity, piling into defense stocks in recent months as Ukraine’s allies have upped their military support, and as some of its donors seek to replenish their thinning stocks.

The STOXX Europe Total Market Aerospace and Defense index, which tracks 25 leading defense companies, has climbed 41% since late September, outperforming the region’s broader benchmark index, the Stoxx Europe 600, by 18 percentage points.

The MSCI World Aerospace and Defense Index, a global benchmark, rose nearly 26% over the same period.

As Ukraine’s war with Russia rages on into a second year, the European Union — alongside the United States and the United Kingdom, Kyiv’s other two main backers — has reaffirmed its solidarity with Ukraine.

That solidarity has translated into further commitments on military spending in recent weeks.

In early February, the bloc announced that it would inject another €545 million ($575 million) into its €3.6 billion ($3.8 billion) military assistance fund for Ukraine.

And in January, Germany, France, Poland and the United Kingdom agreed to supply modern battle tanks to Kyiv, responding to a longstanding call by Ukrainian President Volodymyr Zelensky, despite fears that such a move could inflame the West’s tensions with Russia.

Leopard 2 A6 main battle tanks during a visit by German Defense Minister Boris Pistorius to the Bundeswehr's Panzerbataillon 203 tank squadron on February 1, 2023 in Augustdorf, Germany.

BAE Systems

(BAESF)
, Europe’s largest defense contractor by revenue, logged record orders worth £37 billion ($44 billion) last year, though the majority were related to programs predating the war.

And more is coming down the pike. Brad Greve, the UK company’s chief financial officer, told investors last week that he expected the impact of restocking “will come later as governments convert demand into firm orders.”

“[It is] a factor which could contribute to a longer growth cycle for the industry,” he added.

BAE shares are up 55% since Russia invaded Ukraine a little over a year ago. The company forecasts that its earnings-per-share — a measure of profitability -— will increase by between 5% and 7% over 2023.

Johansson at Saab told CNN that orders directly connected to Ukraine started to pick up in December.

“More is definitely coming,” he added, noting that Western governments were spending more on their defense and security amid a “quite dramatic” ramp-up in geopolitical tensions.

Johansson expects Saab’s sales to grow 15% this year, although he said he hoped for an end to the war soon.

In Germany, Rheinmetall

(RNMBF)
, the country’s biggest arms manufacturer, told the Rheinische Post newspaper Monday that it hoped to open a €200 million ($211 million) battle tank factory in Ukraine, capable of producing about 400 tanks a year — a sign that defense companies are expecting strong demand for years to come.

In the near term at least, a let-up in government orders is unlikely.

“Ukraine should get all the necessary military equipment and training it needs to defend its territory,” Josep Borrell, the European Union’s foreign affairs and security chief, said in a statement last month.

“[The EU] will continue supporting Ukraine for as long as it takes and as long as it is needed.”

— Stephanie Halasz, Radina Gigova and Inke Kappeler contributed reporting.

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