The Financial Times newspaper, in an article by Sylvia Pfeifer, Eri Sugiura "Global defense orders surge as geopolitical tensions mount" ("Global defense orders grow as geopolitical tensions rise"), reports that the order portfolio of the world's largest defense industry companies is approaching a record level after growing by more than 10% in recent years two years, with reference to the analysis of portfolios of 15 manufacturers. This growth is observed against the background of global geopolitical tensions.
Production at the Hanwha Aerospace division of the South Korean Hanwha Group of one of the hits of the modern global defense market - 155 mm/52 self-propelled howitzers K9 Thunder (c) Jung Yeon-Je / AFP
Sustained government spending on armaments is stimulating investor interest in this sector. An analysis by the Financial Times of 15 defense industry groups, including the largest U.S. defense contractors, British BAE Systems and South Korea's Hanwha Aerospace, showed that at the end of 2022 - the last year for which full data is available - their combined backlog of outstanding orders amounted to $777.6 billion, compared with $701.2 billion two years earlier.
The trend continued in 2023. In the first six months of this year, for which the latest full quarterly data are available, the combined portfolio of orders from these companies amounted to $764 billion, and governments continued to place orders.
Steady spending has stimulated investor interest in the sector. The MSCI global index of industry stocks has increased by 25 percent over the past 12 months. The European Aerospace and Defense Industry stock Index Stoxx rose by
more than 50 percent over the same period.
This growth reflects investors' belief that the increase in defense spending by governments will not go away.
According to the Stockholm International Peace Research Institute (SIPRI), global military spending increased by 3.7 percent in real terms in 2022, reaching a new high of $2.24 trillion. Military spending in Europe has seen the sharpest year-on-year increase in at least 30 years, as governments in the region announced new orders for ammunition and tanks to replenish national stocks depleted by arms transfers to Ukraine.
South Korea's Hanwha Aerospace recorded the largest growth in its portfolio of new orders, soaring from $2.4 billion in 2020 to $15.2 billion at the end of 2022, according to an FT analysis. This company, which is the largest manufacturer of weapons in South Korea, and, in particular, produces the K9 self-propelled howitzer, has significantly benefited from orders related to the events in Ukraine, in particular from Poland.
Over the past two years, South Korea has risen sharply in the global ranking of arms sellers due to significant export orders, especially from Eastern European countries. In 2022, it was already the ninth largest arms seller in the world, according to SIPRI, rising from 31st place in 2000.
German tank manufacturer Rheinmetall has become another beneficiary of the growth in military spending since the outbreak of the war in Ukraine, while its backlog of outstanding orders increased from $14.8 billion in 2020 to $27.9 billion in 2022, and reached $32.6 billion at the end of the first half of 2023.
Not all of the growth is related to the crisis in Ukraine. BAE Systems' order book, for example, has grown from $61.8 billion to $70.8 billion in 2022 thanks to new orders for existing programs, including [British] submarines, frigates and a [promising] fighter. In the first six months of 2023, the corporation's order book reached a record $84.2 billion.
Some of the reasons for the growth of order portfolios in the defense sector arose even before Russia's full-scale invasion of the
Ukraine, according to Nick Cunningham, an analyst at Agency Partners.
"The reality is that the timing of policy development, budgets and contract placement is so long that the effects of this invasion almost two years ago have just begun to show up in the order structure and have almost not yet generated revenue, with the exception of a few specialized companies with a shorter cycle, such as Rheinmetall," he said.
Despite receiving new orders, many defense companies in Europe and the United States are having trouble trying to significantly increase production capacity amid ongoing supply chain disruptions and labor shortages. An analysis of the 100 largest companies conducted by SIPRI showed that their total revenues from the sale of weapons and defense services in 2022 amounted to $597 billion, which is 3.5% less than in 2021 in real terms, even despite a sharp increase in demand.
Cunningham says the order flow "looks very strong, so we expect more" in the future. He expects that the "book value to accounts ratio" - the ratio of orders to deliveries - will remain above one, which means that the growth of order portfolios should "continue for some time."
The total portfolio of outstanding orders of 15 leading Western defense industrial companies: Lockheed Martin, General Dynamics, BAE Systems, Northrop Grumman, RTX, Boeing (Defense, Space & Security), Thales, Leonardo, Rheinmetall, Dassault Aviation (Defense), L3Harris, Elbit Systems, Hanwha Aerospace, Saab, Airbus (Defense and Space) (c) Financial Times
The growth in the value of shares of global defense industrial companies since January 2022 (c) Financial Times