Due to the increasing geopolitical tensions, such as the conflict in Ukraine, the order books of world’s largest defence companies have reached near-record highs. They have grown by over 10 percent in only two years.
The analysis found that the combined order backlog of 15 major defence contractors, including Britain’s BAE Systems, South Korea’s Hanwha Aerospace and the largest US contractor, the US contractor, was $777.6bn at the end 2022, the latest data available for the full year. This is up from $701.2bn just two years ago.
The trend will continue into 2023. The combined backlogs of these companies in the first half of this year, the most recent comprehensive quarterly data available, stood at $764bn. Governments continued to place orders and their future pipeline of business grew.
Investors are now more interested in the industry due to sustained spending. The MSCI global benchmark index for stocks in the sector has risen by 25 percent over the last 12 months. Europe’s Stoxx Aerospace and Defence stocks index rose by more than 50% over the same time period.
Investors are convinced that the government will continue to increase its defence spending.
According to the Stockholm International Peace Research Institute, total global military spending increased by 3.7% in real terms to $2,240bn in 2022, a new record.
The military expenditures in Europe have increased at the fastest rate in 30 years. This is because governments announced orders for new ammunition and tanks in order to replenish stockpiles that were depleted due to donations made to Ukraine.
Hanwha Aerospace saw the largest increase in new orders. According to an analysis, its backlog increased from $2.4bn to $15.2bn by the end of 2022.
This company, which is the largest arms manufacturer in the country, and produces the K-9 self propelled howitzer, has benefitted from Ukraine-related sales, especially from Poland.
South Korea has risen the ranks among arms sellers in the last two years, mainly due to significant export orders from countries in eastern Europe. According to Sipri, it was the ninth largest arms seller in the world in 2022. It ranked 31st in 2000.
Rheinmetall, a German tank manufacturer, has also benefited from increased spending following the Ukraine war. Its order backlog has risen from $14.8bn to $27.9bn by 2022. The backlog was $32.5bn.
The higher spending is not all related to Ukraine. BAE Systems, for instance, saw its order backlog rise from $61.8bn dollars to $70.8bn dollars in 2022, thanks to new orders placed for existing programmes such as submarines, fighter aircraft and frigates. In the first half of 2023, its order backlog reached a record amount of $84.2bn.
Nick Cunningham of Agency Partners, an analyst, says that some of the reasons for higher backlogs date before Russia’s invasion of Ukraine.
He said: “In reality, lead times are so long for budgeting, policymaking and placing orders that the invasion from almost two years ago only appears in orders, and barely in revenue, except for some shorter-cycle specialists like Rheinmetall.”
Many European and US defense companies struggle to increase production capacity despite receiving new orders. This is due to persistent supply chain disruptions as well as labour shortages.
Sipri’s analysis of the top 100 companies revealed that sales of military and arms services would total $597bn by 2022. This is 3.5 percent less in real terms than in 2021, even though demand was increasing sharply.
Cunningham stated that the “order pipeline looks really strong so we expect to receive more”. He believes the “book-to-bill ratio” (the ratio of orders and deliveries) will remain above 1, meaning that backlogs are likely to “increase in the near future”.