Defense Industry Still in Growth Mode

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While all around us appears to be contracting, some a little, some a lot, one industry is pretty confident of growth this year and next. The defense industry, worth in excess of $1.3trillion worldwide and which grew by 6% last year according to moneyweek.com is likely to grow, at least in the US, this year and next. The U.S. House of Representatives said last week that leaner years lay ahead for the Pentagon after defense funding surged to $656 billion in 2008 according to Reuters. But leaner years in defense speak means the budget will grow less fast than in previous years. However, it will still grow for two reasons. First, the US has two costly wars to continue to fund, wars that are taking a heavy toll on conventional arms and equipment in the field. Second, defense programs are long term affairs and congressmen typically fight protracted and long running battles to protect projects providing jobs in their own backyard. Growth is expected to drop back to maybe 2.3% in real terms.

Richard Aboulafia of the Teal Group, an aerospace consultancy, predicted that spending on new systems would be crimped while fixing and buying proven systems would hold steady. If that is the case, and it sounds logical, then demand for armor plate and high strength quality steels, non ferrous metals, alloying elements and support services to the manufacture of munitions, vehicles, aircraft spare parts and so on will remain firm. Metals producers and distributors in these industries can expect activity levels to hold up well although competition will increase from firms desperate for a piece of the pie. To the extent that programs come up for re-quote though raw material costs will on the whole have come down. During our own conversations with suppliers we have heard of components for aircraft ejector systems dropping by over 20% from a year ago and copper alloy strip for ammunition by nearly 30%. Maybe when the defense procurement committees open discussions with the standard intention of getting more for less, they may, for once, stand some chance of getting it.

–Stuart Burns

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