The effect was harsh, but unmistakable. After the opening bell of the New York stock exchange on Monday, October 9, the first trading day after Hamas’s large-scale attack on Israel from Gaza, the prices of American arms manufacturers jumped sharply. Shares of companies in the defense sector collectively shot up 6 percent, the biggest increase in one day in more than three years.
In total, major names in the United States arms industry such as Northrop Grumman, Lockheed Martin, General Dynamics and RTX recorded an increase in their collective market value of 28.4 billion dollars (approximately 26.9 billion euros). They have increased slightly since then, against the backdrop of further escalation of the conflict.
Shares of defense sector companies usually increase in value after geopolitical shocks, and the escalation of the battle between Israel and Hamas was no exception. For companies in the American arms industry, the conflict, on top of the war in Ukraine, means even more work to be done due to the growing need for ammunition and equipment. But can they handle the ever-increasing demand?
US President Joe Biden expects no different. He is asking Congress – despite a protracted impasse in the House of Representatives over the necessary election of a chairman – for tens of billions of dollars in additional defense spending, especially for support to Ukraine and Israel, he announced in a televised speech on Thursday evening. According to American media, this amounts to 60 billion dollars for Ukraine and 14 billion for Israel. This is primarily intended to finance the replacement and modernization of American weapons arsenals, parts of which have been donated to Ukraine in particular, to keep arms deliveries going.
“We must ensure that Israel has what it needs to protect their people, today and forever,” Biden said. He spoke of “an unprecedented commitment to contribute to Israel’s security”, including by “ensuring that the Iron Dome continues to guard the skies above Israel”, referring to the Israeli anti-missile defense system.
Rockets and artillery shells
Israel, which already receives more than $3 billion in military aid from the US annually, is particularly in need of rockets and artillery shells for its anti-air defense, as well as other munitions, at the current stage of the conflict. The American RTX is involved in the production of so-called Tamir missiles for the Iron Dome, in collaboration with Israel’s Rafael Advanced Defense Systems. The first American deliveries of such weapons arrived in Israel just days after the attack by Hamas.
“We fully expect there will be additional requests for security assistance for Israel as they continue to use munitions in this fight,” White House National Security Council spokesman John Kirby said. “We will work closely with them to ensure we meet their needs as best as possible and as quickly as possible.”
For US arms producers, increases in the defense budget, as proposed by Biden, are the main prize: unlike erratic geopolitical shocks, they ensure long-term price increases because they are the main driver of the market. The US defense budget for fiscal year 2024 is already approximately $832 billion.
However, experts say the sector is struggling to keep up with the growing demand for defense equipment while continuing to meet the needs of the Pentagon, the US Department of Defense. “If we have to send weapons to Israel, certainly part of the industrial base will have to be kicked into high gear, perhaps faster than we thought,” said Cynthia Cook of the Center for Strategic and International Studies think tank, told the Financial Times (FT). The prospect of continued demand is pushing arms manufacturers to invest in more capacity.
Even before the escalation in the Middle East, this production capacity was under pressure due to growing global orders for defense equipment. Particularly since the Russian invasion of Ukraine in February 2022, arms manufacturers have been working overtime to meet a growing demand for weapons. This often involves conventional armaments such as fighter planes, missiles, tanks, armored vehicles, artillery and ammunition – or replacement of equipment donated to Ukraine by both the US and allies.
Global defense spending reached $2,200 billion last year, the highest level since the end of the Cold War, the Stockholm International Peace Research Institute (SIPRI) calculated. The import of weapons by European countries increased by 47 percent in the period from 2013 to 2017 and from 2018 to 2022, the organization reported earlier this year. Ukraine became the third largest importer of weapons worldwide, after Qatar and India. But a country like Poland is also spending tens of billions to better arm itself against the threat from Russia.
Largest arms exporter
The US is by far the largest arms exporter in the world: the American share of global arms exports increased from 33 to 40 percent in the same time. That of Russia, traditionally number two, actually shrank from 22 to 16 percent, according to SIPRI. Players such as France, Turkey and South Korea are also making progress.
In his TV speech, Biden emphasized without further ado the economic benefits of the American top position. “When we spend money appropriated by Congress, we use it to resupply our own reserves with new equipment made in America,” he said, referring mainly to arming Ukraine by supplying equipment from its own arsenal to Kyiv. to deliver. “Patriot missiles for anti-aircraft batteries made in Arizona, artillery shells produced in twelve states across the country, including Pennsylvania, Ohio and Texas, and so on.” He spoke of “the arsenal of democracy, which serves the cause of freedom.” In addition to economic benefits such as employment, the supply of American weapon systems, which is accompanied by long-term maintenance contracts, ensures close ties with allies in Washington’s view.
For example, Lockheed Martin, the largest group in the global sector, produces the HIMARS and Hellfire missile systems and F-35 fighter aircraft. Northrop Grumman, one of the largest arms manufacturers in the world, builds bombers, among other things. Aircraft manufacturer Boeing, known for civil aviation but with a long defense history, supplies Apache helicopters as well as ammunition and bombs. General Dynamics supplies Abrams tanks and tank ammunition, among other things. RTX (formerly Raytheon) builds integrated air defense systems and missiles.
Ground offensive
The conflict in the Middle East is now increasing the pressure on the sector. Although the immediate needs of Israel, a country with its own defense industry and already a significant arsenal, differ from those of Ukraine, the needs of both countries may eventually overlap. According to experts, the Israeli army may need guided missile systems that Ukraine already lacks, including armed drones, the FT reports. The needs could also become more acute if the war escalates or Israel launches a ground offensive in Gaza.
For the arms makers it means a growing base of orders and scaling up of production. Lockheed Martin CEO Jim Taiclet be recently on the conflicts in Ukraine and Israel as drivers of sales growth. Growing threats on the world stage “are increasingly focusing the US and our allies on defense,” he noted.
His colleague Gregory Hayes from RTX spoke this spring already had “a lot of good news” for his group in that regard. “For us it is now mainly a matter of getting it all out the door.”