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Wednesday | 11 October, 2017 | 9:26 am

Defense

By Lynn Stanley

Readiness // Rebuilding efforts indicate a bumper crop of contracts for military needs

CONTENTS   
> AEROSPACE
> AUTOMOTIVE
> COMPUTERS + TELECOM
> CONSTRUCTION
> DEFENSE
> ENERGY
> HEAVY EQUIPMENT
> TRANSPORTATION

 

October 2017 - India and China currently have the world’s largest populations, but the United States trumps both countries when it comes to defense spending. A Military Balance 2016 report released by the International Institute for Strategic Studies calculated U.S. military spending at $597 billion, surpassing that of the rest of the world.

MSCI’s Forecast 2017 Conference in September shed some light on what steel and aluminum producers can expect. Teal Group Corp. defense expert Richard Aboulafia told conference attendees military aircraft demand will remain stable and profitable. While Aboulafia was cautiously optimistic about growth, he delivered good news for steel and aluminum producers. “Civil and military aviation will continue to favor legacy products,” he said.

Scott Ulnick, Ducker Worldwide Advisors, told MSCI attendees that trends for military, paramilitary and shipbuilding will parallel automotive demands: “That is more aluminum flat-rolled and extruded products for light weight, but with steel still dominant.”

Ramping up

The new administration’s ramp-up of U.S. military forces is also projected to drive growth. President Trump’s “Buy American, Hire American” executive order led to the enactment of several statutes including the Berry Amendment and Specialty Metals Clause.

Section 1(a) of the order states that “Buy American Laws means all statutes, regulations, rules and Executive Orders relating to federal procurement or federal grants require, or provide a preference for, the purchase or acquisition of goods, products or materials produced in the United States, including iron, steel and manufactured goods.” For iron and steel products, Section 1(b) defines “Produced in the United States” as “all manufacturing processes, from the initial melting stage through the application of coatings must have occurred in the United States.”

The intent of these directives is to protect the defense industry from potential supply shortages resulting from foreign sourcing. According to Jeffery Green, the U.S. armed forces depend upon numerous critical materials to both build and maintain  aircraft, ships and other mobile equipment. Green is the founder and president of J. A. Green & Co., which provides policy expertise on issues like national security and defense. Green also recently served with the House Armed Services Subcommittee on Readiness as its staff director.

The F-35 Joint Strike Fighter, for example, uses titanium for approximately 18 percent of its production. Beryllium is used in the F-35’s optical system.

Take-off

President Trump’s defense budget request for FY 2018 is $639.1 billion. Earmarked to rebuild the Armed Forces, investments include $10.3 billion for [70] F-35s; $3.1 billion for [15] KC-46 tankers; $2.0 billion for a B-21 bomber; $5.5 billion for [2] Virginia Class submarines; $4.0 billion for [2] DDG-51 destroyers; $4.6 billion for [1] CVN-78 Class aircraft carrier; $1.1 billion for [2,647] Joint Light Tactical Vehicles; and $13.2 billion for science and technology.

This uptick in readiness is already having a trickle-down effect on manufacturers. In a third quarter earnings call, Pat Davidson, vice president of investor relations for Oshkosh Corp., reported strong results in the company’s defense business. M-ATV and JLTV sales were highlighted.

“The U.S. Marines have indicated they would like to increase their quantity of JLTVs from approximately 5,500 units to more than 9,000 units,” he told investors. “The U.S. Air Force also said they would like to acquire JLTVs. Outside the U.S., we recently learned that the State Department approved the possible foreign military sale to the UK MOD for up to a maximum of 2,747 JLTVs.”

Oshkosh closed out third quarter with a backlog for 2018 of nearly $1.2 billion. “[It is] almost $1.4 billion if we include a $195 million JLTV contract [announced immediately before earnings were released]. Combined with normal annual aftermarket volume, we expect to have line of sight for $1.7 billion of defense sales for 2018 at the end of this fiscal year.”

Several metal-consuming manufacturers including MD Helicopters Inc., Huntington Ingalls Inc. and General Electric Co. announced DoD contract awards in September. One recipient—MD Helicopters, Mesa, Arizona—was awarded a $1.39 billion firm-fixed-price foreign military sales contract for 150 MD 530 aircraft.

A defense department spokesman tells Modern Metals that the FY18 budget proposal contains the department’s anticipated acquisitions and corresponding metal purchases for the year. Future requirements—and the corresponding metals buy—depends on subsequent budgets approved by Congress and the president.

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