(Bloomberg) — German defense manufacturers including Rheinmetall AG are urging domestic steelmakers to ramp up production of military-grade metal, to secure their long-term ability to make armored trucks and tanks. <\/p>\n
Their call comes as European nations including Germany boost defense spending in response to Russia\u2019s war in Ukraine and President Donald Trump\u2019s plan to scale back the US military\u2019s involvement in the region. German defense firms currently rely primarily on Swedish steelmaker SSAB AB for their supply, exposing them to the risk of a shortfall as demand intensifies. <\/p>\n
So far two producers \u2014 Salzgitter AG and Germany\u2019s oldest joint-stock company AG der Dillinger H\u00fcttenwerke \u2014 are publicly heeding the call to strengthen the domestic supply chain. Others remain hesitant, underscoring how difficult it is to quickly re-tune in such a capital-intensive industry. <\/p>\n
Dillinger, founded with the permission of Napoleon Bonaparte over 200 years ago, has been military-certified since 2021. Though smaller than the likes of ArcelorMittal SA and Thyssenkrupp AG, its heavy-plate production gives it a key role in the defense industry from its base near Germany\u2019s border with France. <\/p>\n
The company told Bloomberg it\u2019s in contact with \u201call well-known manufacturers of land vehicles in Germany and Europe\u201d about supplying its steel. <\/p>\n
Salzgitter is yet to deliver to the defense sector despite being one of Europe\u2019s biggest steelmakers. But that is about to change, following Trump\u2019s warnings about limiting US involvement in the region and the German government\u2019s move to overhaul fiscal rules to allow for more defense spending. <\/p>\n
\u201cWhen we talk about resilience, it makes no sense to source steel from abroad in this day and age,\u201d Thomas M\u00f6llmann, head of Salzgitter\u2019s new defense task force, said in an interview. Supplying defense firms will restore steelmakers\u2019 status as \u201csystemically relevant\u201d players in Germany, he said. <\/p>\n
Though volume is low compared to sales to the auto industry, the defense industry is promising higher profit margins. Salzgitter had originally applied for military certification to supply emergency response agencies, for example, but will now seek contracts with defense manufacturers. Deliveries would start after its application is approved, potentially in the coming weeks, M\u00f6llmann said. <\/p>\n
The demand is not in question. Rheinmetall said it needs several thousand tons of military-grade steel annually \u2014 a number that\u2019s doubled in two years \u2014 and that it has purchased its first tranches from domestic producers. It declined to name the German companies, though it welcomes the extra supply. <\/p>\n
Rheinmetall is among the major beneficiaries of Europe\u2019s push to re-arm itself, responding to US demands that NATO members take more responsibility for their own security. The company\u2019s stock price has almost tripled this year, vaulting it into the euro area\u2019s main benchmark index. <\/p>\n
Germany\u2019s new ruling coalition agreed in March to effectively abolish borrowing limits for defense-related expenditure, allowing military procurement deals of unprecedented scale. The draft defense budget is expected to show an increase of about 15% to more than \u20ac60 billion ($69 billion) in 2025 and almost \u20ac70 billion in 2026 when it\u2019s presented in the coming weeks. <\/p>\n
The spending boost offers a respite to a steel industry that has struggled for years to compete with Chinese producers. <\/p>\n
Still, most domestic steelmakers are holding back, saying even with the surge in demand the volume is too low to justify investment costs and the long military certification process. <\/p>\n
Thyssenkrupp, for example, said it has no plans to reopen the heavy-plate plant that Germany\u2019s biggest steelmaker closed in 2021 for economic reasons. <\/p>\n
Smaller steelmaker Benteler does supply the defense industry, though the volumes it delivers are low. The company has noticed an up-tick in demand but has no plans for a separate defense technology or armaments division, according to Ralph Mathis, chief strategy officer at its Benteler Steel\/Tube unit. <\/p>\n
\u201cIt will always be a marginal area for us,\u201d he said in an interview. <\/p>\n
More domestic production has a knock-on benefit for German steel intermediaries such as D\u00fcsseldorf-based processor Kl\u00f6ckner & Co, which in March acquired Ambo-Stahl to prepare and cut steel with lasers to make parts for tanks, armored vehicles and marine vessels. <\/p>\n
Most military steel processors in Germany are relatively small, making them vulnerable to periods of slow demand. Skills are often confined to a few individuals, and Kl\u00f6ckner\u2019s Chief Executive Officer Felix Schmitz said bigger firms like his should take responsibility for ensuring the know-how survives. <\/p>\n
More steelmakers may enter the defense space over time, he said. \u201cIf there are bottlenecks due to high demand and military-grade steel becomes even more expensive, this may become more interesting for some producers,\u201d he said. <\/p>\n
Germany should consider purchasing guarantees because heavy-plate production is still too expensive for some steelmakers, said Hans Christoph Atzpodien, chairman of the Federation of German Security and Defense Industries.\u00a0 <\/p>\n
The government has said steel is a matter of national security, but has stopped short of measures to bolster domestic production for military use. <\/p>\n
\u201cDefense capability and security are collective goods. You can\u2019t expect individuals to take care of this in their own private economic interests,\u201d Atzpodien said. \u201cThe state has to think about how to do it, and especially how to get collective and private economic interests adequately aligned.\u201d <\/p>\n
–With assistance from Michael Nienaber. <\/p>\n