A report published on Tuesday by Deloitte confirms that Russia’s invasion of Ukraine is putting additional pressure on an already weakened global aerospace supply chain, limiting the industry’s ability to meet demand. It has also forced Western aerospace and defense companies to ask tough questions about which suppliers they rely on and where they source materials and components.
Supply chain disruption, critical mineral supply and resilience have been topics of discussion among A&D companies for years, observes John Coykendall, U.S. and global aerospace and defense leader at Deloitte. But the invasion, concludes the report he co-authored, has exposed an industry that may be too dependent on particular countries or regions.
“You see it more broadly than aerospace and defense,” Coykendall says. “Looking at the energy markets, countries are realizing that they may be depending on sources that are no longer as reliable as they used to be.”
Vladimir Putin has long understood the price of eastern Ukraine and the rest of the country. This appreciation has not been matched by Western A&D companies who are now feeling the loss of more than 50% of the world’s aerospace titanium from the Ukraine-Russia region on a daily basis. They also recognize the impact of losing more than 50% of the world’s supply of neon gas, essential for the production of the semiconductors they use.
“The concentration of rare earth elements, critical minerals in this region is something [industry] hadn’t really looked before,” says Coykendall.
Indeed, Russia’s stature as the 14th largest economy in terms of merchandise exports ($337 billion) is offset by its competitive edge in supplying several key commodities. While its control of neon gas accounts for half of the total, it accounts for almost 90% of the neon (used to etch circuits on silicon wafers) consumed by American companies. Russia also supplies other essential A&D materials such as aluminum, nickel, cobalt and vanadium.
The hole in the supply of critical minerals and the components that therefore cannot be produced without them is forcing Western A&D companies to better understand the web of interconnected supply chains that enable them to deliver goods and services. Supply chain risks were increasing before Covid-19, Deloitte analysts note, due to the increased volatility that has accompanied globalization and an accelerating pace of unexpected geopolitical events.
“I think the addition of geopolitical risk underscores the importance for companies to understand the multiple layers of the supply chain through to the extraction and processing of the critical minerals they use,” Coykendall says.
Disruptions from the Ukraine conflict and tensions in the South China Sea could impact the A&D supply chain in three main ways, Deloitte predicts. The authors point to the forced decoupling of critical mineral supply chains from anywhere, anytime, sourcing to regional “shoring of friends” agreements for minerals and manufacturing output from a group of Western friendly nations and other global pockets.
“Each nation contributes a certain stage of the value chain that best matches their capabilities, so there is assurance of some supply,” says Coykendall. A recent example of this trend comes from mineral-rich Australia, whose local division of munitions producer, Thalesaccelerated production of M795 155mm artillery ammunition for the US military after the Pentagon certified the Australian-made TNT for use in December.
Supply chain disruption due to the conflict in Ukraine is a key factor in the ability of Western OEMs to meet what the report says is growing demand for commercial and defense aircraft.
“I’ve traveled a lot,” says Coykendall. “It really feels like demand is back with a vengeance.” He adds that US data indicates that demand for air travel is now rebounding to 90% of its pre-Covid levels. Despite smaller airline fleets with fewer wide-body aircraft, passenger numbers have increased and international travel has seen a significant increase in the past two months as countries scrapped Covid testing requirements (states recently dropped the covid test requirement before flying to America).
Order books for narrow-body jetliners are strong, Coykendall says, with concomitant demand for MRO (maintenance, repair and overhaul) of existing fleets. The ability of companies like Boeing
Demand for defense and aerospace systems is expected to be strong with increased efforts to localize production and supply, according to Deloitte’s report. This aligns with the annual Senate defense policy bill, which the Armed Services Committee advanced on Thursday, authorizing $1 billion in national defense stock funding in fiscal year 2023 for “ acquire strategic and critical minerals currently in short supply”.
Congress also earmarked $600 million for the Biden administration to invoke the Defense Production Act to address industrial base constraints for faster missile production and increased national capacity for strategic and critical minerals. .
And yet, the administration’s overall defense budget has failed to keep pace with inflation. Proposed Air Force and Navy reductions in aircraft and ship fleets, and a reduction of 12,000 men in the Army’s final strength indicate that military leadership is sending a signal to decreasing demand. The war in Ukraine may be a factor in what the Pentagon perceives it can do.
Deborah Rosenblum, a Pentagon official serving as the undersecretary of defense for industrial base policy, said Defense News earlier this month, “With the invasion of Ukraine, some materials from both Russia and Ukraine are critical to our munitions [where] the market has become disrupted, and it just isn’t working.
Deloitte’s report emphasizes the demand for defense purchases in Europe in response to the situation in Ukraine which “prompted many countries to increase their defense budgets”. The conflict is fueling the appetite of European and NATO nations for unmanned strike drones, digitally integrated air defense systems and military cybersecurity systems.
“I think we’ll see how [defense procurement] playing out here,” Coykendall says. “I think where you’re going to see more growth is with European and NATO countries that have historically spent less than the 2% of GDP that they’re supposed to spend. The result of the war in Ukraine is a level of focus on defense spending that has been absent in many European countries for some time.
While attention may equate to bumps in European defense spending, it will take time for funding to flow through the system, Coykendall acknowledges. This could give US suppliers and European defense companies time to come to terms in a constrained supply environment. Most A&D companies don’t publicly discuss their efforts to improve resilience and secure the inputs they need, he says.
“I think companies are looking to their suppliers and talking about dedicated solutions. [part/material] production lines within a facility from which they are committed to purchasing in volume. These kinds of strategies, specific commitments have been around for some time, but Ukraine [war] reinvigorated them.