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Defense Outlook

Banking on the Status Quo

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MCN Editor Dan Markham The new administration is not likely to lead to significant changes in defense spending, at least in the short term.

January 20th ushered in a new administration and Democratic control over both houses of Congress. This change in governance will be studied closely by the metals sector, curious how, and when, the Biden administration will address such relevant subjects such as steel and aluminum tariffs, taxation and regulation.

Yet one segment of the supply chain has an even more direct connection to the goings on in D.C., the defense sector. It’s a segment that supplies directly to Uncle Sam or to and through the hundreds of defense contractors working with the federal government. So what kind of changes do these supply chain participants expect to see with this overhaul of power in the nation’s capital?

Not a whole lot.
Veteran participants and analysts of the defense sector don’t anticipate the shift to a Democratic administration will be felt much by the metals industry, and certainly nothing in the short term.

“I don’t see any issues. It’s going to be another banner year,” says Joseph Carbone, vice president of sales and marketing for Tech Steel and Materials, Holbrook, N.Y.

In December, defense industry analyst James McAleese of McAleese and Associates spoke about the spending outlook under the new president. His conclusion was Fiscal Year 2022 spending would be flat to down 3 percent, ranging from $720 to $741 billion. The federal government budgeted $741 billion for fiscal year 2021.

“I’ve seen no indication that Biden is necessarily targeting DoD immediately. He’s got other priorities.”

The calculus has changed a little since McAleese’s remarks, given the Democratic victories in the Georgia Senate races gave the party control of that chamber. A lot depends on how much sway the progressive caucus has in the Senate.
“It is not necessarily going to be Biden attacking the Defense Department; it’s going to be the progressives. They now realize that, once you look at the federal budget of $5.7 trillion, if the tax increases don’t go and the entitlements aren’t going to go down, all that’s left is that $1.4 trillion of federal discretionary spending per year,” McAleese said.

Working against future defense spending are the considerable costs incurred in 2020-21 fighting the coronavirus. With a third stimulus package approved, any debt concerns could get Congress looking to pare some future costs from the DoD.

“They’ve got to find some areas to cut,” says Viv Helwig, founder and owner of Vested Metals, St. Augustine, Fla. “With the budget pressures coming out of COVID, we’ll probably see a decrease in metal requirements on new equipment.”

But only so much. As the end-of-year fiscal showdown demonstrated, when Congress overwhelmingly overturned President Trump’s veto of the annual defense bill, there tends to be broad, across-the-aisle support for funding defense.

Moreover, as T&T Materials’ James Mossgraber notes, the Oval Office has a way of turning the most dovish individual into a hawk. “Regardless whether you’re branded as a progressive or liberal or conservative or reactionary, when you reach that office and you receive those briefings about what China’s doing or what Russia is doing, you don’t just ignore that.

“Do we need a strong military? Yes,” says Mossgraber, vice president and general manager of the Rochester, N.Y.-based company. “To me, the difference in the party’s outlook is “How much is enough?”

And what we make isn’t just for our needs. “We’re America. We make our money through warfare. We sell weapons all across the world. We provide defense to our nation and hundreds more out there,” Carbone says.

Of course, even if the total spend doesn’t change much from year to year, there will be a shift in priorities. McAleese says five areas stand out as strong growth areas: space (approximately $18 billion per year), hypersonics ($3.2 billion annually), microelectronics ($1.5 billion), AI ($800 million) and 5G ($600 million).

“Space is supported by continued aggression from key adversaries such as China and Russia. Hypersonic programs are also anticipated to witness a significant uptick driven by programs transitioning from development to production.”

Helwig, whose company is located not far from the hub of the space program in Florida, has already seen space taking off. “You see companies flocking to the Space Coast again. You’ll see funding continue to increase and costs decline. And there’s the defense pieces, with a lot in satellite and telecommunications, but also with private companies like Space X. In 2021, we’re probably going to see strong growth there.”

Additionally, even if new programs are scaled back, that doesn’t stop activity. “We service and supply material to a larger segment that would be characterized as routine maintenance. You may want to cut defense spending, but you can’t stop the maintenance,” Mossgraber says. “You can’t put a pilot in an aircraft and say we skipped the last three maintenance upgrades. And as that is required, so too are the raw materials to do the repair.”

One other thing working toward continuity in defense spending is the simple long-gestating nature of some programs. A multiyear project to build a new amphibious landing vehicle is not going to be halted simply because of a change in the presidency or the person heading up the DoD. Programs may be modified or an order number reduced, but rarely is an expensive undertaken simply mothballed.

Though priorities often change with a new administration, the business environment between suppliers and the defense sector tends to remain fairly stable. Thankfully, the distance between the Beltway and the folks on the ground is significant.

“Living through the Bush administration, the Obama administration and the Trump administration, there is not a discernible difference in the day-to-day procedural workings. You’re talking about people who are professionals in their disciplines, whether it’s engineering or procurement or quality management. This is their career, and they follow procedures and policies and it really doesn’t matter who controls Congress or who controls the White House,” Mossgraber says.

The only way the supply chain may notice a difference is if the administration prioritizes set-aside categories for smaller companies. Helwig hopes his company’s recent 8A certification will enable it to do some additional work, as a sole-source contractor or teaming up with larger suppliers under such an emphasis in the Biden administration.

Caption: An Air Force F-16 Fighting Falcon receives fuel from an Air Force KC-10 Extender during an early morning midair refueling mission supporting Operation Octave Quartz above Africa, Jan. 9, 2021.
(Photo courtesy Department of Defense)


COVID Could Have Long-Term Effect on Defense

There tends to be strong correlation between the defense sector and the commercial aerospace segment, with so much of DoD spending going into aircraft of one type or another.

In 2020, for suppliers to both those sectors, defense spending provided a buffer to the brutal news the industry had experienced since the start of the pandemic. While other markets, such as automotive, rebounded quickly from the shutdowns associated with the onset of the coronavirus outbreak, commercial aerospace remains years away from recovery.

“Clearly military markets carried more of the load in the first half of 2020 as the impact of the virus began to manifest itself,” said TIMET’s Henry Seiner during the most recent  titanium conference presented by the International Titanium Association.

According to Aviation Week, approximately 2,100 military aircraft will be delivered across the globe over the course of the next five years, continuing to prop up the market.  About 22 percent are deliveries to North America.   

But defense isn’t necessarily immune to the effects of the virus. It just may take a little longer to suffer the consequences.

When Seiner took a look back at the most recent recession, the global financial crisis of 2008-09, defense spending took a considerable hit in the five years after the downturn ended. With a few exceptions, most countries with significant defense budgets reduced spending in the half-decade following the recession.  

“There are other factors that will help determine what the next five to 10 years look like, but clearly there’s been a significant amount of spending by governments to counter the virus in 2020. Expectations are it will be drawn out and the recovery will be uneven, such that defense budgets will be under the magnifying glass in the coming years,” Seiner said.
Aviation Week estimates global defense spending will decline by about 5 percent over the next five years, approximately $70-80 billion annually. However, it’s possible the reductions in spending could be twice that amount, the publication estimated.

While the pandemic could have long-term negative consequences on overall spending, it could also serve to shine a light on other areas that would benefit the U.S. manufacturing industry. The early-spring shortages of PPEs, ventilators and other essential products have illustrated the need to re-examine the full supply chain.

“It’s compelled people to not just assume those supply chains are in place.  And the time you want to do that evaluative process is now when you’re in the throes of an emergency,” says James Mossgraber, vice president and general manager at T&T Materials. “You want to do it in advance of it, and not stumble on it when you’re in dire straits.