Australia / Analyst Insights
Increased defence spending set to benefit shipbuilders
by Andrew Ledovskikh
Jun 28 2016

Defence spending has rebounded over the past five years, following significant cuts in 2010-11. Since 2013-14, the Federal Government has made strong commitments to boost defence spending over the next decade. The Defence White Paper, released in February 2016, has outlined the Federal Government’s intention to support Australian shipbuilding firms. Contracts awarded to Australian companies to construct patrol vessels, frigates and portions of the new Australian submarines are expected to drive growth for shipbuilding and repair services operators over the next five years and beyond.

Defence spending is often volatile as it generally reflects the changing requirements of national security and foreign policy, and the different priorities of political parties. The Labor Federal Government cut defence spending significantly in 2010-11, and then cut forward spending in the 2012-13 Federal budget. The election of the Liberal Federal Government in 2013-14 precipitated a dramatic increase in planned military expenditure. In 2016, the Federal Government re-committed itself to increasing defence spending to 2.0% of GDP by 2023-24. The Labor opposition has largely supported this commitment. This spending aims to increase the Australian armed forces’ capability to respond to potential threats to Australian national security and foreign policy objectives. Defence spending will be coordinated through the Integrated Investment Program, which will allocate approximately $195 billion over the decade to 2025-26. The Federal Government has committed to purchasing new aircraft, and constructing naval vessels and submarines. These significant capital expenditures are expected to drive increased revenue in the defence industry over the next five years.

Increased defence spending is good news for shipbuilding operators. Most of the industry’s revenue is derived from government contracts for military vessel construction. As a result, changes in defence spending have a significant effect on industry revenue and employment. Operators have traditionally faced boom and bust cycles as large military vessel construction contracts boosted demand, followed by job losses and dips in revenue as contracts expired. Over the past five years, contracts to construct the Hobart-class air warfare destroyers (AWDs) and the Canberra-class landing helicopter docks (LHDs) have supported industry firms. However, the completion of the LHD project in 2015 led to BAE Systems announcing 125 job cuts at its Williamstown Shipyard in Victoria, with further cuts announced in 2016.

The 2016 Defence White Paper aimed to address the boom-bust cycle experienced by shipbuilding and repair services operators. The Federal Government set an objective to maintain a sustainable shipbuilding industry in Australia, in an effort to retain domestic shipbuilding capacity. A program to continuously build military vessels is expected to commence in 2017-18, with 12 offshore patrol vessels being constructed to replace the Armidale-class patrol boats. The $35 billion future frigate construction program is also scheduled to commence for 2020-21. These projects are forecast to boost revenue and employment for shipbuilders over the next five years, and significantly assist the domestic industry’s viability over the long term.

 

Relevant industries:

Shipbuilding and Repair Services

Defence