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Defense Orders Outpace Equipment Losses in Ukraine
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 McAlinden Research Partners McAlinden Research shares current movements in the Ukrainian war effort as well as two defense stocks that may see a boost as this conflict continues.

A decade into the post-Maidan period in Ukraine, the duration of Russia's formal invasion of the country has just entered its third year. Within that time, the conflict has drawn resources from virtually every corner of the globe. However, as MRP's coverage of the war has recently noted, the breadth of assistance flowing to the Ukrainian side has recently narrowed to the lowest level since Q1 2022. This has allowed Russia to swing the initiative in its favor throughout the past several months, and it will likely retain an offensive posture for the duration of the year. Ukraine's next chance for a counteroffensive may not arrive until 2025 and the potential for such a maneuver will continue to be heavily dependent upon a revival of U.S. and European aid to the country.

Russia is currently advancing at a pace unseen since 2022, as it is conducting "a cohesive multi-axis offensive operation in pursuit of an operationally significant objective for nearly the first time in over a year and a half," according to a recent report from the Institute for the Study of War (ISW). Advances in the Donetsk Oblast, specifically in the Avdiivka, Bakhmut, and Novomykhailivka directions, are likely setting the stage for a sizeable Spring-Summer offensive that could be focused more broadly throughout the sprawling 1,200km frontline. Moscow's most pronounced advantages exist in the insurmountable firing rate of its artillery corps, air superiority that allows jets to relentlessly hammer Ukrainian positions in many portions of Eastern Ukraine, and a steady flow of newly manufactured battle tanks to the front.

Though the EU has sought to address the ammunition issue with lucrative pledges to provide one million shells to Ukraine in the year to March 2024, the bloc has recently disclosed that just over half of that sum will be deliverable in the time period they promised. A large portion of these shells are the product of existing European stockpiles, which have already become thin in recent months. To boost the production of new artillery shells and other equipment, some EU defense contractors have sought to consolidate the continent's discordant military supply chain through M&A. As MRP noted earlier this year, Germany's Rheinmetall acquired the Spanish munitions manufacturer Expal Systems in August in a deal worth $1.2 billion as part of a bid to scale up the continent's output of NATO standard 155mm shells. 

Center for Strategic and International Studies data projects that the U.S.'s monthly production of 155mm artillery shells could rise from 28,000 last October to roughly 37,000 by April and about 60,000 in October 2024. A further rise to as much as 100,000 shells per month by the start of Q4 2025 is also on the table. Russia's firing rate, however, has been as high as 60,000 per day in the past, which has exhausted Ukrainian units' ability to provide meaningful counterbattery fire. Moscow believes it will only need to procure enough supplies to fire 15,000 rounds per day, mixing 155mm and 152mm rounds, to propel a Ukrainian surrender in 2025. To supplement Russia's ambitions, North Korea has likely sold millions of shells to Russia recently to bolster its efforts. As MRP noted in 2023, Pyongyang is known to have a large stockpile of artillery shells and rockets that would be compatible with Soviet-era weaponry, as well as a history of producing critical 152mm ammunition. The U.S. Army has said it needs Congress to approve $3.1 billion of supplemental aid to buy 155mm rounds and sufficiently support Ukraine and other strategic U.S. allies.

Just this morning, a US-built M1A1 Abrams tank was destroyed in Ukraine for the first time. The U.S. supplied 31 of these tanks to the Ukrainian armed forces last year, but they had yet to be spotted close to the frontline until very recently, when at least one unit was visually confirmed to be operating in the western suburbs of Avidiivka, following the retreat of Ukrainian forces from the city proper on February 17. New drone footage from the battlefield, as well as high-quality photos disseminated across various social media channels, show a damaged Abrams tank in flames, which then explodes after "cooking off," a result of ammunition within the vehicle igniting.

Though the loss of one tank, which is an older generation than the more advanced M1A2 Abrams produced by General Dynamics, marks a symbolic new phase in the Russo-Ukrainian war. Since the start of the formal Russian invasion of Ukraine, GD has received a contract worth $1.1 billion to provide 250 new M1A2 tanks to Poland, the first U.S. ally in Europe to receive the Abrams. A further 116 M1A1 tanks are also being delivered to Poland from U.S. stockpiles. The Pentagon put up $1.1 billion in 2022 for General Dynamics to produce up to 96 new light tanks, known as Booker M10s, for delivery starting in March. 

Visually confirmed losses of US-supplied M2A2 Bradley infantry fighting vehicles (IFV) comprise 69 of the 186 units the US has supplied to Ukraine, according to open-source intelligence (OSINT) analysts at Oryx. That puts the attrition rate near 37% and the price tag on visualized losses of this single vehicle type as high as $138 million. The U.S. armed forces have about 4,000 Bradley IFVs at their disposal, so the losses likely account for less than 1.8% of all available units. Additionally, BAE Systems was awarded a $190 million contract last August to produce 70 M2A4 Bradley IFVs and the M7A4 Fire Support Team Vehicles, essentially supplanting all of the Bradley losses sustained in Ukraine thus far. Raytheon Technologies Corp. (RTX:NYSE) Lockheed Martin Corp. (LMT:NYSE) 

Ukraine's 47th Mechanized Brigade has been the primary recipient of the U.S.'s Bradleys and shifted its position eastward from the Zaporizhzhia frontline near Orikhiv to the Adviivka direction in Donetsk last Autumn. The brigade's change in position has also changed its posture from an offensive orientation to an "active defense," which is the strategy Ukraine has said it will employ in 2024. More Bradleys will likely be needed to bolster Ukraine's defensive capacity and will certainly be needed if there is ever to be a renewed counteroffensive effort.

The release of footage last week appearing to show the targeting and destruction of a Patriot missile defense system's control center in the Kherson region would mark a second confirmed hit on the set of advanced interceptors thus far provided to Ukraine. The U.S. and Germany have supplied as many as five Patriot systems (a Raytheon Technologies Corp. (RTX:NYSE) product) to the war effort, which means the attrition of this air defense component could be up to 40.0%. Though analysis of footage from cameras throughout Kyiv provided strong proof that a Patriot system had been hit last May, U.S. officials claimed that the strike on the Patriot system only generated minimal damage, but this cannot be confirmed with certainty.

The price tag on a single Patriot air defense system is in excess of $1.0 billion, making these interceptors the most expensive piece of equipment provided to Ukraine on a per unit basis. The U.S. is estimated to maintain about 50 of these systems in total, meaning that the loss of just two could wipe out 4% of all available stocks.

At a cost of over $3.7 million per projectile, the launch of just one full battery (16 missiles) of Patriot PAC-3 missiles racks up a cost of almost $59.7 million. In January, NATO announced it would help buy up to 1,000 Patriot missiles to strengthen the critical layer of air defense that Patriot systems can provide. Per AP sources, the contract for these missiles could be worth around $5.5 billion. Defense industry manufacturer Lockheed Martin Corp. (LMT:NYSE) is the prime contractor for the PAC-3 missile.

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McAlinden Research Partners Disclosures
This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.
McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication.

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