Rheinmetall’s share price plummets in Frankfurt following Germany’s decision to halt a project to build six frigates

(Il Sole 24 Ore Radiocor) - Rheinmetall plummets in Frankfurt after the German government put a stop to a multi-billion project to build six frigates. The arms manufacturer – which was due to be the project’s main contractor – is thus dragging down the entire European defence sector. In Milan, shares are consequently falling Avio , Leonardo and Fincantieri , whilst in Paris Thales is losing ground.

Specifically, Defence Minister Boris Pistorius has decided to scrap plans to build six F126 frigates, due to ‘significant delays and unforeseen costs exceeding the budget’. This was the German Navy’s most significant warship order since the Second World War, according to the Financial Times, and Rheinmetall had been selected as the main contractor with a contract worth €12.8 billion. Now, according to *Der Spiegel*, Berlin is aiming to purchase eight smaller Meko A-200 frigates, with the rumour causing the share price of their manufacturer, TKMS, to surge.

The announcement that the project has been scrapped comes in the midst of the German government’s attempts to take a leading role in European defence and security, with a €780 billion spending plan to reorganise the country’s armed forces by 2030. In this context, the F126 frigate, 166 metres long and weighing 10,000 tonnes, was intended to be a multi-purpose warship capable of remaining at sea for long periods and performing a variety of roles, with a particular focus on anti-submarine warfare. In announcing the end of the plan to build the warships, the German Ministry of Defence explained that the contract for the construction of the six frigates with NVL, recently acquired by Rheinmetall, had been negotiated at a cost of approximately 15.2 billion euros, well above the 10 billion initially planned to be spent. Furthermore, other factors could have pushed the total financial requirements of the operation to over 18 billion euros. It is expected that around 2 billion euros of costs relating to the F126 programme will be written off.

According to analysts, the impact on Rheinmetall could be significant. “Management will have to revise its forecasts for its naval division,” writes Jens-Peter Rieck of MWB Research in a note. In fact, Rheinmetall’s naval segment was expected to generate, according to estimates, a turnover of around 5 billion euros in 2030, but, in light of the latest developments, the expert has revised the estimates down to around 3 billion euros. “The cancellation of the F-126 frigates deprives Rheinmetall of the flagship project that justified the acquisition of Nvl and on which the forecasts for the naval sector up to 2030 were based.”

JPMorgan’s commentary is also along the same lines, stating that the German company ‘may fail to meet its annual target for orders secured’ due to the project being put on hold. The German arms manufacturer is aiming for an order volume of €80 billion this year, but without ‘the frigate order in the second quarter’ it is unlikely to reach this target. Furthermore, “it is highly unlikely that Rheinmetall will secure a new major naval contract in the near future”.