In the wake of NATO’s landmark decision to increase its defence spending target from 2% to 5% of gross domestic product (GDP) by 2035, the global defence industry is undergoing a significant transformation. This move, agreed at the NATO summit in The Hague in June 2025, responds to heightened geopolitical tensions, notably the conflict between Russia and Ukraine, and reflects an urgent drive to bolster military readiness and technological capabilities across member states.
NATO’s expanded defence spending blueprint delineates a clear allocation: 3.5% of GDP is to be committed to core defence capabilities, while 1.5% will be directed towards defence-related infrastructure and innovation. Member countries are required to submit annual plans outlining credible pathways to reach this goal, with progress reviews scheduled for 2029. According to reports, this shift marks a historic increase in European defence funding, aiming to enhance deterrence against Russian aggression and embrace emerging military technologies such as artificial intelligence, autonomous systems, and cyber capabilities.
The strategic emphasis on advanced technology as a “force multiplier” has not gone unnoticed by investment firms. BlackRock, for instance, highlights defence tech as a principal investment theme for 2025, citing robust inflows into defence-focused exchange-traded funds (ETFs) worth over US$7.5 billion this year. The firm underscores the increasing priority of AI in boosting intelligence and military capacity, a trend mirrored in expanding budgets across the NATO alliance.
Australian defence companies stand at the forefront of capitalising on this wave of investment and innovation. Firms such as DroneShield Ltd, Elsight Ltd, and Vection Technologies Ltd are leveraging contracts and expanding their client base to meet rising demand. DroneShield recently reached a record high in its share price, aligning its growth ambitions with amplified defence spending in key markets like France.
Further reinforcing Australia’s strategic role is the country’s position in the critical minerals sector, vital for manufacturing sophisticated defence hardware. China’s tightening grip on critical minerals—germanium, gallium, rare earths—has disrupted Western supply chains, prompting concerted efforts to establish alternative sources. Australia’s rare earth producers Lynas Rare Earths Ltd and Iluka Resources Ltd have enjoyed renewed investor interest following Canberra’s backing of a US-led initiative to set a price floor for rare earth elements. This policy aims to reduce dependence on China by stabilising prices and fostering a resilient supply chain. Lynas, in particular, was the first company earlier this year to produce heavy rare earths commercially outside China, and both companies welcome the price floor as a signal of long-term sustainability for Western rare earth production. Industry commentary suggests that the Australian government’s contemplation of such price floor mechanisms aligns with broader efforts to enhance market certainty and counter price volatility.
Domestic industrial developments further illustrate Australia’s growing defence sector prominence. Austal Limited has been officially recognised by the Australian government as a sovereign shipbuilder, positioning it to compete for up to A$20 billion in defence contracts, including a significant A$10 billion project to build next-generation stealth frigates for the Royal Australian Navy. Meanwhile, Electro Optic Systems has secured a €71.4 million (A$125 million) contract for high-power laser defence systems, strengthening Australia’s foothold in counter-drone technology—a critical area of modern warfare.
In the realm of critical minerals processing, the Australian government recently pledged A$135 million to support Trafigura-owned Nyrstar’s lead and zinc smelters, pivotal for producing byproducts including antimony, bismuth, germanium, and indium. This support aims to prevent the collapse of essential domestic smelting capacity amid rising energy costs and global competition, particularly from China.
Globally, efforts to diversify critical mineral supply chains are gaining traction. The US Department of Defense awarded $10 million to NioCorp Developments to develop a domestic supply chain for scandium—a metal critical for aerospace and defence applications—reflecting a shared Western imperative to lessen reliance on Chinese sources.
However, it is important to note some contrasting operational experiences within the sector. For example, Belgian materials company Umicore reported no disruptions despite China’s export curbs, attributing resilience to effective stock management and a diversified supply chain. This underscores that while Chinese restrictions pose challenges, strategic preparedness can mitigate immediate impacts.
As NATO’s increased defence spending plans begin materialising, the Australian defence and critical minerals sectors appear well-positioned to benefit from these geopolitical and economic shifts. The growing emphasis on cutting-edge defence technologies and secure supply chains for essential materials presents lucrative opportunities. For investors and policymakers alike, the challenge will be to identify companies not only backed by government support but also equipped with the innovation, infrastructure, and agility necessary to thrive in this dynamic, high-stakes environment.
Source: Noah Wire Services
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