U.S. arms makers strain to meet demand as Mideast conflicts rage

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Top U.S. arms makers are straining to meet surging demand for precision missiles and other weapons being used in the U.S.-led fight against Islamic State and other conflicts in the Middle East, according to senior U.S. officials and industry executives.

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Global demand for U.S.-made missiles and so-called smart bombs has grown steadily since their use in the first Gulf War. But the United States and a host of allies are now rushing to ensure a stable supply of such weapons for what is expected to be a long fight against Islamic State, whose rise has fueled conflict in Syria and across a swathe of the Middle East.

U.S. officials say arms makers have added shifts and hired workers, but they are bumping up against capacity constraints and may need to expand plants or even open new ones to keep weapons flowing. That could create further log-jams at a time when U.S. allies are voicing growing concern that Washington's processing of arms sales orders is too slow.

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U.S. arms makers strain to meet demand as Mideast conflicts rage
FILE - In this Monday, Oct. 20, 2014 file photo, thick smoke and flames from an airstrike by the U.S.-led coalition rise in Kobani, Syria, as seen from a hilltop on the outskirts of Suruc, at the Turkey-Syria border. For a force that has built its reputation on projecting an aura of momentum and invincibility, the prolonged stalemate in Kobani is a setback for Islamic State militants with potential implications in terms of recruitment and support. Nearly two months after it launched its lightning assault on the small Kurdish town, the group is bogged down with an increasingly entrenched and costly battle in which hundreds of its fighters have been killed and a good deal of its military apparatus destroyed. (AP Photo, Lefteris Pitarakis, File)
Smoke rises from the Syrian city of Kobani, following an airstrike by the US led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border Monday, Nov. 17, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
Smoke rises from the Syrian city of Kobani, following airstrikes by the US led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border Monday, Nov. 17, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
Armed people, believed to be Kurdish fighters, stand behind a wall, bottom center-left, as smoke rises from the Syrian city of Kobani, following airstrikes by the US led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border Monday, Nov. 17, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
Smoke rises from the Syrian city of Kobani, following airstrikes by the US led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border Monday, Nov. 17, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
FILE - In this Nov. 17, 2014 file photo, smoke rises from the Syrian city of Kobani, following an airstrike by the U.S.-led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border. The mass beheadings of Egyptian Christians by militants in Libya linked to the Islamic State group have thrown a spotlight on the threat the extremists pose beyond their heartland in Syria and Iraq, where they have established a self-declared proto-state. Militants in several countries - including Libya, Egypt, Algeria, Yemen and Saudi Arabia - have pledged allegiance to IS leader Abu Bakr al-Baghdadi. (AP Photo/Vadim Ghirda, File)
A tractor drives on agricultural fields as smoke rises from an Islamic State group position in eastern Kobani, after an airstrike by the US led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border Saturday, Nov. 8, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
Two bombs, seen on top right, fall on an Islamic State fighters' position in the town of Kobani during airstrikes by the US led coalition, seen from the outskirts of Suruc, near the Turkey-Syria border, Wednesday, Oct. 29, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
This image made from gun-camera video taken on July 4, 2015 and released by United States Central Command shows an airstrike on a bridge near Islamic State group-held Raqqa, Syria, that was a key transit route for the militants. After billions of dollars spent and more than 10,000 extremist fighters killed, the Islamic State group is fundamentally no weaker than it was when the U.S.-led bombing campaign began a year ago, American intelligence agencies have concluded. (U.S. Central Command via AP)
This image made from gun-camera video taken on July 4, 2015 and released by United States Central Command shows an airstrike on a main road and transit route near the Islamic State group-held Raqqa, Syria. After billions of dollars spent and more than 10,000 extremist fighters killed, the Islamic State group is fundamentally no weaker than it was when the U.S.-led bombing campaign began a year ago, American intelligence agencies have concluded. (U.S. Central Command via AP)
In this photo taken from the Turkish side of the border between Turkey and Syria, in Akcakale, southeastern Turkey, people watch as smoke from a US-led airstrike rises over the outskirts of Tal Abyad, Syria, Monday, June 15, 2015. Thousands of Syrians cut through the border fence and crossed over into Turkey Sunday, fleeing intense fighting in northern Syria between Kurdish fighters and jihadis. (AP Photo/Lefteris Pitarakis)
In this photo taken from the Turkish side of the border between Turkey and Syria, in Akcakale, Sanliurfa province, southeastern Turkey, smoke from a US-led airstrike rises over the outskirts of Tal Abyad, Syria, Sunday, June 14, 2015. Syrian Kurdish fighters closed in on the outskirts of a strategic Islamic State-held town on the Turkish border Sunday, Kurdish officials and an activist group said, potentially cutting off a key supply line for the extremists' nearby de facto capital. Taking Tal Abyad, some 80 kilometers (50 miles) from the Islamic State stronghold of Raqqa, would mean the group wouldn't have a direct route to bring in new foreign militants or supplies.(AP Photo/Lefteris Pitarakis)
Turkish soldiers guard the border area with Syria in Akcakale, southeastern Turkey, as smoke from a fire caused by a US-led airstrike rises over the outskirts of Tal Abyad, Syria, Monday, June 15, 2015. A day after thousands of Syrians cut through the border fence and crossed over into Turkey, fleeing intense fighting in northern Syria between Kurdish fighters and Islamic State group, Turkish army retook control. (AP Photo/Lefteris Pitarakis)
FILE - In this Oct. 22, 2014, file photo, thick smoke from an airstrike by the US-led coalition rises in Kobani, Syria, as seen from a hilltop on the outskirts of Suruc, at the Turkey-Syria border. For four months, Syrian Kurdish fighters battled Islamic State militants in the rubble-strewn streets and crumpled buildings in the town of Kobani as U.S. aircraft pounded the extremists from the skies above. (AP Photo/Lefteris Pitarakis, File)
A bombs, seen top left, falls on an Islamic State position in eastern Kobani, during an airstrike by the US led coalition, seen from a hilltop outside Suruc, on the Turkey-Syria border Saturday, Nov. 8, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
Children run on a hillside as smoke rises from an Islamic State fighters position in the town of Kobani during airstrikes by the US led coalition, seen from the outskirts of Suruc, near the Turkey-Syria border, Wednesday, Oct. 29, 2014. Kobani, also known as Ayn Arab, and its surrounding areas, has been under assault by extremists of the Islamic State group since mid-September and is being defended by Kurdish fighters. (AP Photo/Vadim Ghirda)
In this photo taken Tuesday, March 10, 2015, members of a U.S. Air Force munitions team assemble guided bombs to support the 379th Air Expeditionary Wing at the al-Udeid Air Base in Qatar. The base is the regional nerve center for the air war against the militants who have taken over nearly a third of Iraq and Syria. That makes it the main hub for coordinating warplanes from the U.S. and 11 other nations in the coalition carrying out bombing raids. (AP Photo/Adam Schreck)
In this photo taken Monday, March 9, 2015, a B-1 bomber prepares to land after finishing a mission at the al-Udeid Air Base in Doha, Qatar. The base is the regional nerve center for the air war against the militants who have taken over nearly a third of Iraq and Syria. That makes it the main hub for coordinating warplanes from the U.S. and 11 other nations in the coalition carrying out bombing raids. (AP Photo/Osama Faisal)
A U.S. military officer looks out at the flight deck of the French navy aircraft carrier Charles de Gaulle in the Persian Gulf as the U.S. helicopter prepares for takeoff Thursday, March 19, 2015. The Charles de Gaulle, France's only aircraft carrier and the flagship of the French navy, arrived in the Persian Gulf last month to help provide additional air power to the U.S.-led coalition conducting airstrikes against the Islamic State militants who have seized a third of Iraq and Syria. (AP Photo/Hasan Jamali)
FILE - In this Aug. 10, 2014 file photo, an aircraft lands after missions targeting the Islamic State group in Iraq from the deck of the U.S. Navy aircraft carrier USS George H.W. Bush in the Persian Gulf. Combined U.S.-Arab airstrikes at the heart of the Islamic State group's military strongholds in Syria achieved their strategic aim of showing the extremists that their savage attacks will not go unanswered, the top American military officer said Tuesday, Sept. 23, 2014. (AP Photo/Hasan Jamali, File)
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Islamic State's deadly attacks in Paris last month have added urgency to the U.S.-led bombing campaign against the group in Iraq and Syria. The campaign had resulted in 8,605 strikes at an estimated cost of around $5.2 billion as of Dec. 2.

Meanwhile, a Saudi-led coalition including Bahrain and the United Arab Emirates and backed by Washington is carrying out a nine-month-old military campaign against Iran-backed rebels in Yemen. Gulf states are also supplying U.S.-made arms to rebels fighting Syria's government in that country's four-year-old war.

"It's a huge growth area for us," said one executive with a U.S. weapons maker, who was not authorized to speak publicly.

"Everyone in the region is talking about building up supplies for five to ten years. This is going to be a long fight" against Islamic State.

The impact is palpable in Troy, Alabama, where Lockheed Martin Corp builds its 100-pound Hellfire air-to-ground missiles at a 3,863-acre highly secured facility surrounded by woods and horse pastures. Realtors are adding staff in anticipation of new hiring at the plant, and the large grocery chain Publix is opening a store soon.

"What's good for Lockheed is good for Troy," said Kathleen Sauer, president of the Pike County Chamber of Commerce, adding that the expansion was helping a local economy where unemployment rates are already among the lowest in the state.

"Look at our downtown," she said. "Almost all the stores are open and we have more coming in."

Lockheed has added a third shift at its plant, which employed 325 workers as of February, and is now at "maximum capacity," said one executive familiar with the issue. The company announced in February that it will add 240 workers by 2020 and expand the facility, which also produces a 2,000-pound air-to-surface stealthy missile.

Frank Kendall, the Pentagon's chief arms buyer, told Reuters this week there has been particularly strong demand for the Hellfire missiles. At $60,000 to $100,000 apiece they are inexpensive compared to many missiles and can be launched from everything from aircraft and helicopters and ships to destroy armored vehicles or punch into buildings.

Kendall and other senior U.S. officials told Reuters they are working with Lockheed, Raytheon Co and Boeing Co. to ramp up production of precision munitions and potentially add new capacity.

"We are watching that closely. We are looking at the need to increase capacity," Kendall said.

SALES SURGING

Defense shares have performed strongly in recent months on expectations of better results, and many soared after the attacks in Paris.

Total U.S. foreign military sales approvals surged 36 percent to $46.6 billion in the year through September 2015 from around $34 billion a year earlier. Approved sales of missiles, smart bombs and other munitions to U.S. allies jumped to an estimated $6 billion in fiscal 2015 from $3.5 billion a year earlier.

This year alone, the U.S. government has approved the sale of Hellfires to South Korea, Pakistan, Saudi Arabia, Lebanon, France, Italy and Britain. In June, the U.S. Army said it had asked Lockheed to boost production of the Hellfire from 500 per month to 650 by November.

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"There are essentially waiting lists for Hellfire. They can't make them fast enough," said one State Department official, who asked not to be identified.

Lockheed declined to provide any details about how it is meeting increased demand for Hellfires and other munitions.

In addition to approved foreign military sales, many munitions sales are overseen by the U.S. Commerce Department and negotiated directly between countries and companies. U.S. weapons makers do not routinely report such sales, and do not break down revenues by specific weapons.

Also in high demand, Kendall said, are Boeing's Joint Direct Attack Munition (JDAM) kits, which turn unguided munitions into smart bombs and have been used consistently to strike Islamic State targets in Iraq and Syria.

Last month, the State Department approved a $1.29 billion deal with Saudi Arabia for more than 22,000 JDAMS and other types of precision-guided bombs.

Boeing said it boosted the daily production rate of JDAMs at its facility outside St. Louis by 80 percent in July to meet demand from the U.S. military and more than 25 other countries.

Raytheon, one of the largest U.S. munitions makers, declined comment on its missile production work. The company has a large missile production facility in Tucson, Arizona, which could potentially boost production, Kendall said.

REACHING CAPACITY

Kendall said U.S. manufacturers had been "very responsive," but some facilities were already reaching maximum capacity and it would take years for firms to make necessary expansions.

He said the U.S. government could potentially chip in to defray the cost of new facilities and tooling, but that would be addressed on a case-by-case basis.

It takes time for foreign and U.S. orders to be processed by the U.S. bureaucracy and translate into contracts for companies, but that is now occurring, stretching many facilities to capacity limits, according to industry executives, who were not authorized to speak publicly.

Vice Admiral Joe Rixey, director of the Pentagon's Defense Security Cooperation Agency, said industry was keeping up with demand thus far but that pressures were mounting.

"We are reacting to get it done," Rixey told Reuters. "We're working on purchasing capacity and shifts."

Defense shares have been buoyed by a two-year congressional budget agreement that ensures stable funding for fiscal 2016 and 2017, share buybacks and growing confidence that a revenue trough is nearly over.

Raytheon told analysts in October that its missile sales - which account for about 28 percent of overall revenues - jumped 11 percent in the third quarter and looked set for further growth in the fourth quarter.

Lockheed and Boeing do not provide details about their missile sales, but they account for a relatively small - albeit growing - portion of their defense businesses, according to analysts.

The long-term increase in demand is also expected to boost revenues for key suppliers such as Orbital ATK and Aerojet Rocketdyne Holdings Inc, which make the propulsion systems for many of the missiles.

U.S. Air Force Chief of Staff General Mark Welsh said the U.S. military had increased its orders in recent years to replenish and expand its stockpiles, but more work was needed. He said Washington was encouraging its allies to do the same.

"We all have to be better at pre-planning for munitions, because they're expensive and we don't have an industrial base that can spin up over night and produce them," he said last week after a speech hosted by the Atlantic Council think tank.

For U.S. towns and cities that are reliant on the arms industry for growth, the growth is welcome economic news despite the rise in global conflicts.

"It's a dangerous world," said Kevin Flowers, who works at Alabama Real Estate Connection in Troy, which he said was adding staff in anticipation of further expansion by Lockheed.

"We have to be ready. Better safe than sorry."

(Additional reporting by Idrees Ali in Washington and Rich McKay in Troy, Alabama; editing by Stuart Grudgings)

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