In the wake of NATO’s historic decision to increase its defence spending target to 5% of gross domestic product (GDP), the global defence sector is experiencing a major shift — and Australian companies are in a strong position to benefit.
With geopolitical tensions, particularly from the Russia-Ukraine war, consistently dominating headlines, the growing defence focus is expected to trigger a surge in demand for advanced military technologies. From drones and cyber capabilities to autonomous systems, the need for next-gen defence tech is becoming more pressing, and local firms are already preparing to play a crucial role in meeting this demand, with several major developments announced this week.
NATO’s defence surge: What it means for the sector
At the NATO summit in The Hague in late June, member nations agreed to hike defence spending to 5% of GDP, a drastic increase from the previous 2% target, in response to US pressure amid growing concerns over global security, particularly in light of the ongoing Russia-Ukraine conflict.
With the alliance now focused on bolstering its military readiness, the demand for cutting-edge defence technologies has surged, opening up new opportunities for companies that specialise in drones, cybersecurity and autonomous systems.
BlackRock has identified defence tech as one of the key investment themes of 2025, noting that the shifting US security posture has already driven EU defence spending above its previous 2%-of-GDP target after undershooting for more than 20 years.
“Technology is also now a key part of national security,” the BlackRock Investment Institute said in its latest market outlook. “The US sees AI as a ‘force multiplier’, a tool to enhance intelligence, military capability and autonomous systems.”
BlackRock’s growing position in defence ETFs, which have already attracted more than US$7.5 billion in global inflows this year, underscore the sector’s potential for high growth.
For Australian firms, this signals a golden opportunity. Companies like DroneShield Ltd (ASX:DRO, OTC:DRSHF), Elsight Ltd (ASX:ELS), and Vection Technologies Ltd (ASX:VR1) are already making inroads in the market, securing substantial contracts and expanding their customer base.
Read more: DroneShield hits record high as expansion plans align with French defence boost
China’s tightening grip on critical minerals
Another factor reshaping the global defence landscape is China’s increasing restrictions on the export of critical minerals. Materials like germanium, gallium, and rare earths are essential for the production of advanced military systems, and China’s stranglehold on their supply has caused significant disruptions in Western supply chains.
Australia’s rare earth producers, including Lynas Rare Earths Ltd (ASX:LYC, OTC:LYSCF) and Iluka Resources Ltd (ASX:ILU), were seeing renewed investor interest on Tuesday thanks to Canberra’s backing of a US-led initiative to set a price floor for rare earth elements.
The move aims to reduce Western reliance on China’s critical mineral supply chain and has already sparked a rally in Australian stocks. Lynas shares rose 5%, while Iluka gained 4.7%.
Both companies have expressed strong support for the initiative. Lynas, which earlier this year became the first to commercially produce heavy rare earths outside China, sees the price floor as a step towards creating a larger, more resilient global supply chain.
Iluka, developing its Eneabba refinery in Western Australia, highlighted that the US$110 per kilogram price floor for neodymium-praseodymium (NdPr) is a key signal for the future sustainability of Western rare earth production.
Read more: Rare earth price floor plans boost Lynas and Iluka shares
Australian defence firms poised for growth
This week alone has seen several Australian defence and tech companies step up with major deals announced.
Austal Limited (ASX:ASB) announced it has been recognised by the Australian government as a sovereign shipbuilder and secured a strategic position to compete for up to A$20 billion in defence contracts. This comes alongside the announcement of its role in building the Royal Australian Navy’s next-generation stealth frigates, valued at A$10 billion, and cements the company’s importance in both local and international defence supply chains.
Read more: Austal named sovereign shipbuilder as Hanwha eyes bigger stake
Similarly, Electro Optic Systems (ASX: EOS) on Tuesday said it has secured a €71.4 million (A$125 million) order for its high-power laser defence system, further establishing the company’s leadership in counter-drone technology — a rapidly expanding market within modern defence sectors.
A sector set to thrive
As NATO’s spending surge takes effect, and as global defence priorities shift, the spotlight is now on Australian companies providing cutting-edge technologies. From rare earths to drone systems, the local sector stands to gain significantly.
For investors, the key will be identifying companies that have not only secured government backing but have also developed the infrastructure, expertise and agility to meet the demands of this rapidly evolving sector.