foto: Ministy of Defence, Public domain/DANA self propelled howitzer
Ukraine and Western Europe need ammunition, and they need artillery ammunition. Its key component is propellant charges, generally gunpowder. The Czech company Explosia a.s. plays a crucial role in this respect and significantly influences the production capacity of the Czech defence industry.
One of the significant obstacles to the development of production capacity is, according to the information that the editors of Security Magazine have been encountering for a long time in contact with defence industry companies, not only at major trade fairs, the generous business policy of Explosia. Generous in the conceptual sense that Explosia, unlike the standard practice of virtually all major players in the industry, does not require advance payments from its customers.
Explosia: We require advance payments only very rarely
Milan Vencl, the company's spokesman, also confirmed this when asked directly: "As far as advance payments are concerned, we use them very rarely with new customers or in projects where we produce a tailor-made product for a single customer. If, for whatever reason, the manufactured product is not picked up, we would have no use for it. We would not like to disclose more detailed information in light of the above."
The question is closely related to the desired investment in expanding production capacity. According to the spokesman Vencl, Explosia wants to "more than double production capacity in certain market segments" in 2026/2027. "In 2022, the Pardubice explosives manufacturer achieved a pre-tax profit of CZK 198 million. Last year, it continued its successful trend and increased it to 284 million on a turnover of 1.42 billion. Plans for this year are no less ambitious, although Explosia is struggling with limiting production capacity. Increasing that capacity is also already in the works," the May press release said. According to its recently published annual report for 2023, the company collected only about CZK 20 million in advances. But the consequence of this approach is that the company lacks funds for investments.
The need to increase the capacity of gunpowder production is a long-term
The need to increase gunpowder production capacity has been increasingly discussed following the Russian attack in February 2022, and also specifically in the context of the Czech munitions initiative. However, this discussion did not start in February 2022. With the generally deteriorating security situation and increasing defence spending and modernisation projects of the armies and the Czech Army, the topic of ammunition production capacity was on the table long before that. "In the last two years, we have felt a significant increase in demand for large-calibre ammunition," Josef Tichý, the then director of Explosia, told Security Magazine in October 2019.
Four years later, his successor Kamil Dudek said: "We are already one of the seven most important players in the world in the field of production of fully combustible propellant cartridges, there are only five of us in Europe. With the planned expansion of our production capacity for these products to more than double, we will be a strong player. Similarly, we want to expand the production of spherical powders, for which there has been a great hunger in recent years and the market has not been saturated." He continued, "This year we have increased our investment to double that of previous years, we have the cash on hand so there is definitely no problem in financing. But if someone has the idea that we will build a new hall, equip it with technology, recruit and train more employees in a matter of months, they are either unable to perceive reality or they are ignoring it."
We are registering a huge demand. Investments remain significantly undersized
In mid-2022, the headlines proclaimed that Explosia was going for the record: "The company is now also registering huge demand for smokeless powders. And the war conflict has also sparked increased interest in explosives from Pardubice, with Explosia supplying more than CZK 150 million worth of products for the defence of Ukraine. Explosia's investments over the past decades were significantly undersized," the company said in a press release at the time. However, we did not read anything about an actual increase in production. Explosia's revenues grew from CZK 985 million in 2021 to over 1.326 billion in 2022 and 1.42 billion in 2023. The company's profits grew at a similar rate, but not its investments. In 2021, the company invested 61.4 million in 2021 with profits of 86 million, but only 87.5 million a year later with profits of over 198 million. And even the pre-announced doubling of investments for 2023 would not be flattering in this comparison – profits for 2023 were 284 million, but investments, according to the annual report, were only 136.8 million, not double but 1.5 times that of 2022.
One of the reasons for this is the backlog of advance payments, i.e. less available funds for investment, and thus a much lower rate of capacity addition than the market would need. This puts enormous pressure on prices, and Explosia's profits are rising with its current performance – so from its perspective, all is seemingly well. However, demand here is outstripping supply by high orders of magnitude, and there is huge potential in the whole segment. It is difficult to imagine a private company reacting as slowly to such a situation as a de facto state-owned joint stock company whose shares are held by the Ministry of Industry and Trade.
Two billion in investments by 2026 – will it be enough?
"The plan for this year is to invest almost CZK 320 million, and in total the most important Czech explosives producer wants to invest up to CZK two billion by 2026," reads a press release from Explosia in March this year. "The capacity of production of fully combustible modules is currently 80,000 units per year, from 2027 we would like to reach production of up to 200,000 units per year," said Radomír Krejča, chairman of the board of directors. However, the current situation cannot satisfy the demand, although the company's management has felt the increase since 2017. There have been no significant steps in the area of recruitment, increase in the number of shifts or optimisation of production, which could have resulted in Explosia increasing supplies to Czech ammunition manufacturers. We can only hope that the investments planned from this year onwards will have the desired effect and that the effect will be sufficient.
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