The Absorption Gap
Bergerac is a town of about 27,000 in the Dordogne valley, in southwestern France.
It is best known to outside visitors for its wine.
To the European defense industrial complex, it is now known for something else.
It is the single most important node in the resupply of European artillery propellant, and it has been since the day Eurenco decided to restart what had been a shuttered powder facility.
The man making that decision is Thierry Francou, the CEO of Eurenco.
In a series of public statements over the past eighteen months, Francou has done something rare for a defense industrial executive in Europe: he has spoken plainly about what his factories can and cannot produce, on what timeline, and what would break the schedule.
In March 2026, hosting the Polish state defense holding PGZ at Bergerac, Francou said this: “This visit is a powerful symbol of our operational progress. Our future production plant in Pionki will be directly based on our new modular charge and propellant lines in Bergerac, which were constructed and commissioned in less than nine months.”
That sentence — constructed and commissioned in less than nine months — is the kind of detail I want this edition to be about.
Because it is the operational signal that almost no piece of European defense commentary picks up on. The newspapers are writing about how much money is being committed. The trade press is writing about which prime is announcing what. What very few are writing about is the actual industrial cadence of the upstream — the Tier 2 and Tier 3 suppliers whose physical output determines whether any of the headlines turn into delivered weapons.
I want to walk you through what Francou’s Bergerac restart actually means.
Because it is not, on its own, the story most journalists are telling about European rearmament.
It is something else.
It is the visible part of a much larger problem that goes by no consensus name yet, but which I have started calling — for my own bookkeeping over the last several months — the Absorption Gap.
The chain almost no one walks
Let me lay out the propellant value chain end to end, because almost no published note does this, and the structure of the chain is the structure of the problem.
At the top of the chain is the consumed product: an artillery shell fired by a Bundeswehr or Ukrainian gun crew, in NATO 155mm caliber. The shell itself — the steel projectile with its high-explosive fill — is the part the public sees in the supply numbers (Rheinmetall went from roughly 70,000 rounds in 2022 to roughly 1.1 million by 2026, and is targeting 1.5 million by 2027).
The shell does nothing without propellant — the powder charge that fires it down the barrel. For modular artillery charge systems, that is Eurenco’s product.
The propellant does not exist without nitrocellulose — the chemical base that, when nitrated, becomes the energetic backbone of the modular charge. European producers can make somewhere between 4,500 and 10,000 tonnes per year of military-grade nitrocellulose at full ramp. Supplying Ukraine alone is estimated at over 6,000 tonnes per year. Adding Europe’s own ammunition build implies a total requirement closer to 20,000 tonnes.
The nitrocellulose does not exist without high-purity cellulose. Historically, that means cotton linters — a by-product of cotton processing. And here is the part of the chain that I cannot stop returning to.
Europe sources more than 70 percent of its cotton linters from China.
Read that again. The chemical input that is upstream of the propellant that is upstream of the artillery shell — the round Europe is now committing tens of billions of euros to produce in volume — depends, at the molecular level, on a Chinese export that Beijing could decide to restrict at any moment, in a fashion structurally identical to the rare-earth controls of 2025–2026.
Wood pulp is the announced alternative. It is technically feasible. But every propellant formulation built around cotton linters has to be requalified for wood pulp before it can go into a Bundeswehr ammunition stock. That qualification work is not optional. It is safety-critical and runs on regulatory timelines, not on Telegram chats. The propellant industry treats these processes the same way pharmaceutical companies treat FDA recertification: not fast.
That is the chain.
I want you to hold it in your head while we look at the rest of the picture.
Where the money has actually gone
The European Commission, on 30 March 2026, adopted a €1.5 billion work programme under the European Defence Industry Programme — EDIP. Calls for proposals went live on the EU Funding & Tenders Portal that same day. The headline allocations: more than €700 million to scale production of counter-drone systems, missiles and ammunition; €240 million to fund joint procurement by Member States and Norway; €260 million for the Ukraine Support Instrument; and €100 million in equity support, via a new Fund Accelerating Defence Supply Chains Transformation, for SMEs and small mid-caps.
The €100 million SME line is the one I want you to remember. We will come back to it.
This €1.5 billion sits on top of much larger national commitments. Germany’s defence budget for 2026 alone exceeds the EDIP envelope by an order of magnitude. The European Commission’s announced ambition is to lift defence investments procured from European suppliers to at least 55 percent of the total by 2030, and to organise at least 40 percent of procurement as joint procurement by end-2027.
Those are the policy numbers. They have all been written about extensively.
The numbers that have not been written about — and that I find more revealing — sit one layer below.
The Bruegel gap
The Bruegel research institute has been tracking the gap between German defence demand and German defence industrial production with more rigour than almost anyone else.
Two figures from their analysis are worth reading slowly.
First: between 2025 and early 2026, the six-month moving average of German domestic defence orders rose by roughly two times. Over the same period, German domestic defence-sector industrial production rose only marginally.
Second, the longer trend: since 2019, German defence demand has more than doubled. German defence production has risen by approximately 25 percent.
Demand is growing five to six times faster than supply.
This is the central operational fact about European rearmament right now.
If you read only one statistic in this edition, that is the one to keep.
It tells you something the headlines do not. It tells you that the constraint on the European defence build-out, as of mid-2026, is not budgetary. It is industrial. The orders are being placed. The money is being moved. The factories are not delivering at anything close to the cadence the orders imply.
And — to underline the point — Germany is the European economy whose defence industrial base is in the best relative shape. The smaller member states are further behind.
The Pistorius admission
Boris Pistorius, the German defence minister, has been one of the few European political figures to talk publicly about the gap with operational precision rather than hand-waving.
In May 2026, asked about the timeline for closing a long-range strike capability gap that the planned US drawdown opens up further, he said: “That this may now not happen in the way we had assumed tears this capability gap open again. We have to look at how we can compensate for that. There are ideas, but no solution yet.”
Separately, on the broader question of why the orders are not converting into deliveries on schedule, he summarised it cleanly: “We have the money and we’ve triggered procurement. But we don’t control all the variables.”
That second sentence is, to me, the single most important quote a European defence minister has given in two years.
We don’t control all the variables.
Translated out of politician-language: the budget exists, the political will exists, the procurement contracts have been signed — and the production schedules do not believe them. The variables Pistorius does not control are the variables a Next Financial reader cares about: nitrocellulose supply, special-steel forging capacity, gas-turbine slots, precision machining lead times, mechanical actuation, hydraulic assemblies, energetic chemicals, semiconductor-grade insulation, and the regulatory clock of safety qualification.
These are the Absorption Gap.
The fragmentation tax
There is a second dimension to the Absorption Gap that is easy to miss because it shows up as administrative friction rather than as a binding constraint.
It is the fragmentation of the European defence market itself.
For most of the period covered by the EU’s procurement statistics, only 9 percent of tendered European defence contracts were awarded to a supplier from another EU member state. More than three quarters of contracts went to domestic suppliers. National procurement officers prefer national champions; national industrial policy prefers domestic jobs; national security policy prefers national supply.
The Commission’s stated objective — 55 percent European-supplier procurement by 2030, 40 percent joint procurement by 2027 — is a direct response to this. The objective is rational. The execution is going to be painful, because every member state has fifty years of habit on the other side.
In the meantime, the practical effect is that a German order does not necessarily mean a German Tier 2 supplier gets contracted. It means a German prime gets contracted, and the prime sources from whichever Tier 2 supplier — domestic or otherwise — has the certified capacity to deliver on time. In a tight market, the capacity that exists wins, regardless of nationality. In an even tighter market, the order leaks across the Atlantic.
This is how a continent that has approved over €131 billion in fresh defence commitments ends up — on a non-trivial fraction of contracts — buying from American primes. The European budget is real. The European industrial absorption capacity is not yet real enough to consume it.
The visible Tier 2 layer
Bergerac is one node. There are others.
In Lingen, Germany, Rheinmetall is converting the former Hagedorn civilian plant into a military-grade nitrocellulose facility — the first major German Greenfield NC capacity addition in decades. In Walsrode, the Czechoslovak Group (CSG) has taken control of the historic propellant site. In Pionki, Poland, Eurenco is building with PGZ — the Polish state defence holding — on the Bergerac template. In Slovakia, Eurenco signed a March 2026 joint venture with CSG’s ZVS holding for a new Modular Artillery Charge System plant. In Belgium, the Clermont site is doubling capacity.
Step one layer out and look at special steels. The German GMH Gruppe has, in the past year, consolidated three of its open-die forging operations — Kind & Co., Schmiedewerke Gröditz, and Buderus Edelstahl — into a single Open-Die Forging Group, with €30 million of integration investment including a new ladle car for steel purity at Gröditz and energy-efficient forging furnaces relocated from Wetzlar. This is the kind of operational consolidation that does not make headlines, but it is exactly what scaling a defence forging supply chain looks like in the real world: combine the existing assets, modernise the choke-point equipment, run them harder.
Step out again, and look at drive systems. Renk Group — supplier of the transmissions and drive components that go into every European tracked combat vehicle — posted its best Q1 in company history for order intake in 2026, with an above-average increase in adjusted EBIT.
Step out again, and look at sensors. Hensoldt’s Q1 2026 revenue jumped 25 percent to €496 million with record optronics margins — and yet the stock fell, because the free cash flow conversion dropped to 40 percent under the weight of a multi-billion-euro capacity expansion programme.
Pause on that last one for a moment. A defence supplier reports a record-margin quarter and the stock sells off because the cash flow is being absorbed by capex. That is the Absorption Gap showing up on a single line of an income statement: demand is growing faster than the supplier can build the factories to serve it.
Why this matters for what you own
If you have any defence exposure in 2026, it is most likely sitting in the prime contractors — Rheinmetall first, Leonardo, Saab, BAE, perhaps the US primes (Lockheed Martin, RTX, General Dynamics).
The European primes have rerated meaningfully over the past two years. They are pricing in a continued ramp of orders. They are also pricing in the assumption that those orders convert to deliveries on something close to the announced timelines.
The Bruegel data tells you that assumption is structurally optimistic.
Two-times demand growth against twenty-five percent production growth, sustained for a multi-year period, is not a gap that gets closed by a press release. It is a gap that gets closed by Tier 2 and Tier 3 suppliers physically building capacity — and that capacity build takes between three and seven years, depending on the equipment, the regulatory qualification, and the workforce. Eurenco built Bergerac’s new lines in nine months only because the site was already permitted, the workforce existed, and the underlying technology was off-the-shelf. Most Tier 2 capacity additions do not have those conditions.
The risk this creates for primes is not catastrophic. They will still deliver. But they will deliver later, at higher unit cost, with smaller fleet sizes, and with periodic supply-chain misses that compress margins.
The opportunity this creates is upstream. The Tier 2 and Tier 3 suppliers that already exist, that already have certified capacity in the binding constraint categories, and that are being asked to scale at this moment — those are the assets where the rent of the European rearmament is actually accruing. Not, in most cases, the prime contractors whose names are on the press releases.
Eurenco is not publicly listed. Some of the suppliers I will name in the next section are. Some of the most interesting ones are listed in places — and at sizes — that have kept them outside the main European defence ETFs and outside the consensus rotation that drove Rheinmetall and Renk last year.
The named concept
I have been calling this — for my own reference — the Absorption Gap.
The phrase is meant to capture, in one expression, the central operational fact of European rearmament in 2026: the budgetary absorption capacity of the European defence industrial base is structurally below the order pipeline being placed against it. Money is not the constraint. Will is not the constraint. The physical ability to build, certify, deliver, and integrate is the constraint.
The Absorption Gap is fixable. It will be fixed. But it will be fixed on the timeline of capital cycles in heavy industry, not on the timeline of political announcements. That mismatch is the trade.
The chip names rerated in 2023. The European prime defence names rerated in 2024 and 2025. The trade that has not yet rerated — because the market is still tracking the wrong layer of the value chain — is the upstream layer where the absorption actually has to happen, or not happen.
What follows
I am skipping the part of this edition that I find most operationally important, because that part belongs behind the paywall.
What is in the paid section is the trade.
Specifically: the four publicly listed Tier 2 and Tier 3 European defence suppliers I would own to express the Absorption Gap thesis directly — including one that is mispriced because the market is still treating it as a diversified industrial rather than as a defence pure-play; the two privately held names I am watching for IPO or for cross-listed exposure routes; the three failure scenarios where this thesis breaks (each named explicitly with the trigger to watch); and a hedge structure for readers who already have meaningful exposure to the European prime contractors and want to rotate a portion of the book one layer upstream without doubling their European defence beta.
Next Financial Premium
If you have read this far, you already know the most important thing about this story: the European rearmament trade as it is currently expressed by the consensus is mispriced on the wrong layer of the supply chain.
You also know which kinds of suppliers actually sit on the binding constraint, and roughly when the constraint will start to bind harder.
The thing you do not yet have is the trade.
What is behind the paywall:
The four publicly listed Tier 2 / Tier 3 European Defence suppliers with the cleanest exposure to the Absorption Gap, including the one the market is still pricing as a diversified industrial rather than as a Defence pure-play
The two privately held names worth tracking now, for IPO timing or for cross-listed exposure routes — including the single most important non-listed propellant pure-play in Europe
The three failure scenarios in which this thesis breaks, named explicitly with the trigger I am watching for each — including the regulatory scenario I assign the highest non-trivial probability
A hedge structure for readers who already own the European prime defence names (Rheinmetall, Leonardo, Saab) and want to rotate a portion of the book one layer upstream without doubling the European defence beta of their portfolio