BAVARIA, GERMANY – Hidden among forests and farmland beneath the Bavarian Alps, Rheinmetall's sprawling industrial site feels more like a small village than one of Europe's most strategically important defense facilities. Factory buildings are spread across roughly 90 hectares of land as construction crews work on a vast expansion, known as "Project Firepower," that will transform the site into one of Europe's largest gunpowder plants. The quiet surroundings belie the significance of what is being built there.

As European governments dramatically increase defense spending following Russia's invasion of Ukraine, one of the biggest challenges has become producing enough ammunition. And one of the biggest constraints on that effort has been gunpowder. The gunpowder choke point Gunpowder prices have spiked as the war in Ukraine depleted stockpiles.

"Without gunpowder, it's impossible to protect our people because at the end of the day, you need gunpowder for ammunition," Rheinmetall CEO Armin Papperger told CNBC's Annette Weisbach at the Bavarian site on Wednesday. "Without gunpowder, no warhead will go out of the barrel." Scarcity of gunpowder is seen as a choke point for ramping up production of ammunition for militaries, and a barrier for Europe to ensure defense sovereignty. However, Papperger told CNBC that shortages of nitrocellulose — also known as guncotton, a key ingredient in ammunition propellant — are no longer a problem for Rheinmetall after the company secured its own supply and built reserves.

Europe has relied heavily on China for cotton linters, the raw material traditionally used to produce military-grade nitrocellulose, but exports have slowed in recent years. Cotton linters, the short fibers left on cotton seeds after the longer fibers used to make textiles have been removed, can be treated chemically to make nitrocellulose. That is then used in ammunition propellants.

"At the moment, we have reserves for the next four years," Papperger said. The Bavarian facility will also house a research and development center for advanced gunpowder, including high-energy smokeless propellants made with guncotton, which can pack more energy into the limited space inside a shell than traditional black powder, Papperger said. The company is working to qualify wood-derived cellulose as an alternative to cotton linters, he added.

Doubling gunpowder production Rheinmetall's expansion of its Aschau am Inn site in Bavaria follows the buildout of its ammunition plant last year and comes as gunpowder prices have spiked after the war in Ukraine depleted stockpiles. With it, Rheinmetall aims to more than double production of gunpowder by 2028 to 4,200 metric tons annually. It has also invested millions in gunpowder facilities in Spain and Switzerland.

The German defense contractor is one of the world's largest ammunition manufacturers and one of the few manufacturers to cover the entire value chain, from the gunpowder propellant to the bullet casing. Gunpowder produced at the site will be used in weapons for the future, whether that be in drones, small or large caliber, or tank or artillery ammunition, Papperger said.