Sources close to the defence contractor said yesterday that the future of the business was in jeopardy because it could not afford to compete with state-subsidised foreign rivals.
They added that sales to the Ministry of Defence, Royal Ordnance's biggest customer, have collapsed in the past decade as a swathe of orders went to cheaper, state-backed competitors.
A merger with the German defence group, Rhinemetall, was being discussed as a possible solution to Royal Ordnance's plight, the company said.
"Life in the UK ammunition business is very tough. Sales to the MoD went from pounds 350m 10 years ago to pounds 150m as state-backed firms from South Africa, South Korea, China and Israel entered the market. Talks with the Germans are at a very early stage, but a joint venture is a possibility," the sources said.
Despite Royal Ordnance's attempts to increase its export sales, which have doubled in the past 10 years and now account for 60 per cent of turnover, MoD orders remained crucial to the division's survival, the company said.
An MoD spokesman said that although the Government had "a strong strategic interest in the future of the UK ammunition industry, Royal Ordnance's survival will depend on its ability to remain competitive and win orders in the UK and overseas".
Royal Ordnance has already undergone a major shake-up since being bought by British Aerospace in 1987. Since then BAe has closed five plants and cut its workforce from 19,000 to just over 4,000.
The staff operates from 12 sites around the country, including plants in Lancashire, Nottingham, Durham and Wolverhampton. They manufacture propellants and shells for tanks and rifles.
Earlier this year the company cut 199 jobs in Nottingham and said it would shut down a plant in Faldingworth which employs 57 people.
The latest crisis is part of a widespread slump in the global ammunition industry which has been squeezed by tighter defence budgets in Europe and a fall in Asian demand.
Experts claim that defence spending among European nations has fallen by around 40 per cent since the late 1980s, while the number of suppliers has remained constant.
This has forced a number of firms to turn to export markets in the Middle East and South-east Asia, where they face stiff competition from state- owned suppliers.Reuse content