Is the market for hydrogen fuel just hot air?
Hydrogen stocks looked until recently to have been powered, appropriately enough, by rocket fuel. Some specialist producers of hydrogen fuel cells had gained around 300% between the beginning of 2019 and the selloff in March.
The enthusiasm was not hard to explain: many believe that hydrogen battery technology will be at the forefront of the world’s transition away from a carbon-based economy.
These high-flying stocks nonetheless succumbed to gravity in sympathy with the broader bear market in the first quarter; they did recover in the second quarter’s rally, but most have now weakened again in July amid the return of economic pessimism.
For long-term secular growth themes – and we believe the rise of batteries is one – these types of dips, macro in nature rather than related to these specific sectors, can represent attractive entry points.
After all, in early March there were reports of a ‘clean hydrogen alliance’ in Europe that would receive public support as part of the continent’s industrial strategy. This kind of commitment could support hydrogen specialists through the volatility and doubt typical of nascent technologies.
Yet, despite our conviction in the long-term investment case for battery technology, we would urge caution in the case of hydrogen fuel cells.
First, we should not suppose that hydrogen is ‘clean’ just because it exists naturally in the atmosphere. The process of using hydrogen in fuel cells is in fact carbon intensive and reliant on fossil fuels. At present, most hydrogen produced for industrial purposes comes from separating the carbon dioxide from natural gas or by using crude oil or coal as a feedstock.
Second, hydrogen as employed in fuel cells is highly combustible – as I alluded to, liquid hydrogen is a component of rocket fuel. Hydrogen’s boiling point is around -250°C, so you get some idea of the difficulty of rendering it stable enough for everyday use.
Third, and linked to this, hydrogen fuel cells are heavy and expensive – probably prohibitively so for mass deployment in vehicles. This is particularly challenging for fuel-cell manufacturers given that so many other types of battery are becoming increasingly lighter and cheaper for electric cars.
The market’s embrace of lithium ion batteries for electric vehicles also creates a further hurdle for hydrogen fuel cells. Electric vehicles need an infrastructure to support them, and at the moment the rollout of charging points favours lithium ion batteries over hydrogen options.
Finally, as investors we must be cognisant of the importance of liquidity in the securities we hold. Many of the listed specialists in hydrogen fuel cells are small, with market capitalisations below $1 billion and relatively thin trading volumes, and few have turned a profit.
None of this means hydrogen fuel cells do not have an exciting future, though. For some specific purposes, such as where battery density is less of an issue, they will be essential. With increased spending on research and development, greater investment and innovation, hydrogen could become commercially viable over the next few years.
Equally, we would argue that being positive on hydrogen fuel cells does not necessarily imply a negative outlook for lithium ion batteries. Even if hydrogen fuel cells do come to justify the hype, for the foreseeable future the world will rely on other battery technologies to power the transition to electric car fleets and to capture the potential of renewable energy.
The battery value chain is complex and interrelated, but in aggregate we believe it is poised for immense growth.