What happened
Shares of industrial gas manufacturers Air Products & Chemicals (APD -0.77%) and Linde PLC (LIN -0.32%), along with fuel cell specialist Bloom Energy (BE -5.88%) jumped more than 10% in July, according to data from S&P Global Market Intelligence.
Bloom's shares, which were up more than 70% at one point, tumbled back to earth to finish July up just 11.8%. Meanwhile, Linde and Air Products saw more gradual increases but finished ahead of the fuel cell generator manufacturer, to end the month ahead by 15.6% and 18.7%, respectively.
Image source: Getty Images.
So what
In July, it was all about the hydrogen. While hydrogen is just one of the industrial gases Air Products and Linde produce, a renewed focus on hydrogen's potential as a vehicle fuel and an electrical storage medium has boosted hydrogen stocks across the market in 2020. Some of this is due to the recent IPO of Nikola (NKLA 0.88%), which plans to build hydrogen fuel cell-powered pickup trucks and semis.
In particular, the idea of producing "clean" hydrogen is fueling the industry. Right now, in the U.S., the bulk of hydrogen fuel is derived from natural gas. Because natural gas is cheap, this allows fuel cell companies like Bloom to market their products -- in Bloom's case, mostly backup generators -- as cost-competitive with grid electricity. Hydrogen can also be produced from water through electrolysis, but that's a more expensive process.
Still, all three companies made news in July by announcing developments in their clean hydrogen production efforts. On July 5, Air Products announced a partnership with German manufacturer ThyssenKrupp to build "world-scale" electrolysis plants to produce green hydrogen. On July 15, Bloom announced it would partner with South Korea's SK Engineering and Construction to build renewable hydrogen-producing electrolyzers in South Korea. The very next day, Linde announced it had signed a memorandum of understanding with a subsidiary of China Power International Development to "jointly promote the application and development of green hydrogen in China."
Now what
While hydrogen as a clean fuel is probably getting more attention now than it has in a decade, there are big questions about how viable and cost-effective the technology is, compared with existing options, especially batteries. On Linde's Q2 2020 earnings call, CEO Stephen Angel couldn't resist throwing shade at other companies jumping onto the trend:
There's a lot of hype, marketing, and companies that want to burnish their [environmental, social, and corporate governance] credentials. Some companies are just looking for a way out of their current predicament. And then you have companies like Linde that are actually players in the hydrogen business today.
Angel is optimistic about the technology, as was Air Products CEO Seifi Ghasemi on his Q3 2020 earnings call. But Angel was clear that even he doesn't think the hydrogen market is a slam dunk. According to him, plenty of things need to happen to make it viable:
[T]he cost of clean hydrogen at the point-of-use needs to drop at least 50% to 60%... . To reach that target, renewable power costs need to come down, along with the cost of electrolysis itself. This can be achieved by scaling up capacity, improving efficiencies and developing greater standardization around the supporting infrastructure. This will not happen overnight, but it's certainly feasible within the next 10 years and something we can directly impact.
Some form of carbon pricing will also need to be in place for clean hydrogen to compete against cheap fossil fuels in some sectors. And the market needs to develop, especially fuel cell electric vehicles for heavy haul trucking, which could become the largest target market for mobility by an order of magnitude.
I say this can be a huge market by 2030. What needs to happen? It is a bit of chicken or the egg in the mobility market. You need fuel cell electric vehicle adoption to drive hydrogen growth, but you also need low-cost hydrogen and scaled infrastructure to enable fuel cell electric vehicle adoption.
It's still a big risk, but investors who think this is where clean fuel technology is heading -- or, at least, where a portion of the clean fuel market is heading -- may want to keep these stocks on their radar screens. Just remember, though, that the big payoff may be years or even decades away.
