09 October 2020
Chemicals
Europe
Industrial gas companies set to
benefit from hydrogen boom
What’s it all about? Martin Roediger, CEFA
Industrial gas companies have many decades of experience in producing, handling, Co-Head of Chemicals
and selling hydrogen to various end markets. Both Linde and Air Liquide already +49 69 756 96 169
have sizeable hydrogen businesses in operation, in contrast to many start-ups in [email protected]
this field. They are one-stop-shops for many customers, given their broad hydrogen
offering along the entire value chain. With the upcoming boom in green hydrogen Chemicals research team
and the likely establishment of blue hydrogen as a bridge technology, we expect Biographies at the end of this document
hydrogen to become a multi-billion euro business opportunity for both industrial
gas players. Linde and Air Liquide shares offer investors the chance to play the very
promising hydrogen economy with a favourable risk-reward profile.
IMPORTANT. Please refer to keplercheuvreux.com\disclaimer for keplercheuvreux.com
“Important disclosures” and analyst certification(s).
This research is the product of Kepler Cheuvreux, which is authorised
and regulated by the Autorité des Marchés Financiers in France.
Chemicals
360 in 1 minute KarineD ellapinaC o He ad of DTP +33 1 53 65 35 11kdellapina@keplercheu vreux .com
Investment case summary
We remain cautious on the “classical” chemical sector, given the muted and
volatile demand environment for many consumer products in which chemicals
play an integral part. However, within chemicals we like the industrial gas
companies Linde and Air Liquide due to their robust business models, which have
proven effective in the current crisis, with resilient earnings in Q2 and H1. They
also offer good growth prospects and strong cash flow generation, enabling them
to grow their dividends. Moreover, both stocks rank highly in terms of
sustainability criteria, making them attractive for ESG investors.
Key findings
Many countries, along with the European Commission, are pushing for either
green or low-carbon hydrogen. As we explained in our primer from September
2020, hydrogen is set to grow sharply, and we believe that industrial gas
companies are set to benefit significantly from the expected boom in hydrogen.
Linde and Air Liquide are both well-established players in this area with several
decades of experience and sizeable businesses (c. EUR2bn sales each). They are
one-stop-shops for many customer industries as they are engaged in all aspects of
the value chain in hydrogen, from production to storage, transportation, and
distribution. Linde and Air Liquide are the suppliers of choice for many clients due
to their global presence, expertise, technology, proven reliability, and strong
balance sheets (which is very important in this business).
We expect both players to double their annual hydrogen sales to c.
EUR4bn/USD4bn by 2030E, while accelerating their top-line performance. Strong
top-line growth together with leverage effects should lead to further margin
expansion. Thus, we expect adjusted operating profit to grow at a 2020-30E CAGR
of 6.1% at Linde and 6.5% at Air Liquide.
We expect the strong growth in green and blue hydrogen at both industrial gas
players to outweigh the diminishing revenues in pure grey hydrogen by far. Thus,
we expect both to reduce their carbon intensity by 2030E (Linde: -33%, Air Liquide:
-29%), playing an important role in lowering GHG emissions.
We believe that ESG investors will continue to play the hydrogen theme, but in
contrast to some start-up companies, the more experienced hydrogen players
Linde and Air Liquide offer attractive risk-reward profiles given their established
presence and strong foothold in the sector. Moreover, both stocks have
underperformed electrolyser companies, offering some catch-up potential.
Valuation model
For Linde, we lift our EPS estimates by 6-8% for 2020-22E thanks to strong Q2
results and increased guidance for FY 2020. For Air Liquide, we cut our 2020-22
EPS estimates by 1-5% due to a disposal and adverse forex effects.
We have made detailed estimates for Linde and Air Liquide until 2030E to reflect
the promising growth prospects in hydrogen. These estimates are higher than
before, as until now we applied the terminal growth rate for the period beyond
2022.
We lift our TP for Linde from EUR225 to EUR252 and for Air Liquide from EUR143 to
EUR151. We confirm our Buy ratings on both stocks.
Opportunities related to hydrogen over 2030-50 are not included in our model.
Investors could play such long-term prospects by applying a higher terminal
growth rate in the DCF analysis. If we lift our TG rate by 1% (from 3% to 4%), the
DCF value adds 42% additional upside for Linde and +47% for Air Liquide.
Conclusion
Given that Linde offers a stronger earnings growth profile near term while Air
Liquide will suffer from a jump in carbon intensity next year, we prefer the former
over the latter. Linde remains our Most Preferred Stock in the chemical sector.
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Chemicals
Summary of key changes and valuation
Table 1: Overview change in earnings estimates
Adj. EPS Adj. EPS Change Adj. EPS Adj. EPS Change Adj. EPS Adj. EPS Change
2021E new 2021E prev. 2022E new
2020E new 2020E prev. -0.6% -3.6% 2022E prev.
8.0% 5.24 5.44 6.1% 5.96
Air Liquide 4.73 4.76 9.10 8.57 10.10 6.29 -5.2%
Linde 7.79 7.22 9.50 6.3%
Source: Kepler Cheuvreux
Table 2: Overview change in TP Rating TP new TP old Change Share price (7 Oct) Upside
14.1%
Air Liquide Buy 151 143 5.9% 132.8 24.9%
Linde Buy 252 225 12.0% 201.9
Source: Kepler Cheuvreux
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Investment case in six charts
Chart 1: Est. hydrogen-related sales at Air Liquide and Linde Chart 2: Exposure to hydrogen-related activities at Air Liquide and Linde
(2019)
Source: Kepler Cheuvreux
10.0% 9.5% 7.2%
Chart 3: Adj. operating profit at Air Liquide and Linde 2019-23E 9.0% Air Liquide Linde
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Source: Kepler Cheuvreux
Chart 4: Carbon intensity at Air Liquide and Linde (kg GHG/EBITDA)
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
Chart 5: Change in EPS 2020-22 estimates at Air Liquide and Linde Chart 6: TP changes at Air Liquide and Linde (EUR)
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
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Contents
360 in 1 minute 2
Summary of key changes and valuation 3
Investment case in six charts 4
Suppliers of choice in hydrogen 6
Industrial gas companies are already strong players in hydrogen 6
Industrial gas companies’ green activities 18
Conclusion: strong position should enable industrial gas companies to capture growth
opportunities 23
Opportunities, challenges, and the most likely prospects 25
Opportunities: support from politics, customers, and investors 25
Challenges by competition 28
Legal and political challenges 29
Cost position between grey, blue, and green hydrogen 32
Most likely prospects in hydrogen 33
Prospects for hydrogen business at Linde and Air Liquide 37
Prospects for industrial gas companies 37
Company aspirations on hydrogen 45
Effects on ESG parameters 46
Valuation, target prices, and risks 50
Change in earnings estimates at Linde 50
Change in earnings estimates at Air Liquide 50
Valuation and ratings 51
Stock-picking recommendations 55
Investment case 55
Our favourite stock is Linde 55
Company parts 57
Air Liquide 58
The protagonist of hydrogen 59
Buy, target price up from EUR143 to EUR151 61
Key financials 63
Linde 64
Promising prospects 65
Target price raised from EUR225 to EUR243; Buy rating maintained 66
Key financials 69
Research ratings and important disclosures 70
Legal and disclosure information 73
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Suppliers of choice in hydrogen
Hydrogen has been a market for industrial gas players for several decades. Linde and Air
Liquide are already well-established players, with a strong presence in this field. They are
engaged in all aspects of the value chain, in activities including production, storage,
transportation, and distribution. They operate in numerous countries and the European
Commission’s promotion of hydrogen could trigger higher demand for their offering. We
consider both companies to be well-positioned to benefit from the strong growth prospects
in this field.
Industrial gas companies are already strong players in hydrogen
Established players with long-term experience and already sizeable businesses
Air Liquide has been active in the field of hydrogen for 50 years now. Air Products also claims to
have been in the hydrogen business for more than half a century, while Linde claims it has more
than 100 years’ experience in hydrogen.
Both Linde and Air Liquide have long-lasting relationships of trust with their customer industries,
as they have proven to be reliable suppliers that have never encountered any issues in their many
decades of collaboration. Industrial customers would face losses worth millions of euros if
production were interrupted due to an accident or insufficient supply.
While Linde generates annual sales of over USD2bn in with pure hydrogen and hydrogen mixtures,
called syngas (hydrogen + carbon monoxide), Air Liquide makes around c. EUR2bn a year
(=USD2.4bn based on today’s exchange rates). Compared to overall group sales, Linde’s revenue
exposure to hydrogen-related gas is c. 7%, while at Air Liquide the sales exposure is c. 9%.
Hydrogen is used in several applications, the most important of which are: 1) the production of
ammonia, which is needed for the production of nitrogen fertilisers; and 2)the reduction of
sulphur content in oil-related products in refineries. The market for hydrogen currently amounts
to c. 70m tonnes a year, according to the Hydrogen Council.
Today, most hydrogen is grey hydrogen. It is said to account for 96% of the hydrogen supply. Here
the key production process, using natural gas (e.g. methane) as input, is via a steam methane
reformer (SMR). Other natural gas based technologies are the autothermal reforming (ATR) and
partial oxidation (POX) processes.
Chart 7: Different syngas (H2/CO/CO2) generation technologies
Source: Air Liquide, Kepler Cheuvreux
Another grey hydrogen production process is coal gasification. However, this uses coal as input.
All of these processes emit CO2 emissions during production, and coal even more so than gas. In
contrast, clean hydrogen, which is hydrogen without CO2 emissions (via renewable energy), is of
lesser importance today.
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There is no market price for hydrogen, which can be looked up on any stock exchange or market
data provider. Hydrogen is primarily produced at the plants of those players who need the product
(i.e. refineries or ammonia plants). According to Bloomberg, the price for grey hydrogen is
currently EUR1-2 per kg. However, we doubt that this is figure is correct. According to Linde, (grey)
hydrogen costs c. USD1/kg when the natural gas price is between USD2 and USD3 per m btu
(which is currently the case).
We understand from Air Liquide that roughly 80% of the hydrogen market in 2019 (measured in
USDbn) was captive, i.e. dominated by ammonia producers, chemical companies and refinery
operators, while c. 20% was covered by “merchant players”, i.e. industrial gas companies. We
assume the split is not exactly 80%/20%, but actually 84%/16%. Using the average USD/EUR rate
of 2019, we calculate that Air Liquide, Air Products and Linde generated USD6.7bn in sales with
hydrogen-related products in 2019. As the top three players account for 70% of the merchant
market (source: Air Liquide), we estimate that the size of the merchant market is around
USD9.6bn. With our 84%/16% assumption for the split in captive and merchant market, we
estimate a market size of USD60bn. Actually, the recent comment by Linde indicates that the
actual size of the market could be even larger, at closer to USD100bn.
Chart 8: Hydrogen market split in 2019E (c. USD60bn) Chart 9: Hydrogen market shares of merchant players
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
Air Liquide has stated that it produced 14bn cubic meters of hydrogen a year in both 2015 and
2016. Based on data provided by the Hydrogen Council, hydrogen demand in 2015 was 8 Exajoule
for pure hydrogen (=8trn Megajoule or 2.22trn KWh). As one cubic meter is equivalent to 3KWh,
the total hydrogen market amounted to 741bn cubic meters at that time. Accordingly, Air
Liquide’s market share would have been 1.9% in 2015.
The current volume-based market shares should not be significantly different than the levels
reported in 2015. Linde claims to produce the highest number of hydrogen molecules, implying
that it produces the highest volumes. Assuming that the volume-based market shares are 2.3% for
Linde and 2.2% for both Air Liquide and Air Products, we conclude that c. 10% of the hydrogen
market is dominated by the merchant players. That leaves c. 90% of the market volumes for
captive producers.
The size of the hydrogen market is estimated at 70m tonnes globally by the Hydrogen Council. We
calculate an average hydrogen price of USD850/tonne (or USD0.85 per kg). This is rather close to
the USD1/kg figure mentioned by Linde. However, if our numbers are right, there is a huge
discrepancy between the average prices of the various players. It seems that Air Liquide has the
highest average price (we estimate on average: USD1,500/tonne), while the prices for captive
producers are the lowest (we estimate: c. USD800/tonne). The problem is that these prices are not
comparable. While industrial gas companies have to pass on their energy costs (50% of their total
costs) which are incorporated into the price, the calculation at captive companies can be made
excluding this item. Moreover, industrial gas companies need to earn their cost of capital, which
means that the pricing incorporates a premium over costs. In contrast, the price at captive
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producers is probably identical to their costs. Given the fragmented market structure and based
on the findings from our primer report on hydrogen, the transition to hydrogen will require
significant capex. As this cannot be shouldered solely by refineries and chemical companies, this
represents a good opportunity for the industrial gas companies to take over their customers’
hydrogen facilities (known as “decaptivation”). Air Liquide confirmed this opportunity at KECH’s
Autumn Conference last month. Moreover, many new applications will be non-captive. As a result,
industrial gas companies will be able to capture a decent share of these markets.
Handling and storage
Hydrogen molecules are particularly difficult to transport and store due to their high diffusivity,
low density, and corrosive nature. There are several ways to store hydrogen: 1) in pressurised
vessels with steel/composite cylindrical tanks; 2) in the form of liquid hydrogen; 3) in salt caverns;
4) combined with ammonia; and 5) in the form of metal hydrides. Storage in liquid organic
hydrogen carriers such as toluene and methycyclohexane (MCH) is being developed.
High-capacity storage is possible and most effective via salt caverns, which have already been
used for more than 30 years. But there are only four industrial sites (excluding small-scale
demonstrators) in the world. Three are in Texas (Clemens Dome, Moss Bluff and Spindletop) and
one is in the UK (Teesside). While two salt caverns are run by petrochemical companies, the other
two are operated by Linde and Air Liquide. Thus, both industrial gas companies have decades of
experience with hydrogen storage. Nevertheless, Linde claims to have developed the first high-
purity hydrogen storage cavern in the world. In contrast, Air Liquide claims that the data for
Spindletop in the table below are not correct as its cavern is considered to be the largest hydrogen
storage facility in the world, being 1,500 meters deep and nearly 70m in diameter. It could hold
enough hydrogen to back up a large scale SMR for 30 days. Using 200,000 cubic meters/hour as a
benchmark, we calculate a storage capacity of 144m cubic meters (in the event of 24/7
production).
Table 3: Hydrogen storage in salt caverns globally
Location Clemens Dome (US) Moss Bluff (US) Spindletop (US) Teesside (UK)
Operator Conoco Philips Linde Air Liquide Sabic
2007
Start 1983 566 2014 1972
55-152
Volume (10^3 cubic meter) 580 120 >580 3*70
Pressure (bar) 70-135 Confidential 45
Energy (Gwh) 92 >120 25
Source: Storengy, Kepler Cheuvreux
Obviously, the four hydrogen storage caverns cited in the table above have been sufficient. Three
of these four caverns are in Texas and thus at or near the US Gulf coast, where it makes sense as
this is a big industrial hub in the US. In many other regions of the world, production of hydrogen
and thus its storage is more decentralised.
Many other locations for hydrogen storage in salt caverns are being explored. We pointed out in
our primer report that we do not see any limitations in available storage capacities. However,
extensive expertise in hydrogen storage offers Linde and Air Liquide a competitive edge, which is
necessary as they face numerous challenges. First, operators need to adapt to the geology, then
there is a need for solution mining water and brine disposal. Finally, for H2 (hydrogen) production,
an H2 pipeline network and/or H2 uses are all necessary near the salt cavern.
For easier and more efficient transport, hydrogen is stored in composite tanks or in cylinders.
Other transport methods are equipped trailers or pipelines. As most of the hydrogen volumes are
currently delivered to or near the customer’s site, pipelines are the most efficient transport option.
Only smaller amounts are stored and delivered via truck tanks or in cylinders.
Safety is an important feature in the industry in general, and for hydrogen in particular. Hydrogen
pipes have to resist corrosion and this problem is compounded by the fact that hydrogen can easily
migrate into the crystal structure of most metals. For process metal piping at pressures of up to 7,000
psi (48 MPa), high-purity stainless steel piping is preferred. Both Linde and Air Liquide make sure that
pipelines as well as tanks and cylinders are built using the right materials with the appropriate
characteristics. This is essential to avoid defects such as microcracks. We are not aware of any
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accidents having occurred at industrial gas facilities in recent decades, and this favourable track
record is a big plus for players such as Linde and Air Liquide.
Customers want to be able to rely on their hydrogen suppliers. None of them can run the risk of
accidents, especially fatal incidents involving their personnel. Moreover, a standstill in production
due to an accident could cost the companies millions due to potential outages and/or repair costs.
Moreover, as ESG investors play an increasing role, no client wants to admit to a worsening of its
safety record. Thus, it is absolutely key for the hydrogen supply operator’s clients that they be
reliable. Linde and Air Liquide have built up a strong track record over the decades in this regard,
which is another advantage.
Linde and Air Liquide offer all aspects of safe handling. The most critical (and thus high-end
application) is certainly space exploration. Linde offers its cryogenic propellant storage and
handling system for the Arian 5 rocket propulsion test facilities SEP, France and DLR, Germany. Air
Liquide supports the space industry at two levels: the design and manufacture of cryogenic tanks
and equipment, and the production of industrial gases. Moreover, it is involved in every step, from
the design of launchers’ cryogenic tanks of the Ariane programme to every evolution of the Ariane
launcher, from Ariane 1 to Ariane 6.
Huge pipeline network
The industrial gas companies already have an established infrastructure for hydrogen pipelines.
According to HyArc, there are currently around 4,542km of pipelines dedicated to hydrogen
transport. However, most of them do not belong to the general grid but are dedicated to specific
onsite customers.
Air Liquide has the largest pipeline network with 1,850km, followed by Air Products (1,140km) and
Linde (c. 1,000). Thus, Air Liquide’s share in the network is 41%.
Chart 10: Hydrogen pipelines globally by player (km) Chart 11: Global hydrogen pipeline network by player
Source: HyArc, Kepler Cheuvreux Source: HyArc, Kepler Cheuvreux
North America dominates the hydrogen pipeline network with 2,755km, which is 61% of the global
market. Europe is number two with 1,598km, representing 35% exposure to the global network.
The rest of the world accounts for just 190km, 4% of the total.
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Chart 12: Pipeline network by region
Source: HyArc, Kepler Cheuvreux
Air Liquide has the majority of its pipeline network in Europe, its home turf. Here, the French
company dominates the region with a share of 85%, but it also has a sizable business in the US,
especially on the Gulf Coast. Thus, it commands c. 17% of the network in North America.
In contrast, Air Products has more than 90% of its pipeline network in North America. It ranks
number one in this region with a 39% share. Its exposure to Europe is very small.
Linde is number three in terms of pipeline network, just slightly behind Air Products. Roughly 80%
of Linde plc’s hydrogen pipeline network is in the US & Canada, primarily due to its predecessor
Praxair. Thus, in North America, Linde commands a c. 29% share in the network. In contrast, the
share in Europe and in the rest of the world is 11% each. We calculated this data based on raw
data from HyArc. However, we believe this is outdated, as Linde plc (created with the merger of
Linde AG and Praxair) did not exist when the data was gathered, although we did adjust the data
to reflect the required antitrust disposals.
Chart 13: Hydrogen pipeline by player and region (km)
Source: HyArc, Kepler Cheuvreux
That said, having a huge pipeline network does not necessarily mean a high share in production,
it merely means more flexibility in supplying clients. The Hydrogen Analysis Resource Center
(HyArc) provides data about production capacity in various regions such as North America,
Europe, Asia, and rest of the world. Again, we believe the numbers are outdated for the same
reason as above.
The predecessor Linde AG had to sell several assets due to antitrust requirements, which included
some hydrogen production facilities. In North America, for example, the former Linde AG was forced
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to sell eight HyCo production plants in five locations to Matheson Trigas (Tayio Nippon Sanso) plus
two HyCo’s to Celanese as well as Lyondell Basell to obtain approval from the FTC. Moreover, it had
to sell a package of assets to Messer, which included an hydrogen liquefaction facility. As a
consequence, nearly all of Linde AG’s hydrogen assets in the US (in terms of capacity) were sold.
According to our calculations, Linde plc is still the number two player in North America today with
4,800 tonnes of capacity per day (share: 35%) behind Air Products, with 5,700 tonnes per day
(share: 42%). In contrast, Air Liquide has a production capacity of just 1,750 tonnes of hydrogen,
which is 13% of the merchant market. Other players do not play a meaningful role.
Chart 14: Hydrogen production capacity in North America (kg/day) Chart 15: Hydrogen production capacity in Europe (kg/day)
6,000,000 5,699,647 1,800,000 1,663,236
5,000,000 1,600,000
4,829,336 1,400,000 1,418,498
1,200,000
4,000,000 1,000,000
3,000,000 1,747,070 1,366,888 800,000 557,009
2,000,000 600,000 Air Liquide Air Products Linde
1,000,000 400,000 156,198
200,000 Other
0
Air Liquide Air Products -
Linde Others
Source: HyArc, Kepler Cheuvreux Source: HyArc, Kepler Cheuvreux
In contrast, in Europe Air Liquide leads in production capacities (1,663 tonnes per day), which
equates to 44% of the European market. Linde is number two with 1,418 tonnes per day and a 37%
share. Air Products is number three with 557 tonnes per day (share: 15%).
In contrast to Europe and North America, the disposals required by the antitrust authorities in Asia
(in particular South Korea, China, and India) were modest. According to Linde’s prospectus, no
hydrogen assets were affected in these countries.
In Asia, Air Liquide dominates the hydrogen market, based on data from HyArc. However, the data
also includes large projects such as Yanbu in the Middle East, which might be misleading.
According to HyArc, its capacity is 1,600 tonnes per day (43% share). Air Products and Linde are
basically competing head-to-head with a daily capacity of around 900 tonnes (a 24% share each),
while the rest play a minor role.
Chart 16: Hydrogen production capacity in Asia (kg/day)* Chart 17: Hydrogen production capacity in rest of the world (kg/day)
1,800,000 1,599,184 700,000 650,636
1,600,000 905,966 600,000
1,400,000 896,794 500,000 255,683
1,200,000 Air Liquide Air Linde 400,000
1,000,000 Products 239,604 103,096 300,000 74,867
Deokyang Others 200,000
800,000 100,000 11,225
600,000
400,000 0
200,000
0
Air Liquide Air Products Hyundai-Wison Linde
*Middle East is included here Source: HyArc, Kepler Cheuvreux Source: HyArc, Kepler Cheuvreux
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In the rest of the world (South America, Africa and Australia), total hydrogen capacity is rather
small. Two-thirds of the market is dominated by Hyundai-Wison, a consortium of the Korean
company Hyundai Engineering & Construction as well as the Chinese EPC firm Wison Group. Linde
is number two in this region and has some meaningful assets, followed by Air Liquide in third
position.
Hydrogen filling stations
A hydrogen station is a filling or storage station for hydrogen, where it is dispensed by weight. The
pressure is either 700 bar or 350 bar, with 700 bar being more commonly used to refuel hydrogen
trucks. Hydrogen filling stations usually receive hydrogen by tanker trucks from hydrogen suppliers.
The number of hydrogen filling stations is growing rapidly. In 2019, the figure reached 432
worldwide, an increase of 83 filling stations compared to 2018, of which 330 were publicly
accessible.
Chart 18: Hydrogen filling stations globally
Source: H2stations.org, Kepler Cheuvreux
In the short term, another 226 additional hydrogen filling stations are planned, bringing the total
to 658.
There are 178 hydrogen filling stations in Asia, and 177 in Europe. In North America, there are 74
stations. Japan (114 stations) and Germany (87 stations) are considered advanced countries.
Chart 19: Hydrogen refuelling stations by region (absolute numbers) Chart 20: Number of hydrogen refuelling stations by selected
country/state
North Rest of the
America (74) world (3) 120 114
17.1% 0.7% 100 87
80
Europe (177)
41.0% 60 48
40 33 27 26
Asia (178) 20
41.2%
0
Source: Hy2stations.org, Kepler Cheuvreux Japan Germany California South China France
Korea
Source: Hy2stations.org, Kepler Cheuvreux
What is interesting is that a large part of these refuelling stations were built by industrial gas
companies. Linde claims to have installed c. 190 stations (it rounds up the figure to 200), while Air
Liquide says it has installed more than 120, implying a total of more than 310 refuelling stations.
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Thus, 72% of global refuelling stations were installed by these two companies (44% by Linde, 28%
by Air Liquide). We conclude that Linde and Air Liquide play a dominant role in establishing this
kind of infrastructure in hydrogen.
Chart 21: Split of hydrogen refuelling stations globally (432 by end-2019) installed by engineering company
Source: Company data, Kepler Cheuvreux
Air Liquide mentioned that it also operates 50 hydrogen refuelling stations. We assume that
Linde’s figure is even higher. However, running hydrogen refuelling stations (which is similar to
running a petrol station) is not these companies’ business model. Their aim is to sell hydrogen
technology (equipment), which is much more lucrative than refuelling hydrogen cars. The
purpose of such investments is to prove to the outside that it is possible to do it and it also shows
that Linde and Air Liquide have the expertise to do it. Their ambition is not to go into the retail
business. Thus, both companies are looking for partnerships with oil and gas companies to supply
the hydrogen for these hydrogen refuelling stations.
According to the Hydrogen Council, 10,000 HRS are planned until 2030. So a lot of public and
private money will be invested in the infrastructure. That would finally establish the business,
which is currently still in its infancy. We have the impression that Linde and Air Liquide have
invested in HRS for several ears to showcase the technology and give hydrogen a push in mobility
applications– although we doubt that it is lucrative. Thus, it should not be a problem for the two
industrial gas companies if they lose their leadership position in future, when HRS infrastructure
is expanded on a massive scale.
Liquefaction and compression technology
Hydrogen can be stored in three ways: 1) high pressure storage in gaseous form; 2) very low
temperature storage in liquid form; and 3) hydride-based storage in solid form. While the latter is
seldom used, storage using the first two methods, via compressed gaseous hydrogen (CHG2) at
different pressures or as liquid hydrogen (LH2) in its cryogenic state (i.e. at -253 °C), are common.
Both Air Liquide and Linde are capable of compressing hydrogen as well as liquefying it.
Hydrogen refuelling stations offer both compressed gaseous hydrogen and liquid hydrogen. It is
not clear yet what form will become more common. Experts such as Martin Daum, head of Daimler
trucks, in an interview with Handelsblatt on 17 September 2020, forecast that hydrogen in trucks
will be in liquid form due to the higher energy density. Liquid hydrogen allows them to perform
like diesel trucks, Daum says, and is easier to transport. In the future, green hydrogen will be
largely imported from warm countries in liquid form.
Both Linde and Air Liquide have been offering liquefaction technologies for many years, which are
based on very complex cryogenic systems. Just a few companies have the capabilities necessary
to design and build them and Linde sees itself as a leader in this field with more than 600 cryogenic
units installed worldwide. Linde claims that its Kryotechnik AG has decades of experience in the
construction of hydrogen liquefaction systems and thus designs liquefiers with capacities ranging
from 150 to above 20,000 litres per hour in one train. Linde has disclosed that its liquefaction
capacity is 170 tonnes per day (TPD), while Air Liquide offers Hylial, a hydrogen liquefier capable
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of supplying 500-1500 litres per hour of liquid hydrogen for hydrogen electric vehicles, space test
centres and microelectronics. However, Air Liquide also claims to have large liquefiers in its
offering. Its renewable natural gas based SMR (upgraded from biogas) in Nevada has liquefaction
capacity of 30 tonnes per day.
Chart 22: Liquefier (cold box) at Linde
Source: Linde
Air Liquide also has long-lasting experience in cryogenics. There are many applications for liquid
gases including nitrogen, carbon dioxide, helium and hydrogen, which are used as refrigerants to
modify the physical properties of materials or to maintain temperatures during the process. Such
liquid gases can be used as energy sources to power various applications such as fuel cell vehicles
and microelectronics. Industrial cryogenics have been instrumental in the development of
superconductivity, launcher propulsion, cryo grinding, reactor cooling and cryogenic cleaning. Air
Liquide’s advanced Business & Technologies (aB&T) offers a range of cryogenic equipment in the
fields of science and industry.
In addition to the development of applications, the equipment of hydrogen fuelling stations with
the corresponding H2 components is one of the key areas of both companies’ hydrogen expertise.
Linde says that with the development of its ionic compressor and its cryo pump it has set new
benchmarks in terms of safety, efficiency and reliability.
Chart 23: Ionic compressor at Linde
Source: Linde
Moreover, Linde’s portfolio includes H2-fuel-cell-based technologies for self-contained power
supply – such as the fuel-cell power generator Hymera.
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Chart 24: Cryo pump at Linde
Source: Linde
State-of-the art technology in grey hydrogen
Linde, Air Liquide and Air Products have cutting-edge technology in grey hydrogen via steam
methane reformers (SMR), which they have developed over many decades. Pressure Swing
Adsorption (PSA) facilities are used to separate gas species from a mixture of gases. PSAs are often
used downstream to purify hydrogen/syngas, but they can also be used on a stand-alone basis as
well. Linde has more than 150 SMR and PSA plants running for the production of hydrogen. We
assume Air Liquide has a similar figure. Air Products owns and operates over 200 PSAs worldwide.
However, producing 1kg of grey hydrogen (based on methane) emits 8.9kg of CO2, so things will
have to change. In the future, the focus will be on green hydrogen, which does not emit any CO2
emissions.
Strong technologies in blue hydrogen
Blue hydrogen is grey hydrogen in combination with carbon capture and storage (CCS) or with
Carbon capture and use (CCU). We see blue hydrogen as a valid bridge technology to establish a
hydrogen economy during the transition.
Air Liquide provides a very good example of blue hydrogen technology. It has developed an
innovative cold capture system (Cryocap) that captures the CO2 released during this hydrogen
production through a cryogenic process. This technology could also improve efficiency, leading
to higher hydrogen production. After the purification, the captured CO2 can be used for a variety
of industrial needs for carbonic gas (carbonation of sparkling beverages, food preservation,
freezing, etc.). The first Cryocap unit (installed in Port Jérôme, France, where hydrogen is
produced and sold over-the fence to the neighbouring refinery) has an annual capture capacity of
100,000 tonnes of CO2.
Another example is Air Liquide’s participation in the Northern Lights project (together with
Equinor, Shell and Total). It is aimed at advancing the development of offshore carbon storage on
the Norwegian Continental Shelf. In addition, the French company has a Blue Hydrogen initiative,
which aims to gradually make hydrogen production carbon-neutral. This also includes hydrogen
produced from bio-methane. Using a purification process, bio-methane is obtained from biogas,
which is composed primarily of methane and carbon dioxide. Biogas is a renewable energy
produced during the anaerobic digestion of biomass, or from sanitary landfills. This bio-methane
can be used to produce bio-hydrogen, as demonstrated recently by Air Liquide, which opened a
public hydrogen station in Offenbach am Main, Germany, in partnership with Hyundai. Blue
hydrogen is more cost-intensive than the bio-methane method, as it can increase capex by c. 50%
and fuel costs by 10% versus bio-methane.
Carbon capture and storage (CCS) can reduce CO2 emissions by up to 90% and thus from 8.9kg to
0.9kg of CO2 per manufactured kg in hydrogen. A rather new technology from Air Liquide, using
amines, could lead to nearly 100% CO2 reduction. If this becomes an established technology on a
large scale, it would also be a feasible option for hydrogen in the long run, and it would compete
with green hydrogen.
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Chart 25: Carbon capture technologies at Air Liquide
Source: Air Liquide
Another blue hydrogen technology is carbon capture and usage (CCU), also known as carbon
capture and utilisation. The process captures carbon dioxide and recycles it for further usage.
Thus, CO2 is used as raw material for valuable products. We mentioned Air Liquide’s plant in Port
Jérôme as an example, which uses CO2 for the beverage industry (carbonated drinks). Other
competitors are also engaged in such CCU projects as we explain in the following section.
Linde’s Engineering division is also active in carbon capture. Its scrubbing process RECTIOL offers
an energy-saving chemical and physical wash process including various types of amines. Linde
has plants that do this in Repcelak, Hungary and Abu Dhabi, UAE. Linde also offers a flue gas
scrubbing technology (Post Combustion Capture = PCC). Thus, Linde has joined forces with RWE
and BASF and developed PCC technologies. This is demonstrated at two pilot plants: RWE Power
in Niederaussem, Germany and NCCC in Wilsonville, the US. The captured CO2 can be used
commercially, e.g. as food grade CO2, to enhance oil recovery (EOR) or as feedstock for the
production of methanol and urea.
Air Products has built an SMR production facility at the Valero Refinery in Texas, which went online
in 2013. Related capex was USD431m. The H2 production capacity is 500 tonnes per day while the
CO2 capture capacity is 1m tonnes a year. The purpose of CO2 capture is oil-enhanced recovery.
In the long run, it could make sense to extract the “C” atom from CO2 because the chemical
industry as customer group needs carbon as an input material for its value chain. Such carbon
could replace the carbon derived from crude oil. This reaction is possible, but it is still difficult to
implement as it requires a lot of energy. The beauty of such a move is that it would create a closed-
loop-value chain, a so-called circular economy. The circular economy is already a big topic for
many chemical companies – although at this stage it still accounts for less than 1% of sales for the
industry. However, some customers (often brand owners) would be willing to pay a premium on
recycled materials as this would reduce the overall carbon footprint.
On page 35, we discuss the costs for carbon capture and storage and how they increase the
levelised cost of hydrogen (LCOH). The costs for CCU are more difficult to assess.
Purification technologies
As the input material for both (grey and blue hydrogen) is methane, the gas needs to be purified.
The purification or separation of hydrogen has traditionally been based on solid-state diffusion
technology using noble metal (palladium alloy) membranes. Besides that, other purification
techniques have been developed: 1) chemical (catalytic purification); 2) physical (metal hydride
separation, pressure swing adsorption, cryogenic separation); and 3) selective diffusion (noble
metal membrane diffusion, polymer membrane diffusion, solid polymer electrolyte cells). Each
technique has both limitations and advantages.
The key purification technologies are pressure swing adsorption (PSA) and temperature swing
adsorption (TSA). Linde and Air Liquide both offer purification technologies. Linde Engineering
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has a high-performance PSA plant. According to Linde, the PSA process has seen tremendous
growth due to its simplicity and low operating costs, and so Linde has supplied more than 500 PSA
plants – including the world’s largest unit. In contrast, Air Liquide offers its ULTRALTM H2, a
(cryogenic) purifier application for the purification of gaseous hydrogen. The adsorption
technology allows for the removal of impurities such as CO, CO2, H2O, and CH4. The purification
principle is based on the reversible cryo-trapping of impurities on a high performance absorbent
bed. While Air Liquide’s purification technology is for the throughput of 3 to 650 normal cubic
metres per hour, Linde’s technology starts at applications for a few hundred Nm^3/hr and ends at
more than 400,000 Nm^3/hr.
Based on a study by Jonathan Weinert (A near-term Economic Analysis of Hydrogen Fuelling
Stations), we understand that hydrogen from electrolysers also requires purification. Thus, even
if green hydrogen becomes a state-of-the-art production method, there will be some business
opportunities for industrial gas companies.
In the event that green ammonia proves to be a viable energy carrier for renewable energy based
hydrogen, we understand that the transformation into hydrogen would again require some
purification. If so, there would also be some business opportunities for Linde and Air Liquide going
forward.
Active in hydrogen along the whole value chain
Linde, like Air Liquide, is active in hydrogen via several divisions of its portfolio. In engineering,
Linde builds SMR plants and thus sees itself as the world’s largest manufacturer of H2 production
plants. Moreover, it also provides equipment for hydrogen refuelling stations at its Engineering
division. Linde Gas masters the entire downstream technology portfolio required to enable a fully
functional hydrogen economy.
Air Liquide’s Engineering & Construction division provides SMR technology for hydrogen
production on small and large scales. In its Global Markets & Technologies division, Air Liquide
provides hydrogen as well as related technologies and services to the Ariane rockets. Finally, in its
Large Industries segment, it sells hydrogen to refineries, chemical companies and other
industries.
Thus, Air Liquide and Linde are both active along the whole value chain in hydrogen. The only
exception is in energy generation, thus at the very beginning of the value chain (see chart below).
Neither Linde nor Air Liquide produce energy. They prefer to buy the energy needed from utility
companies. We do not expect this to change going forward.
Both are active in hydrogen production via steam methane reforming (not coal gasification) and
in water electrolysis and both are present in transmission, distribution and storage. When it comes
to the end-use, both are active in hydrogen refuelling stations, which supply hydrogen to cars,
buses, trucks, trains and ships.
Chart 26: Hydrogen supply chain
*Liquid organic hydrogen carriers
Source: IHS Global
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Industrial gas companies’ green activities
Green hydrogen technology
For a couple of years now, industrial gas companies have started operating in the green hydrogen
sector and Air Liquide has been more vocal on hydrogen at various investor conferences,
explaining why investors have the impression that the French company is already well advanced
on this topic. However, since spring 2020, Linde has also started to provide more comments on
hydrogen. That said, Air Products, the global number three industrial gas producer recently
surprised the market by announcing a massive investment in green hydrogen in NEOM city (a
planned Saudi model city that will be powered by renewable energy, see below).
Below, we highlight a few of the green hydrogen activities that the industrial gas companies are
involved in. Very often, what they have in common is that they build and also operate many
hydrogen stations, which are based on renewable energy supply.
Acquisitions of green technologies by Linde and Air Liquide
In October 2019, Linde Engineering acquired a 20% stake in ITM Power for GBP38m. ITM Power is
a British manufacturer of polymer electrolyte membrane (PEM) electrolysers for the electro-
chemicals splitting of water into hydrogen and oxygen. The deal provides Linde with a strategic
investment in a world-leading manufacturer of integrated hydrogen energy solutions.
Moreover, in January 2020, Linde’s engineering division created a JV with ITM Power, called ITM
Linde Electrolysis (ILE). ILE will focus on providing green gas solutions on an industrial scale, using
ITM Power’s modular PEM electrolyser technology and Linde’s EPC expertise and portfolio of
technologies and services to add value to applications downstream of the electrolyser. ILE targets
industries such as metals and glass, electronics, refinery, chemistry and steel. Today, ITM Power
has a market cap of GBP1.352bn. Thus, Linde’s stake in this company increased by 653% to
GPB286m in one year, benefitting from the current hype for green hydrogen stocks.
In contrast, Air Liquide acquired a 18.6% stake in the Canadian company Hydrogenics Corp. for
USD20.5m in January 2019. Hydrogenics is a leader in electrolysis and fuel cell technologies.
Moreover, Air Liquide entered a technological and commercial agreement with Hydrogenics to
jointly develop PEM electrolysis technologies for the rapidly growing hydrogen energy markets
around the world. In September 2019, Cummins acquired 81% of Hydrogenics, valuing the
company with an equity value of USD232m and an EV of USD290m. Using this as a benchmark, Air
Liquide’s stake in Hydrogenics increased by 110% in eight months, to USD43m.
Table 4: Acquisitions of electrolyser companies by Air Liquide and Linde
Stake Acquired by When? Purchase price Currency Total market cap When? Market cap of stake Performance
ITM Power 20.0% Linde Oct-19 38 GBPm 1,430 today 286 652.6%
Hydrogenics 18.6% Air Liquide Jan-19 20.5 USDm 232 At delisting 43 110.3%
Source: Thomson Reuters, company data, Kepler Cheuvreux calculations
In both cases, the investments were relatively small compared to their overall size (Linde’s market
cap: USD122bn, Air Liquide: EUR63bn). On both occasions, they were small transactions. However,
they have already started to become lucrative for both. The purpose of both deals was not to earn
money buying stocks, but rather to access the electrolyser technology, which they did not have
before. Thus, the deals complement their offering. Given Linde’s and Air Liquide’s size, global
presence and firepower, they can roll out this technology globally.
Air Liquide’s green hydrogen activities
On 1 July 2020, Air Liquide said it was building the first high-pressure hydrogen refuelling station
(HRS) for long-haul trucks in Europe, located at its Fos-sur-Mer site, in the Provence-Alpes-Côte
d'Azur Region in France. This large capacity hydrogen station engineered by Air Liquide (700 bar,
1000kg/day) will allow refuelling up to 20 long-haul trucks per day with low-carbon hydrogen for
up to 800km of range.
In addition to Air Liquide's investment, the station will be built with funding from the Provence-
Alpes-Côte d'Azur Region and Europe FCH Ju (Fuel Cells and Hydrogen Joint Undertaking). The
station will be built in the framework of the HyAMMED project, which brings together industrial
actors, carriers and large retailers such as Carrefour, Coca-Cola, European Partners and Monoprix
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to facilitate the transition to clean and sustainable solutions in transportation of goods. The
station will be commissioned in early 2022 and will primarily serve the first European fleet of eight
44-tonne low-carbon hydrogen trucks specifically designed for the project.
On 22 May 2020, Air Liquide announced it was building high-capacity hydrogen stations with dual
filling positions for vehicles in the US. There are over 8,000 hydrogen fuel cell electric vehicles on
the road in California, and Air Liquide is focused on meeting current needs while anticipating the
future demand. Air Liquide's new generation hydrogen station's core technology has been
successfully deployed in Japan, South Korea and Europe.
Building on this proven technology, Air Liquide has enhanced the station’s design to meet the
demand of the US market, by increasing capacity and developing dual filling positions. The can
simultaneously fill around 250 trucks per day through two fully equipped fuelling positions at 700
bar, as well as dispense up to 1,000 kg/day, greatly increasing the current market capacities.
To successfully optimise space, Air Liquide's new generation station has a compact design
(typically 24.6 sqm), reducing the overall space required and allowing for an easier installation.
The new generation high capacity hydrogen station is just one in Air Liquide's range: to
complement the station technology, it had previously announced the development of a first-of-
its-kind portable hydrogen station.
Air Liquide will contribute to the Beijing 2022 Winter Olympics with its hydrogen equipment and
technology. On 30 April 2020, Air Liquide Houpu Hydrogen Equipment, a subsidiary of the Air
Liquide Group, signed a contract with Zhangjiaou Jiaotou Hydrogen and New Energy Technology
to supply hydrogen equipment to build a hydrogen station in Zhangjiakou city, Hebei province.
This station will serve the fuel cell electric vehicles used during the Beijing 2022 Olympic Winter
Games.
Located in the Economic Development Zone of Thangjiakou city, this station is one of the first
hydrogen industry key projects for the 2022 Winter Olympics. After completion, with a capacity of
1,000kg/day, it will be able to refuel the planned 2,000 vehicles for the Olympics. According to the
terms of the contract, Air Liquide Houpu will be ready to supply, install and operate the equipment
by the end of August 2020. The city plans to complete the construction of the first ten hydrogen
stations before the end of 2020, and another six before the end of 2021.
Air Liquide (along with its partner Hydrogenics) is building the largest PEM electrolyser with a
capacity of 20MW for zero-carbon hydrogen production, using hydropower as the energy source.
The facility is located in Bécancour, Quebec and is expected to be in operation by the end of 2020
with an output of just under 3,000 tonnes per year.
In October 2019, Air Liquide announced a USD150m investment to produce renewable liquid
hydrogen in North Las Vegas, Nevada to the western U.S. mobility markets. Hydrogen will be
produced in part from renewable natural gas (RNG) upgraded from biogas using its advanced
separation membrane technology. It is actually a large SMR, which will produce 30 tonnes of liquid
hydrogen per day.
Air Liquide is further showing the advantages of green hydrogen by leading a major project in
Europe, HyBalance, which was developed in Denmark and is supported by the European Fuel Cells
and Hydrogen Joint Undertaking and the Danish ForskEL programme. It is a significant
demonstration of the complete value chain, from the storage of hydrogen produced through
renewable sources (wind turbines) to its distribution for applications in clean transportation and
the industrial sector. This process also helps balance the grid: the hydrogen will be used for clean
transportation, including the five existing hydrogen charging stations operated by Air Liquide in
Denmark, which supply more than 60 Fuel Cell Electric Vehicles in circulation.
In November 2019, Air Liquide, the Durance, Luberon, Verdon urban area (DLVA) in France, and
ENGIE signed a cooperation agreement to develop the “HyGreen Provence” project, which aims
to produce, store and distribute green hydrogen. It plans to use 1,300 GWh of solar electricity for
the production of renewable hydrogen on an industrial scale through water electrolysis. The
project will be developed in several stages with the first deliverables envisaged by the end of 2021
and a possible final step in 2027. Eventually, several tens of thousands of metric tonnes of
renewable hydrogen could be produced this way annually.
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In July 2020, Air Liquide and the Port of Rotterdam Authority launched an initiative that aims to
enable 1,000 hydrogen-powered zero-emission trucks (of which 500 will be at the Port of
Rotterdam) to travel on the roads connecting the Netherlands, Belgium, and western Germany by
2025. Several partners in the value chain, from truck manufacturers such as VDL Groep,
Iveco/Nikola to transport companies Vos Logistics, Jongeneel Transport and HN Post, as well as
leading fuel cell suppliers have joined this project, which is one of the largest in Europe for the
development of hydrogen trucks and related infrastructure.
It is estimated that the project will eliminate more than 100,000 tonnes of CO2 emissions per year.
To achieve this, 25 high capacity hydrogen stations are necessary. The project also aims to include
the necessary electrolysis capacity to produce low-carbon hydrogen. More parties are likely to join
this initiative. The final investment decision by the project partners is expected at the end of 2022.
In the US, Air Liquide will utilise an innovative pathway for hydrogen sourcing at the Braintree,
Massachusetts hydrogen fuelling station using a water electrolysis system: Proton Onsite Proton
Exchange Membrane (PEM) electrolysis, to generate onsite produced hydrogen.
The production of steel is one of the most CO2-intensive industries in the world. Nowadays, steel
is produced via blast furnace and causes massive CO2 emissions. Since hydrogen only creates
water vapour when burned and can supply temperatures of 1,000 degrees Celsius or more if
needed by these industries, it can be an industry-changing energy carrier in the future.
Air Liquide and Thyssenkrupp have joined forces in a pioneering project to develop lower-carbon
steel production. Hydrogen will be injected to partly replace pulverised coal on a large scale in the
blast furnace during steel production. Air Liquide will supply hydrogen from its pipeline network.
This solution is being implemented at one of the blast furnaces at Thyssenkrupp's integrated steel
mills in Duisburg. Once it is transferred to all the blast furnaces at the site, Thyssenkrupp aims to
reduce CO2 emissions in the production process by up to 20%.
Air Liquide has signed a memorandum of understanding (MoU) with Sinopec to study the
development of a hydrogen mobility network in China. Air Liquide will provide Sinopec with its
hydrogen supply chain expertise, from production and storage to distribution, to provide
competitive hydrogen supply solutions to Chinese clean mobility markets (fuel cells).
Japan H2 Mobility (JHyM), a JV in developing and operating hydrogen station networks for fuel
cell vehicles, intends to launch 160 hydrogen stations in Japan between 2020 and 2021 and 320
such stations by 2025. It currently has 127 hydrogen stations in the country. Two dozen
companies, including 14 infrastructure companies, are participating in this JV, including Toyota,
Nissan, Honda, Tokoy Gas, Air Liquide Japan, Energy Promotion Council, and many more. The JV
puts special effort into the strategic development of hydrogen stations by formulating and
developing plans in which people can access fuel cell vehicles and their hydrogen tanks on their
own (source: Bloomberg News). The company is expected to play a key role in the future hydrogen
market in Asia and is strongly supported by Japan’s Ministry of Economy, Trade, and Industry.
In partnership with Zodiac Aerospace, Dassault Aviation and the CEA, Air Liquide is working on
Hycarus, a European project that aims to show that fuel cells can be used on aircraft. They will be
used to power the non-vital parts of the aircraft, like the galley (kitchen). Air Liquide has designed
on-board hydrogen storage to power the fuel cell while the aircraft is in flight.
In June 2018, Air Liquide and the Chinese startup STNE signed a partnership to accelerate the roll-
out of fuel cell (FC) trucks in China. STNE currently operates an HRS in Shanghai and a fleet of 500
FC trucks. Air Liquide will provide STNE with expertise in the entire H2 supply chain, from
production and storage to distribution.
Linde’s green hydrogen activities
In July 2020, Linde signed a MoU with Beijing Green Hydrogen Technology Development Co., a
subsidiary of China Power Int. Dev. Ltd. to jointly promote the application and development of
green hydrogen in China. Both companies will collaborate on green hydrogen initiatives including
hydrogen technology R&D and the implementation of green hydrogen mobility solutions during
the 2022 Winter Olympics.
Linde recently signed a MoU with Baowu Steel’s subsidiary, Baowu Clean Energy, to jointly
cooperate on R&D to further develop China’s hydrogen market for industrial and mobility
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applications. Both will work together to increase the accessibility of hydrogen to industries and
advance the acceptance of hydrogen mobility solutions in China. They will also explore the option
of investing in liquid hydrogen plants and infrastructure. China targets 5,000 fuel cell vehicles by
2020 and 1m by 2030.
In February 2020, Linde signed a 15-year contract with the government-owned Korea Expressway
Corporation (KEC) to build and operate four Hydrogen Refuelling Stations (HRS) in Chungnam,
South Korea. The HRS will be supplied with hydrogen from Linde's manufacturing facilities in the
nearby Pyeongtaek area.
The most recent project regarding fuel cells in ships will start in 2021 and comes from Norway. The
company Havyard announced that it will work on a zero-emission ship powered by hydrogen. The
company already develops ships and this project should complement Hurtigruten’s traditional
liner service, the former mail ships that go from Bergen in the west to Kirkenes in the far north to
transport passengers and goods. The benefit of its hydrogen ship is that battery solutions do not
contain enough energy to power large vessels at high speed over long distances. Linde’s
Engineering division will support this project as a tank supplier, while PowerCell Sweden AB acts
as fuel cell supplier.
The first project outside Europe is the SF-BREEZE project in San Francisco. The objective of the
project is to design a ship with zero emissions on the water, zero fuel spills on the water or on land,
low noise levels, and a faster response time than diesel. The boat is expected to fuel around
2,000kg of liquid hydrogen per day with a propulsion power of 4.4MW and capacity for 150
passengers. The boat has a hydrogen bunkering connection on top of it that stores the hydrogen.
The hydrogen is provided and stored on land by Linde’s Gas division and is pumped onto the boat
when it reaches harbour.
A reference project for Linde is the Energiepark Mainz (Germany), a power to gas plant (P2G). This
is the production of green H2 for mobility applications (hydrogen fuelling stations) by electrolysis
with renewable energies (wind power). The storage capacity is 1,000kg of hydrogen, while the
maximum energy power is c. 6MW. The project includes investments of EUR17m, of which half
were financed by the German federal ministry for economy and energy. Meanwhile the R&D phase
has been accomplished and the ordinary production phase has started. Linde is responsible for
cleaning, compressing, storing, filling and distributing the hydrogen.
In its hydrogen pamphlet, Linde claims that it is able to produce green hydrogen from biogenic
raw materials. This process was developed by Hydromotive GmbH, a subsidiary of Linde, in 2009.
A demonstration plant was built in Leuna. Glycerol is a by-product of biodiesel production
Moreover, Linde says that it can already supply its customers with 100% green hydrogen. But in
recent years the company has not provided any more updates on this project.
The South Korean company Hyosung announced it would jointly build and operate a USD250m
liquid hydrogen production, transport and recharging facilities together with Linde. The JV is
planned to break ground in Q1 2021 and complete the hydrogen plant by 2022. With an area of
about 30,000sqm, Hyosung will use the advanced hydrogen liquefaction technology of Linde to
store and transport hydrogen efficiently and safely. The facility is expected to have an annual
production capacity of 13,000 tonnes of liquid hydrogen. The liquid hydrogen can shrink to 0.125%
of its size in a gaseous state, thereby making it way easier to store and transport. The hydrogen
can be used in plenty of mobility segments, such as vessels, forklifts, cars, and even drones.
The Swedish company Ovako, a specialist in manufacturing engineering steel, has announced a
collaboration with Linde Gas on the project at the Hofors rolling mill. In the beginning, hydrogen
was used as a fuel to generate heat instead of liquefied petroleum gas, but Ovako decided to use
hydrogen in the combustion process since the emission produced is only water vapour. Ovako
calls this process “a major development for the steel industry”. This was the first time hydrogen
had been used to heat steel in a production environment.
From 2021, 14 fuel-cell trains will be used to replace diesel locomotives in the German state of
Lower Saxony. These Coradia iLint trains can cover around 1,000km on a single tank with top
speeds of up to 140km an hour. Linde will supply the hydrogen. Thus, it will build and run the
world’s first hydrogen refuelling system for trains to support this project.
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At its conference call on Q2 results, Linde mentioned that it is currently looking at more than 100
green hydrogen projects spread over 16 countries, with assigned capex in the magnitude of a
couple of USDbn. In February, Linde mentioned it is willing to invest at least USD1bn in
decarbonisation projects to achieve its new sustainability goals.
Other industrial gas companies with inroads into green hydrogen
Other industrial gas companies are also making inroads into green hydrogen. Air Products
announced in July 2020 that it would partner with ACWA Power (Riyadh, Saudi Arabia) and NEOM,
a planned Saudi model city that will be powered by renewable energy, to develop a USD5bn green
ammonia production facility (1.2m tonnes a year) in Saudi Arabia to supply carbon-free hydrogen
for transport fuel. The ammonia joint venture (JV) will be owned equally by the three partners.
The facility will be powered by over four GW of renewable power from solar, wind, and storage to
enable production of up to 650 metric tons/day of green hydrogen.
This is a huge project. Air Liquide’s largest investment ever (EUR350m in capex for two SMRs in
Yanbu) produces 550 tonnes of (grey) hydrogen per day. Air Products plans to invest a combined
total of approximately USD3.7bn in its share of the JV production facility and a 100%-owned
distribution network to supply green hydrogen to customers worldwide. The investment in the
distribution network is USD2bn. The project is scheduled to be on stream in 2025.
On 5 July 2020, Air Products and Thyssenkrupp signed an exclusive strategic cooperation
agreement for world-scale electrolysis plans to generate green hydrogen. The two companies will
collaborate exclusively in key regions, using their complementary technology, engineering and
project executing strengths to develop projects supplying green hydrogen. Thyssenkrupp will
deliver its technology and supply specific engineering, equipment and technical services for water
electrolysis plants to be built, owned and operated by Air Products. The collaboration leverages
thyssenkrupp's technology supporting Air Product's development of green hydrogen as an energy
carrier for sustainable transportation, chemicals and power generation.
On 18 June 2019, Saudi Aramco and Air Products inaugurated the first hydrogen fuelling station
in Saudi Arabia at Air Producs' new Technology Center in the Dhahran Techno Valley Science Park.
The pilot station will fuel an initial fleet of six Toyota Mirai fuel cell electric vehicles with high-
purity compressed hydrogen. Air Products's proprietary SmartFuel hydrogen fuelling technology
will be incorporated into the new station to supply Toyota Mirai Fuel Cell Vehicles with
compressed hydrogen.
Strategy of industrial gas companies in the hydrogen market
Industrial gas companies such as Air Liquide intend to master the full value chain in hydrogen
(production, purification, liquefaction, storage, transportation and distribution). Such a strategy
is valid for Linde too. The goal is to decarbonise their own production, while helping clients to
reduce their CO2 emissions.
Air Liquide and Linde are also advancing further in renewable energies by investing in
electrolysers. Key is to secure access to renewable energy, i.e. by choosing the right partner. Both
want to partner with renewable energy companies. They will not build their own windmills and
solar farms.
Industrial gas companies want to focus on customer needs. To do so, they must be able to produce
hydrogen 24/7. Moreover, both want to meet customers’ requirements. Finally, new applications
such as hydrogen in blast furnaces for steel production (e.g. Air Liquide’s cooperation with
Thyssen Krupp) and hydrogen for mobility applications are two opportunities that Air Liquide and
certainly Linde want to pursue.
Oil and gas companies are entering the hydrogen market. They need to decarbonise their own
SMR plants and could acquire their customers’ SMR plants (“decaptivation”). Alternatively, Linde
and Air Liquide could acquire these plants, add their carbon capture technology and thus reduce
CO2 emissions drastically. Moreover, in the event that oil and gas companies end up operating
hydrogen refuelling stations, industrial gas companies could partner with them by supplying
hydrogen. We conclude that the industrial gas companies’ strong position should allow them to
capture a number of growth opportunities.
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Conclusion: strong position should enable industrial gas companies to capture
growth opportunities
Over many decades, industrial gas companies like Linde and Air Liquide have built a long-lasting
relationship with their clients and both have proven to be very reliable hydrogen suppliers. For a
customer that could face losses worth several million euros in the event of a standstill in
production, this is essential. Thus, these two companies have an advantage over start-up
companies in the field. Moreover, both companies have the engineering expertise to build plants
in house. Thus, customers can turn to their key relationship manager in both companies to quickly
solve any issues.
In our primer report on hydrogen, we highlighted that its market potential is huge; it could rise by
8x-10x by 2050E. In the report, we said that the required investments in Europe alone could
amount to EUR300-400bn until 2030. Steve Angel, CEO of Linde, mentioned in summer 2020 that
he expects capex in the hydrogen market to amount to more than USD100bn. Clearly, such huge
capex requirements cannot be met by one company alone. Many players will be needed to make
the hydrogen economy a reality. It would also be impossible for industrial gas companies to do it
alone. They will have to partner up with companies, especially in green energy supply.
This raises the question of who can afford to make billion- or several-hundred-million-euro
investments. Industrial gas companies such as Linde and Air Liquide are used to investing billions
of euros a year in gases such as hydrogen, it is part of their business model. They have a strong
balance sheet, enabling them to fund huge investments and rating agencies give Linde and Air
Liquide “A” ratings. Clients want to be sure that their partner can build facilities on time and on
budget without any issues.
In the future, hydrogen will be low-carbon or ideally zero-carbon, especially in the long term
(2050). Some investors may ask what will happen to all the grey hydrogen activities of industrial
gas companies as they emit CO2. It should be mentioned that hydrogen production is based on
long-term take-or-pay contracts, running 15-20 years.
Thus, if demand for grey hydrogen fades, it will be a gradual process over a long period. Moreover,
Linde and Air Liquide have the expertise to convert grey hydrogen into blue hydrogen. The CO2 is
either stored underground (called carbon capture and storage) or used as a raw material in new
products (carbon capture and usage). The latter is part of what is known as the circular economy.
CO2 can be used in carbonated drinks such as sparkling water or Coca-Cola, as Air Liquide’s
production in Port Jerome shows. Thus, we disagree with some investors’ perception that SMR
production facilities will be stranded assets in ten years’ time.
Linde and Air Liquide have all the necessary technology at hand to produce either blue or green
hydrogen. In hydrogen refuelling stations, they have proven their ability to sell top technology to
customers thus dominating the market by far. Linde has installed 190 hydrogen filling stations
worldwide, while Air Liquide has installed more than 120. It seems that the engineering divisions
of both companies offer the best technology for this application.
In the case of either company lacking a certain technology, they have shown their ability and
willingness to buy it. Linde has bought a 20% stake in electrolyser company ITM Power and Air
Liquide owns a 18.6% stake in electrolyser company Hydrogenics Corp. Both industrial gas
companies now have a full offering in the clean/low-carbon hydrogen value chain. They are in
position to roll out the technology globally thanks to their firepower and global presence.
In terms of hydrogen-related sales (including carbon monoxide), Air Liquide seems to be leading
with nearly EUR2.1bn in sales versus Linde’s “above USD2bn” revenues. However, Linde sees itself
as the largest hydrogen producer based on the number of molecules. The reason for this
differentiation is that selling prices for hydrogen can vary strongly depending on the region due
to different input prices (e.g. natural gas).
Linde reiterated its statement on 7 May that green hydrogen is set to become a multi-billion dollar
business in the future. In an interview with German daily Handelsblatt, CEO Steve Angel said that
he expects the company’s hydrogen sales to quadruple in the future. We understand that the time-
line for his ambition is by end of this decade. Today, however, the vast majority is grey hydrogen
(produced via SMR with methane gas, as it does not do any coal gasification), while only a small
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fraction is green (via electrolysis) at Linde. As a consequence, the share of grey hydrogen will
diminish in favour of green and blue hydrogen.
In green hydrogen, both companies are very active in various projects, which we outlined above.
Linde has installed 80 electrolysers worldwide, double Air Liquide’s 40. However, Air Liquide is
currently building a large (20MW) PEM electrolyser in Bécancour, Quebec together with its partner
Hydrogenics. The facility will start operations next year with an output of 3,000 tonnes of hydrogen
a year.
Beside this, Linde and Air Liquide have unique expertise in the storage and handling of hydrogen.
Each of them operates a hydrogen storage cavern. Just two other (non-industrial gas) companies
in the world have this ability. Linde and Air Liquide have huge hydrogen infrastructure, especially
in the US and in Europe and they have the knowhow and experience to fill tanks and cylinders with
hydrogen and distribute it to clients.
Thus, industrial gas companies such as Linde and Air Liquide are active in all parts of the hydrogen
value chain, from building hydrogen facilities or key equipment such as electrolysers, to
production, storage, transportation and distribution. With this very broad offering, which is
unique in the competitive landscape, both companies are one-stop-shops for their customers.
Thus, we see Linde and Air Liquide as the suppliers of choice for many clients. Moreover, as both
players have a strong position as established players with strong technology, we are optimistic
that once the hydrogen economy speeds up, both companies will be able to pick the projects that
are most lucrative for them, i.e. offer an attractive ROIC. This should play out well for them.
Both companies will buy in the necessary renewable energy needed for green hydrogen projects.
They will not build and operate wind mills and solar farms.
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Opportunities, challenges, and the most likely prospects
The hydrogen frenzy has started, and is already becoming a mega trend. The rocketing share
prices of some start-ups with no sales yet but huge losses remind investors of the dot-com
bubble. Investors need to keep cool in this environment. In this section, we analyse the main
opportunities and threats. Finally, we explain the cost positions of the different hydrogen
sources (grey, blue, green) and assess the prospects for the hydrogen market in general. We
conclude that the hydrogen market could grow by factor of 8-10x until 2050 and we see many
new markets and applications for hydrogen on the horizon.
Opportunities: support from politics, customers, and investors
Politics
According to a study by Ludwig-Bölkow-Systemtechnik GmbH for the Weltenergierat
Deutschland, 20 countries have announced an own-hydrogen strategy or are close to. It seems
that Japan is the most advanced as it has had a hydrogen strategy since end-2017. According to
the study mentioned above, Japan is technologically a leader when it comes to hydrogen and it
has the most detailed strategy. Its targets, which are ambitious, are implemented in close
collaboration between the Japanese government and companies. It is interesting to note that
according to this study, countries such as France, South Korea, Australia, Norway, and The
Netherlands published their hydrogen strategies even before Germany.
As part of the Green Deal, the European Commission released its Hydrogen Strategy. As part of the
roadmap to 2050 it targets 40GW of EU-based electrolyser capacity (linked to 60-120 GW
additional renewable capacity) by 2030. The European Commission targets 10m tonnes of green
hydrogen production in Europe by 2030. Basically, this would entail doubling the current level of
hydrogen production in Europe, which is however, mostly grey hydrogen. Another 40GW of
electrolyser capacity is targeted in neighbouring countries (Ukraine, North Africa, etc.).
Table 5: Hydrogen strategy by European Commission Phase 2020 - 24 Phase 2025 - 30
Electrolyser capacity (GW) 6 40
Hydrogen production (m tonnes) 1 10
Hydrogen production (TWh) 33 333
Source: ICIS, Kepler Cheuvreux
The majority of electrolyser capacity is expected to come from large electrolysers, while just a
small part of the 40 GW electrolyser capacity is forecast for captive use.
Table 6: European Union hydrogen roadmap 2030 – electrolyser capacity (in MW)
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total
Captive market 200 250 300
100 200 200
Chemical 5 20 45 130 200 100 100 100 350 400 450 2,350
50 50 50 300 300 400 1,800
Refineries 10 40 50 100 100 60 70 80
510 670 730 100 150 150 800
Steel 0 0 20 30 50 50 50 50 400
2,000 3,000 4,000
Other (glass, ceramics) 0 10 20 30 40 90 100 100 650
160 220 290 890 1,000 1,150 6,000
Hydrogen filling stations 10 20 30 40 50 2,160 3,220 4,290
Sum captive Market 25 90 165 330 440 2,670 3,890 5,020
Hydrogen Market
Centralised GW scale 0 0 200 500 1,000 5,500 7,000 8,500 31,700
(hydrogen plants)
Decentralised 10-100MW scale 10 20 40 70 110 370 460 550 2,300
5,870 7,460 9,050 34,000
Sum hydrogen mkt 10 20 240 570 1,110
Combined sum 35 110 405 900 1,550 6,760 8,460 10,200 40,000
Source: Hydrogen Europe, Kepler Cheuvreux
For the expansion of electrolysers, the EC expects investments of EUR24-42bn, another EUR220-
340bn for the expansion of renewables, a further EUR11bn for retrofitting existing plants with
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carbon capture and storage (CCS), and EUR65bn for hydrogen transport, distribution and storage,
including refuelling stations, equating to overall investments of EUR180-470bn until 2050.
Public estimates of the scale of EU funding earmarked for hydrogen technologies in its recovery
package are patchy. A new EIB administered, fund worth EUR10bn per year, has been proposed
to grant loans for hydrogen infrastructure and renewables infrastructure projects. Funding for
research and innovation (R&I) in clean/green hydrogen will double from EUR650m. A further up to
EUR30bn over ten years will help to reduce the risks of large hydrogen projects in hard-to-
decarbonise sectors like steel and cement production.
Hydrogen Europe calculates the need for investments of EUR430bn until 2030 and necessary
grants/subsidies of EUR145bn in total between now and 2030. There are also various hydrogen
strategies announced by individual countries. Germany wants to install 5GW electrolyser capacity
by 2030 and is willing to provide EUR7bn in subsidies for hydrogen projects in Germany plus
another EUR2bn for partner countries. France is willing to provide EUR7.2bn to support hydrogen
projects. Spain targets electrolyser capacity of 4GW by 2030. Portugal announced a hydrogen
strategy as well this year, which envisages EUR7bn in investments. Thus, we expect substantial
political support for the establishment of a hydrogen economy.
However, other regions are also pushing hydrogen. In our primer report, we also outlined that,
besides Europe, other countries such as Japan, South Korea, Australia, and especially China seem
to be pushing the most. According to Cleantech.com, China is the world’s largest hydrogen
producer, producing 22m tonnes of hydrogen per year, equating to around one-third of global
hydrogen production. The Chinese government has a clear goal: the country hopes to generate
10% of its energy system using hydrogen by 2040 and plans to increase hydrogen production to
60m tonnes by 2050, driven by growth in its traditional feedstock segments but even more with
other applications such as transport, alternative feedstock, building heat and power, and
industrial energy. The focus is on carbon neutrality and energy independence.
In fact, China has recently announced its target to become carbon-neutral by 2060, and it is likely
that hydrogen will be part of this plan. China targets a ramp-up of fuel cell vehicles from 10,000 in
2020 to 50,000 by 2025 and 1m by 2030. Hydrogen refuelling stations are planned to rise from 100
in 2020 to 300 in 2025 and to 1,000 in 2030, and 50% of the hydrogen at these refuelling stations is
expected to be produced using clean energy.
Investors
Investors are looking for the mega trends that could drive the future, and hydrogen is one of these.
Climate protection is key, as we are all well aware. Elections can be decided on this common
knowledge, and hydrogen can help reduce CO2 emissions in a meaningful way. Investors are
trying to figure out who the winners of this industry will be. Ideally, such players will become the
next Tesla, Amazon, or Apple.
ESG investors are especially interested in long-term trends and can thus even invest in stocks that
do not earn money because they are at the dawn of a new industry. We currently see plenty of
hype among investors regarding hydrogen stocks: several companies that claim to have an affinity
to hydrogen have performed well in the last twelve months (LTM) and also year-to-date (YTD). On
average, our sample of hydrogen stocks rocked by 402% since 1 October 2019 and +292% since
the end of 2019. The top performers were McPhy Energy, Plug Power and ITM Power.
The average quintrupling of these share prices over the last twelve months and their quadrupling
YTD reminds us a bit of the dot-com-bubble 20 years ago.
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Chart 27: Share price performance of selected companies which are active in hydrogen
Source: Reuters, Kepler Cheuvreux
In contrast, the general market (Stoxx Europe 600) has been down by 5% since 1 October 2019 and
-12% since end-2019. Thus, hydrogen stocks have massively outperformed the general market.
In the chemicals sector, our most preferred stock Linde has performed well. Linde’s shares have
increased by 27% over the last twelve months and 12% YTD. Air Liquide’s shares rose have risen
by 13% since 1 October 2020, and by 5% since end-2019. Both stocks have outperformed the
chemicals sector (SX4P).
Chart 28: Share price performance of Linde and Air Liquide versus the chemical sector in Europe
Source: Reuters, Kepler Cheuvreux
However, we do not agree with some investors who believe the hydrogen story is fully reflected in
the share prices of Linde and Air Liquide. On the one hand, both industrial gas companies released
good results in H1/Q2, beating market expectations. Moreover, their earnings and margin
performance was rather resilient and thus much better than many other chemical stocks thanks
to their defensive profile (take-or-pay business, healthcare exposure, etc.). Actually, Linde even
raised its guidance for 2020. On the other hand, we see a massive underperformance of Linde and
Air Liquide versus the abovementioned hydrogen stocks. Thus, we disagree with that perception.
Customers
The chemical industry supplies all kinds of industries and this is largely also the case for industrial
gas companies. Many customers are under pressure to reduce their carbon footprint because in
turn their customers ask for it, e.g. automotive companies put pressure on their suppliers to
reduce GHG emissions as they want to reduce the overall carbon footprint of a car and thus their
CO2 balance. Those who do not comply fall off of the supplier list.
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Other companies face regulatory pressure as the European Union is currently intensifying the CO2
reduction target for 2030 from -40% to -55% (vs. 1990). Thus, both higher costs via the EU ETS
scheme (phase 4 is imminent) and the risk of being affected by an expansion of the EU ETS scheme
towards other sectors are looming. The IMO 2020 regulation, for example, has led to lower sulphur
content in ship fuel, which has led to a higher usage of hydrogen in refineries.
Finally, many customers are listed stocks. Management incentive schemes are partly linked to the
achievement of sustainability targets and to the share price performance in absolute and/or
relative terms. A target miss or an underperformance of the shares leads to a lower variable
income for top managers of the customer company, which they naturally want to avoid. Thus,
they are looking for ways to reduce CO2 emissions. A potential way is to use more hydrogen when
possible. Another is to shift towards more environmental friendly production. The use of green
hydrogen would certainly help to reduce CO2 emissions in the steel, cement and chemicals
industry.
Challenges by competition
Competitive situation in electrolysers
As outlined above, there are already several competitors along the hydrogen value chain. Talking
about green hydrogen, we already mentioned smaller players in electrolysers such as McPhy
Energy, ITM Power, Ballard Power, Plug Power, Powercell and NEL. Some of these are start-ups,
while others have already been around for more than 20 years. Besides that, there are also many
established electrolyser producers such as Siemens and Thyssen-Krupp.
In our primer report, we mentioned that Chinese companies have the lowest-cost electrolysers,
when it comes to alkaline electrolysis (Bloomberg). According to Holland Innovation Network
China, Tianjin Mainland Hydrogen Equipment Co., Ltd. (THE) and Beijing CEI Technology Co. Ltd
are the key alkaline electrolyser producers. THE is a world-leading supplier of alkaline
electrolysers and it has a partnership with HydrogenPro (Norway), which holds all exclusive rights
for THE’s business activities in Europe and the US.
HydrogenPro was selected in October 2018 by H2V INDUSTRY for a large-scale P2G project (5x the
100MW hydrogen production units) over a five-year period in Dunkerque, France. Another player
in alakaline electrolysers are Suzhou JingLi Hydrogen Production Equipment Co., Ltd., Yangzhou
Chungdean Hydrogen Equipment, Shaanxi Huaquin New Energy Technology and Suzhou Suqing
Hydrogen Equipment.
In contrast, market leaders in large-scale PEM electrolysers are Hydrogenics (now owned by
Cummins), Siemens, ITM Power and NEL. In PEM, a subsidiary of China Shipbuilding Industry
Corporation and Shandong Saikesaisi Hydrogen Energy Co., Ltd are Chinese PEM electrolyser
producers. From a technology perspective, the Chinese players appear to be substantially behind
its western peers (source: Holland Innovation Network China, Jan 2019).
Competitive situation in transportation and distribution of hydrogen
Linde and Air Liquide dominate the market in the hydrogen pipeline network. Air Products also
has a significant pipeline network. This will probably not last forever. A huge infrastructure needs
to be created to establish a hydrogen economy as it requires massive imports of hydrogen. Such
investments will most likely be done by gas infrastructure companies.
In our primer report in September, we wrote that a group of 11 European gas infrastructure
companies (Enagas, Energinet, Fluxys Belgium, Gasunie, GRT gaz, NET4GAS, OGE, ONTRAS, Snam,
Swedegas, Terega) presented a plan on 17 July 2020 to create a dedicated hydrogen pipeline
network spanning c. 23,000km by 2040, to be used in parallel with the natural gas grid. The
proposed network would run through Germany, France, Italy, Spain, the Netherlands, Belgium,
the Czech Republic, Denmark, Sweden, and Switzerland.
An initial pipeline network of 6,800km has been planned by 2030, which should connect local
clusters of hydrogen production and use. If this becomes a reality, the market share of industrial
gas companies in the pipeline network will automatically shrink. But in contrast to Linde and Air
Liquide’s pipelines, which are dedicated to specific customers and thus somewhat protected
against competition, the planned gas infrastructure (mentioned above) will be open to other
hydrogen suppliers. Thus, it will be regulated.
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Should any client of an industrial gas company that is in a remote location and thus supplied by a
longer pipeline, stop or reduce demand for hydrogen, players like Linde and Air Liquide would
have spare capacity in their pipeline network, which would then eventually be useable in a
regulated hydrogen grid. However, if an onsite/tonnage client does not renew its take-or-pay
contract, it will be a challenge for an industrial gas provider to switch the volumes to another
client.
Competitive situation in refuelling stations
At the start of this report we mention that Linde and Air Liquide dominate the installation of
hydrogen refuelling stations (HRS), although other industrial gas companies such as Air Products
are also able to build HRS. In September 2018, Air Products signed a cooperation with Beijing
Sinoscience Fullcryo Technology Co., Ltd for the development of China’s first commercial-scale
liquid hydrogen-based fuelling station.
Chinese names involved in the construction and operation of HRS are large companies such as
Sinopec (Yunfu HRS) and PetroChina (Wuhan HRS), but several smaller companies as well, i.e.
Shanghai Elite Energy and Technology (entrusts the Anting HRS in Shanghai), Shanghai SinoTran
New Energy Automobile Operation, Shanghai Hyfun Energy Technology, Shanghai Hyfuture
Industrial, Foshan Ruihui Energy and Wuhan Zhongji Hydrogen Energy Development. Leading
companies producing HRS equipment (such as dispensers etc.) are Zhangjiagang Furui Hydrogen
Power Equipment, Shanghai Sunwise New Energy Systems and Shanghai Houpu Excellence
Hydrogen Energy Technology.
The Norwegian company NEL produces very compact HRS (that occupy only 7 sqm) which can
easily be integrated into existing refuelling stations. This is seen as an innovative solution.
However, due to national regulation, this cannot be implemented in China as they needs to be
20m away from existing compressors.
Other kinds of competition
There are also many players in grey hydrogen who could make inroads into green hydrogen. Oil
companies such as Shell are very vocal about such activities. Beside this, we would not wonder if
ammonia producer would try to backward integrate with green hydrogen – instead of grey
hydrogen.
Beside this, we outlined earlier that the hydrogen market today is dominated by captive
producers, i.e. refineries and nitrogen fertiliser producers. In the event of more regulation, it
makes sense for these companies to use CCS or CCU technologies to switch their grey hydrogen
production to blue hydrogen production. If they buy that kind of technology from someone else,
they would compete with industrial gas players such as Linde and Air Liquide.
Legal and political challenges
Plans for implementation are vague – holding back capex by companies
Many hydrogen strategies include ambitious goals. However, the plans for implementation
remain vague. Thus, the World Energy Council in Germany is sceptical – at least for Germany. It
says that the measures currently described will not be sufficient to initiate the planned growth.
For a rapid market ramp-up, planning-reliable instruments are required which, above all, reliably
lower operating costs in such a way that demand is stimulated.
However, there is still no evidence of a secure basis for investments. In Germany, funds are already
flowing into R&D, especially into the so-called "real labs", in which various concepts for the use of
green hydrogen are tested. The real labs are part of the seventh energy research programme of
the federal government, which began in 2018.
However, this is still a long way from entering large-scale hydrogen production, the World Energy
Council says. The German government wants to pave the way by exempting the electricity that is
required for the production of green hydrogen from a considerable part of the levy under the
Renewable Energy Sources Act (EEG). Thus, the scope of the Special Compensation Regulation
(BesAR) of the EEG is considered to be extended to hydrogen electrolysis. However, companies
remain restrained.
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An extension of the special compensation regulation of the EEG is unlikely to trigger investments
in hydrogen electrolysis. The use of the special compensation regulation must be applied for every
new year. On this basis, no company will invest in new plants for the production of green
hydrogen, Uniper boss Andreas Schierenbeck told Handelsblatt. This requires reliable framework
conditions that have to be stable for years.
In the opinion of many companies, contracts for difference are necessary to establish a reliable
framework. This works as follows: public authorities and companies conclude contracts for the
development of climate-friendly projects. This guarantees a certain CO2 price over a certain
period of time. The project developer pays or receives the difference between the reference price
and the actual price in emissions trading. Such agreements are extremely important for energy-
intensive industries such as steel or chemicals. Large quantities of hydrogen are needed as quickly
as possible at a low cost.
Adaption of the legal framework is necessary
An issue with the legal framework is visible at two very promising hydrogen projects, each with
100MW planned and investment costs of EUR150m. The purpose of these two projects is to use
surplus wind power and convert it into green hydrogen, called power-to-gas.
In summer 2019, two network operator consortiums submitted their investment applications for
the largest power-to-gas projects in Germany: Element 1 Gasunie Germany, Thyssengas and
TenneT “Element One”, and “Hybridge” (Amprion, Open Grid Europe). But both power-to-gas
projects are stuck. They are not officially approved in their current form. The project planners
hope that the national hydrogen strategy will ease regulation. However, opponents warn of
distortion of competition.
There are no signs of permits on the immediate horizon. Not even the fact that Element One now
belongs to the prominent circle of “real laboratories of the energy transition” helps the project
planners. The projects were bounced back by the Federal Network Agency (Bundesnetzagentur),
as they were “not approvable on the basis of the applicable law”.
The energy association BDEW is working hard to find a way forward for the green hydrogen
projects. Apart from the question of whether they are compatible with current law, which restricts
electricity transmission network operators and gas pipeline operators, the biggest obstacle is this
clause: “Transmission system operators must not own energy storage systems or build, manage
or operate these systems.” In this sense, power-to-gas systems are regarded as energy storage
systems.
However, the guideline allows exceptions: on the one hand, network operators could circumvent
the unbundling requirement if the systems are “fully integrated network components”. These
would have to serve operational safety and be integrated into either a gas or electricity network.
On the other hand, network operators could become active if no one else can be found in a tender
process who wants to or can set up and operate such an electrolysis system - experts discuss this
variant under the term “market test”. But there are definitely interested parties to be taken
seriously. An initiative by the energy supplier RWE, for example, aims to build a plant with a
capacity of 100MW – as large as Hybridge and Element One.
Network operators should be able to transport hydrogen regardless of how it is produced - similar
to the situation today with natural gas and electricity networks. For the network connections used
to feed hydrogen into existing natural gas networks, it is important to ensure that the users of the
natural gas network are not affected by this.
In their paper “Towards a competitive hydrogen market” from 21 April 2020, the associations
propose concrete changes in the Energy Industry Act and the Gas Network Access Ordinance. The
authors warn that these adjustments would have to be launched during this legislative period, “so
that the transport of pure hydrogen can become a real available option as soon as possible, at the
latest from the middle of this decade”, according to five associations in Germany.
Issues with the grid
The CEO of Tennet mentioned in an interview with Handelsblatt that entering the hydrogen
economy could actually have the opposite effect to what government representatives hope to
achieve. It could ultimately result in higher costs and higher CO2 emissions as well as lower
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competitiveness. What is decisive is where and when the green hydrogen is produced. In his view,
the right signals must be send by the government regarding the electrolysers. The message must
be that they actually support the electricity grid instead of overloading it. As electrolysers require
a huge amount of energy, their location is critical. They must be located close to the renewable
energy production (e.g. North Sea) or close to the industrial customer (e.g. in the south of
Germany). For the latter, additional electricity highways would have to be built to transport
renewable energy to the electrolysers, but this could lead to network bottleneck.
There is already a bottleneck from north to south in the grid. Electrical generation often has to be
reduced in the north and increased in the south, to cope with such bottlenecks. The experts call
this "redispatching". That means that often fossil power plants have to be started in the south and
renewable electricity production has to be reduced in the north to keep the power grids stable.
Basically, this would mean less renewable electricity and more electricity coal or gas power
plants, resulting in higher total carbon dioxide emissions. As a result, Tennet’s CEO has pledged
to create a hydrogen network via pipelines.
Risks related to political acceptance
It is clear that the shift towards hydrogen requires a massive increase in renewable energy. This
will probably be accompanied by rising electricity costs, which finally have to be shouldered by
the final consumers. To keep costs somewhat under control and still make good progress in CO2
reduction, a viable option is to switch from grey hydrogen to blue hydrogen. Blue hydrogen is grey
hydrogen plus either carbon capture and storage (CCS) or carbon capture and use (CCU). While
the latter is certainly appreciated by many people, as it means a circular economy, CCS could be
an issue. In some countries, especially where population density is high, e.g. Germany, it seems
that the population is not in favour of CCS. The outcome would be limited acceptance. In other
countries such as the Netherlands, Denmark, and Norway, but also the UK, we understand that
CCS is not a concern for the population.
Thus, the Hydrogen Roadmap for Europe from the FCH provides two scenarios for hydrogen.
Scenario 1 is about little political acceptance of CCS, while in scenario 2 CCS is feasible and
politically accepted.
In scenario 1, c. 75% of hydrogen needs in Europe would come from electrolysis in 2050, and just
c. 15% from blue hydrogen. In scenario 2, green hydrogen would account for 20% of hydrogen
supply in 2050, while c. 70% would be derived from blue hydrogen.
Chart 29: Scenario 1: supply mix of hydrogen Chart 30: Scenario 2 supply mix of hydrogen
Source: FCH Source: FCH
Our ESG team anticipates that by 2030 green hydrogen will be cheaper and cleaner than blue
hydrogen. Thus, green hydrogen should account for the vast majority of all hydrogen produce in
2050. Accordingly, scenario 1 appears more credible than scenario 2.
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Cost position between grey, blue, and green hydrogen
We highlighted the different cost contributors in our primer report. Thus, we will not repeat all of
our findings here. With the right support from politicians, we see green hydrogen advancing, while
we expect coal-based hydrogen to fade over time. However, we see some opportunities for blue
hydrogen (grey hydrogen + CCS or + CCU) going forward. According to Bloomberg, the costs for
blue hydrogen are between USD1.1/kg and USD3.3/kg, depending on the gas price.
The high end of this range is based on a (Henry Hub) gas price of USD12/m btu. However, it has
been a while since the price was at USD12/m btu. In the last six years, the gas price has never been
that high. The average of the last six years is below USD3. With likely modest demand ahead, we
struggle to see how gas prices could go up in future.
Chart 31: LCOH from natural gas 2020-30 Chart 32: Henry Hub gas price (USD/M btu)
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Jan-14
Jun-14
Nov-14
Apr-15
Sep-15
Feb-16
Jul-16
Dec-16
May-17
Oct-17
Mar-18
Aug-18
Jan-19
Jun-19
Nov-19
Apr-20
Source: Bloomberg Gas price (Henry Hub USD/mbtu)
Source: Reuters, Kepler Cheuvreux
We doubt that the entire green hydrogen supply will be produced at the lowest costs in 2030. It
will most certainly be between USD1.1/kg and USD2.75/kg, the range indicated by Bloomberg (see
chart below).
Using gas prices of USD2, USD3, and USD4 per m btu, we see that the blue hydrogen price (grey +
CCS) based on Bloomberg data is in the middle of the cheapest and the most expensive green
hydrogen. With this, blue hydrogen will probably be competitive versus the range of green
hydrogen offerings. From that perspective, it makes sense to produce blue hydrogen even beyond
2030, even if carbon prices are high.
Chart 33: Impact of carbon prices on the levelised cost of hydrogen (LCOH) from natural gas
LCOH (USD/kg) 50 100 150 200 250 300
3.00 Carbon price (USD/t CO2)
2.50 Blue hydrogen (at USD3/m btu)
Renewable H2 low end (2030)
2.00
1.50
1.00
0.50
0.00
0
Blue hydrogen (at USD2/m btu)
Blue hydrogen (at USD4/m btu)
Renewable H2 high end (2030)
Source: Bloomberg data, Kepler Cheuvreux
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The findings are important, as they suggest two things: on the one hand, they show that it makes
sense to even build new (green field) SMR plants (plus CCS) in 2030 and beyond, while on the other
hand, those SMR facilities, which already exist, can be used further (in connection with CCS). The
incremental investments are modest, in our view. Moreover, once those old SMRs are depreciated,
the earnings are quite attractive. And finally, as capex for older plants is limited, operators can run
these facilities for cash. From that perspective, these SMRs can operate for decades with
reasonable earnings and cash. Thus, we disagree with the view of some investors that SMRs could
end up being stranded assets once low-cost green hydrogen facilities reach EUR1/kg LCOH.
However, we agree that if green hydrogen is being produced at EUR1.00-1.50/kg costs by 2030, the
shift towards green instead of blue hydrogen will accelerate.
Most likely prospects in hydrogen
Market overall
According to Bloomberg, there are three scenarios for the prospects in hydrogen. The theoretical
maximum potential for hydrogen could reach 195 Exajoule, which would be equivalent to 1,370
tonnes. This would be nearly 20x current demand.
In the event of strong policy support, hydrogen demand could reach 99 Exajoule (696m tonnes)
by 2050. This is 10x today’s market. If policy support is weak, the hydrogen market could reach 27
Exajoule (187m tonnes).
Given the announcements by various countries, as well as the EU Commission, in favour of
supporting hydrogen, we see the “strong policy support” scenario as more likely.
Chart 34: Market potential of hydrogen 2020-50 (Exajoule)
100 99
90
80
70
60
50
40 78
30
20 CAGR: 10.8%
28
10
0 10 CAGR: 3.4% 14 CAGR: 7.2%
2020E 2030E 2040E 2050E
Hydrogen demand* (EJ) Additional potential at strong policy** (EJ)
Source: *Hydrogen Council, **Bloomberg NEF, Kepler Cheuvreux
Comparing the Bloomberg figure for the “strong policy support” scenario with the estimate from
the Hydrogen Council for 2050, we see that Bloomberg has a more optimistic stance. Its estimate
(99 Exajoule) is 27% above the figure suggested by the Hydrogen Council (78 Exajoule).
Translating this data into m tonnes (1 Exajoule = 7m tonnes), we see that the hydrogen market is set
is to grow by a factor of 8x (Hydrogen Council) or 10x (Bloomberg). Based on the Hydrogen Council
estimate, the CAGR 2020-50E would be 7.1%, while according to Bloomberg it would be 7.9%.
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Chart 35 Market potential of hydrogen 2020-50 (m tonnes)
700 696
600 CAGR: 7.9%
500
400
300 CAGR: 7.1% 546
200
100 2050E
0 70
2020E
Hydrogen demand (m tonnes)* Additional potential at strong policy (m tonnes)**
Source: Hydrogen Council data*, Bloomberg data**, Kepler Cheuvreux
Some other market participants are more cautious. For example, the World Energy Council
recently said that it expects hydrogen to reach 270m tonnes in 2050E, which is just half of the
Hydrogen Council’s estimate, therefore leading to a CAGR of only 4.6% over 2020-50E.
Whether the final growth rate for 2020-50 is 7.1% (Hydrogen Council), 7.9% (Bloomberg NEF), or
just 4.6% (World Energy Council) remains to be seen. The reason for the variance is the high
uncertainty over prospects, which depend on the degree of political backing. For the short term,
the Hydrogen Council is cautious. It expects a growth rate of just 3.4% a year in the next ten years
(Chart 20). After 2030, it expects an acceleration to kick in. This sounds plausible to us. We agree
with this expectation that the growth rate is likely to be exponential.
Although the overall market should rise strongly, the Hydrogen Council expects little change for
the “existing feedstock use”. This is the result of divergent developments within that application:
some parts of this specific application will probably shrink significantly, especially any fossil-
based applications, because of their high CO2 emissions. With the switch towards battery
electrical vehicles and hydrogen-powered trucks in future, we expect less demand for petrol and
diesel in 2050 compared to today. As a consequence, there will be less demand for
desulphurisation of oil in refineries. However, for other applications such as methanol production
and ammonia production, there is still a need for hydrogen as feedstock in 2050.
Chart 36: Hydrogen demand evolution and by sector (Exajoule) Chart 37: Hydrogen demand evolution and by sector (m tonnes)
80 9 600 63
22 500 155.4
60 400 78.4
16 300 64.4
40 11 200 113.4
9 100 7 71.4
20 1 10 2050E
09 2050E 0 63
2020E Industrial energy
2020E New feedstock (CCU, DRI)
Industrial energy Existing feedstock uses Building heat and power
Existing feedstock uses Power generation, buffering
Building heat and power New feedstock (CCU, DRI) Power generation, buffering
Transportation
Transportation
Source: Hydrogen Council, Kepler Cheuvreux Source: Hydrogen Council, Kepler Cheuvreux
There is no estimated data for the hydrogen applications in 2020. However, we have two
data points for the market split in 2015. The problem is that the estimates are divergent. Based on
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the data from the IEA, hydrogen demand was 72m tonnes in 2015, with the majority applied in
refining (50.2%).
In contrast, the Hydrogen Council says that hydrogen demand in 2015 was just slightly above
55m tonnes (7.9 Exajoule), 23% lower than the figure provided by the IEA. Moreover, the
Hydrogen Council says that the majority of hydrogen is used in ammonia production (50%), while
refining accounts for just 31%. The big question mark is if refining really used 36m tonnes of
hydrogen (IEA) or just 17m tonnes (Hydrogen Council) in 2015. That makes a big difference. In view
1, the other applications need to grow by 2% a year until 2050 to compensate for the evaporation
of hydrogen use in refineries. In view 2, the growth rate needs to be just 1.1% a year until 2050
for full compensation.
Chart 38: Hydrogen demand in 2015 (view 1: 71.7m tonnes) Chart 39: Hydrogen demand in 2015 (view 2: 55m tonnes)
Other Other ProcessingOther industries
5.3% chemicals 5.5%
1.6%
1.6%
Refining
Methanol 30.8%
10.5%
Ammonia Refining
44.5% 50.2%
Ammonia
49.9%
Source: IEA data, Kepler Cheuvreux Source: Hydrogen Council data, Kepler Cheuvreux
We assume that the figures from the Hydrogen Council are more accurate and more detailed
because advisor McKinsey has contributed to the analysis.
In contrast, other hydrogen applications in 2050 (Chart 21), such as transportation (29%), building
heat and power (14%), power generation/buffer (12%), and new feedstock (CCU/DRI; 12%) will be
completely new, as they do not exist today. This will drive the growth in hydrogen.
Hydrogen as energy storage makes sense, as often windmills stand still despite windy weather to
avoid an overload of the grid. In transportation, hydrogen-powered fuel cells make a lot of sense
in heavy-duty trucks, but also in small ships and ferries. Forklifts and some trains are already
powered by hydrogen. Eventually, some aircrafts will also be powered by hydrogen, as recently
announced by Airbus for 2035. We explained in our primer report all these future applications,
thus we will not go in details here.
According to the Hydrogen Council, the largest application of hydrogen will be in transportation,
accounting for 28.5% of the total market in 2050, or 155m tonnes. In contrast, in Bloomberg’s
“strong policy support” scenario, hydrogen demand from transportation is expected to be 301m
tonnes by 2050, nearly twice the figure suggested by the Hydrogen Council. In relative terms,
transportation is also the largest outlet for Bloomberg, accounting for 43% of total demand. Our
automotive team will discuss in a sector report which estimate is more realistic.
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Chart 40: Hydrogen demand in 2050E (est.: 546m tonnes) Chart 41: Hydrogen demand in 2050E (est.: 696m tonnes)
Power Existing Buildings
generation, feedstock uses 7.6%
buffering 13.1%
11.5%
Transportation Industrial Transport Power
28.5% energy 43.2% 31.5%
20.8%
Building heat and power New Industry
14.4% feedstock 17.7%
(CCU, DRI)
Source: Bloomberg data, Kepler Cheuvreux
11.8%
Source: Hydrogen Council data, Kepler Cheuvreux
In other applications, the difference between the Hydrogen Council’s and Bloomberg’s estimates
is less pronounced. Energy/power is expected to reach 176m by the Hydrogen Council and 219m
tonnes by Bloomberg. Industry (excluding energy) is forecast to demand 136m tonnes by the
Hydrogen Council and 123m tonnes by Bloomberg. Buildings is expected to use 78m tonnes by
the Hydrogen Council and 53m tonnes according to Bloomberg.
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Prospects for hydrogen business at Linde and Air Liquide
We discuss the available market for industrial gas players. We expect hydrogen sales to
double at both Linde and Air Liquide over the next ten years, leading to a sales CAGR 2020-
30E of c. 7%. Finally, we analyse how the efforts in hydrogen will impact the CO2 efficiency
of both companies.
Prospects for industrial gas companies
Market expectations for 2050
All market participants agree that growth in hydrogen sales will not be linear, but exponential.
However, Linde and Air Liquide are quite serious about hydrogen. The Hydrogen Council was
established in 2017 by its founders, Air Liquide and Toyota, and Linde joined thereafter. Today,
the association has 92 members with combined revenues of over EUR18.9trn and 6.5m employees
worldwide. Thus, it is a serious organisation. The Hydrogen Council hired McKinsey to assess the
prospects for hydrogen. It concluded that annual sales consisting of hydrogen and hydrogen
equipment could reach USD2.5trn by 2050. Using today’s USD/EUR exchange rate of 1.17, the
expectation about the market size is 11% of the current combined sales of the Hydrogen Council
members. Thus, the USD2.5trn figure does not appear particularly far-fetched.
The big question is the price level at which hydrogen will be sold in future. Today, the production
costs of fossil-fuel-based hydrogen are between USD1/kg and USD1.8/kg, far below the current
production costs of green hydrogen (USD2.50-4.50/kg according to Bloomberg, USD6/kg
according to Linde and the Hydrogen Council as of January 2020). Linde’s CEO, Steve Angel,
mentioned recently that this price (but also capex) needs to come down by 50-60% to become
competitive.
In fact, our ESG team is convinced that if green energy is produced at EUR20/MWh, and
electrolysers are at EUR100k/MW (which is both likely), production costs for green hydrogen could
already be close to EUR1/kg (c. USD1.17/kg) by 2030-35. However, the “retail” price, e.g. at
refuelling stations, would be USD3/kg. Nevertheless, this is far lower than today’s c. USD10/kg at
hydrogen filling stations. As producers of hydrogen need to earn a premium on their cost of
capital, the selling price for hydrogen needs to be higher than EUR1/kg production costs.
Using the cost structure of Air Liquide as a proxy, we guess that the industry price for hydrogen in
such an environment is likely to be EUR1.30/kg (=USD1.52/kg). Multiplying this by the 546m tonnes
estimated by the Hydrogen Council for 2050, the corresponding sales would amount to
c. USD830bn. On top of this comes equipment such as pipelines, storage tanks/cylinders, and
electrolysers, etc. Even if we were to apply a USD3/kg “retail” price, this would lead to a USD1.6trn
sales figure. However, this falls short of the USD2.5trn in sales estimated by the Hydrogen Council
for 2050.
Linde’s CEO, Steve Angel, mentioned during the latest conference call that the green hydrogen
market could reach USD100bn by 2030. However, he wants to see the market developing and
more projects moving forward.
Available market for industrial gas companies
So far, the major hydrogen applications for industrial gas companies are refineries, ammonia, and
methanol. In future, when a hydrogen economy is established based on renewable energy, many
more applications are possible. The industrial gas companies see three key opportunities for
green hydrogen.
Opportunity number 1: mobility applications
The first hydrogen opportunity for industrial gas companies is in mobility. The market could be
huge. Multiplying the likely USD1.52/kg selling price for hydrogen for the industry by the volume
assumptions for transportation by Hydrogen Council (155m tonnes) and Bloomberg’s estimate for
transportation in its strong policy scenario (301m tonnes) for 2050, the addressable market for
this application could reach USD236-457bn) by 2050E.
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Several market participants believe that hydrogen-powered light vehicles could become mass
market going forward as cars need to reduce their CO2 emissions. The Hydrogen Council assumes
that 10m fuel cell cars will be produced by 2030, which compares to the total 89m cars produced
in 2019. However, just 6,740 FCEVs were sold in 2019, despite the fact that first fuel cell cars were
presented to the public 26 years ago (i.e. Daimler, with its Necar). Hydrogen applications for light
vehicles will probably not play a major role in the next ten years despite the inroads made by
Toyota and Hyundai, as most automotive producers are already far advanced with battery-based
electro mobility, and are planning the roll-out of many models in the years to come. In contrast,
fuel cell cars are stuck in a small niche. However, there are many other mobility applications,
where the use of hydrogen makes sense – partly already today. This is especially the case for
heavy-duty trucks, busses, forklifts, trains, barges, and ferries. For such mobility applications
Linde sees the largest opportunity. Eventually, hydrogen-powered planes could also be an
opportunity at a later stage.
We explained the various usages in our primer report on hydrogen: Two fuel cell powered trains
are already running in Germany and another 12 trains have been ordered. In the US, more than
20,000 hydrogen-powered forklifts are used in warehouses, stores, and manufacturing facilities
(source: US Department of Energy).
There are numerous business opportunities for industrial gas companies. Fuel cells are also used
in non-vital parts of aircraft (in the galleys), and the first hydrogen powered ships are now sailing.
Moreover, hydrogen has been used for decades in Arian rockets. Future applications are
hydrogen-powered trucks, which are set to be launched in 2023 (Nikola) and in 2025 (Daimler).
Meanwhile, hundreds of busses run on fuel cells. Finally, several hydrogen filling stations are
currently being built around the world.
We outlined in our primer report that the EU commission estimates that the rollout of an
additional 400 small-scale hydrogen refuelling stations could require investments of EUR850m-
1bn. This equates to EUR2-2.5m each, which is higher than the usual EUR1.0-1.5m capex per
hydrogen filling station today. In China 1,000 hydrogen refuelling stations are targeted by 2030. In
addition, there are many other countries such as Japan, South Korea as well as the state of
California, where hydrogen filling stations are planned to be significantly increased in the years
ahead. According to the Hydrogen Council as of January 2020 there were projects for 10,000 HRS
globally until 2030. We see Linde and Air Liquide well positioned to capture growth opportunities
here, as they have proven to provide top technology and account for the majority of today’s
installed hydrogen fuelling stations globally.
Opportunity number 2: applications in the industry…
Hydrogen, a highly reactive gas, is widely used in many industrial applications to produce different
materials. In electronics, hydrogen is used as a carrier gas (a gas that transports active gases) for
diverse applications such as the manufacture of electronic components. It offers excellent
protection against impurities and oxidation.
However, there are also great opportunities in industries, which have hard to abate CO2
emissions. For example, to achieve green steel, hydrogen is required. We explained the DRI
process in our primer report. In case steel companies switch to low/zero carbon production with
hydrogen, this would be very attractive for industrial gas companies. As the DRI process does not
cannibalise the oxygen need in a steel mill, industrial gas companies could sell both gases to a
steel manufacturer: hydrogen and oxygen.
We outlined in our primer report that the European Commission estimates that it takes EUR160-
200m to convert a typical EU steel installation coming to the end of its life to hydrogen. The steel
industry has certainly a big interest in reducing CO2 emissions as it is one of the most eco-
unfriendly sectors. Each tonne of steel produced generates 1.9 metric tonnes of CO2. The problem
is that massive energy as well as electrolyser capacity is needed to achieve this.
Uniper and E.ON are planning an electrolyser with a power output of up to 100MW, which could
generate 1.7 tonnes of hydrogen per hour. With this hydrogen, 50,000 tonnes of green steel could
be produced. However, we learnt that ThyssenKrupp needs to invest EUR10bn to switch its steel
production into green. Given the company’s difficult situation currently, this will prove
challenging.
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Hydrogen is also used in metallurgy for heat treatment atmospheres that enable to produce
mechanical parts (the sintering of molded parts) or to alter their properties (annealing of metallic
parts). Hydrogen is used commercially to extract tungsten from its ore (wolframite, scheelite, and
ferberite). The same concept can be used to produce copper from tenorite and paramelaconite
(copper oxide, CuO).
In the glass industry, hydrogen is essential to manufacture the flat glass used for flat screens. Most
flat glass uses the float process, for which high purity hydrogen constitutes a protective
atmosphere. Industrial gas companies are well positioned to provide high purity hydrogen due to
their purification technology.
Hydrogen is used extensively for electronics manufacturing in the semiconductor, display, LED,
and photovoltaic application segments. This most simple of molecules exhibits unique properties:
it has excellent heat transfer capabilities and is an efficient reducing and etching agent.
Hydrogen is used to turn unsaturated fats to saturated oils and fats. Food industries, for instance,
use hydrogen to make hydrogenated vegetable oils such as margarine and butter. Hydrogenation
of saturated oils and fats is a batch process. The oil feed (e.g. sunflower seed or olive oil) is pumped
into a heated pressure vessel and a vacuum is applied to inhibit oxidation as the heating is applied.
The hydrogenation reaction is exothermic, so the external heating is removed and cooling
applied.
…and in particular in the chemical industry
An important application of hydrogen is in the chemical sector. Chemicals needs for its production
process both energy (usually in form of steam and electricity) and raw materials (very often
carbon-based). Industrial gas companies have been able to deliver some of the required input
material. In the steam methane reforming process, which so far has been the state-of-the-art
hydrogen production, industrial gas companies generated hydrogen in large quantities at low
costs for their clients. This process comes along with a by-product, called carbon monoxide, a
versatile raw material for many chemical products including methanol and its derivatives.
Chart 42: Products from synthetic gas
Source: Vectorstock, Dreamstime, BASF, Wikipedia, Kepler Cheuvreux
This explains why hydrogen has numerous applications in the chemical industry. It can be
combined with nitrogen to produce ammonia, a fertilizer. It is a reagent that enters into the
composition of textile fibers such as nylon, polyurethane foam and a number of plastic materials.
A very promising application is in this context carbon capture and use (CCU). Air Liquide’s
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customer Covestro uses the waste CO2 as carbon source and thus as raw material for its
polyurethane production in Dormagen. This innovative technology can reduce CO2 emissions.
The Hydrogen Council expects hydrogen could be used together with captured carbon or carbon
from biomass to replace fossil fuels as feedstock for the chemical industry. By 2030E, 10-15m
tonnes of chemicals could be produced from such renewable feedstock, it said. However, the
Hydrogen Council does not mention how much hydrogen is necessary to produce this 10-15m
tonnes of chemical feedstock.
Assuming an input/output ratio of 1:1 and using the assumed industrial selling price of USD1.52,
the corresponding hydrogen sales could be USD15.2-22.8bn for chemicals in Europe in 2030.
Another estimate for the market potential of hydrogen in the chemicals sector is derived from a
study by DECHEMA and Future Camp for the German chemical association VCI. This study provides
a roadmap for the German chemical industry to become carbon-neutral by 2050 (technology path
number 3).
Chart 43: GHG emissions in the German chemical industry 2020-50 (technology path no. 3)
Source: Dechema, FutureCamp, VCI, Kepler Cheuvreux
To achieve a carbon-neutral environment, electricity demand in the chemical industry in Germany
needs is expected to rocket by 1,166% from 54TWh/a in 2020 to 684.6TWh/a in 2050. The basis of
this calculation is that renewable energy is set to increase its exposure of energy supply from 1%
in 2020E to 100% by 2050E, while the energy exposure to natural gas is expected to shrink from
80% in 2020E to 0% in 2050E. Other energy sources such as oil (12% in 2020) and coal (8%) are
likely to evaporate rather quickly.
The main energy- and feedstock-intense basic chemicals, which cause two-thirds of the GHG
emissions are methanol, ammonia, urea, ethylene, propylene, chlorine as well as aromatics
(benzene, toluene, xylene). In the study, butadiene has also been included. If ammonia is derived
from electrolyser-based hydrogen, a separate nitrogen supply is needed, coming from an air
separation unit. This is the home turf of industrial gas players.
In the following section, we explain that it makes a difference if capex spending is for a greenfield
project (completely new facility) or a brownfield project (addition to an existing plant). Cost parity
compared to a new investment in a conventional plant is expected for 2039 (2048 vs. an existing
plant). In the case of methanol derived from electrolyser-based hydrogen, the CO2 as raw material
needs to come from external sources. The cost parity for such a plant compared to an investment
in a conventional plant is assumed to be in 2044 (2048 vs. an existing plant).
Big volume products in chemicals are derived from a cracker. An electrical heated cracker is
expected to reach cost parity compared to an investment in a new conventional cracker by 2044
(2049 vs. an existing cracker). But producing the key input factor naphtha via electrolysers
requires capex of EUR6bn (compared to EUR1bn for a large conventional cracker today). Even in
2050, the capex requirement will be EUR1.8bn.
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As a consequence, the cost parity for naphtha production via electrolysers is expected to be
reached in 2079E (if CO2 costs are EUR100/t). It is very difficult to believe that this is a viable option;
the latest cracker in Europe was built in the 1990s. We see better opportunities for chemical
recycling (Chemcycling) to get input materials (pyrolysis oil) to replace naphtha. However,
assuming the German chemical industry become carbon-neutral, the energy/raw material split
needs to change drastically.
Chart 44: Energy and raw material needs in the German chemical industry on its way to becoming carbon-neutral
Source: Dechema, FutureCamp, VCI, Kepler Cheuvreux
Based on stable volumes, the study expects total costs for energy, raw materials, and CO2
certificates to rise by 61% from EUR22.4bn in 2020 to EUR36bn by 2050 despite some efficiency
gains. The background is the massive increase in total energy costs driven by the rising need for
electricity measured in kWh, although the costs for electricity is assumed to remain stable at
EUR0.04 per kWh. Of course, if electricity costs rise, these costs would be higher.
Moreover, additional investments are necessary to achieve carbon neutrality, which amount to a
cumulative figure of EUR68bn by 2050E, of which EUR45bn is related to the top six basic chemicals.
The additional required capex is especially pronounced as of 2040E and beyond.
The German chemicals association sees hydrogen demand posting a seven-fold increase from
12.5bn cubic meters between now and 2050. This would imply 88bn cubic meters in 2050,
equating to a CAGR of 6.5%.This calculation excludes volume growth in base chemicals, which
represent the bulk of hydrogen volumes. Limited volume growth is included for some specialty
chemicals.
According to the European chemicals association, annual demand for hydrogen in the EU is 108bn
cubic meter, equivalent to c. 10m tonnes of hydrogen. This is primarily consumed by the chemical
industry and the refinery industry, but there is no split available.
As outlined before, hydrogen demand is expected to reach 70m tonnes in 2020, according to the
Hydrogen Council. We use the product split for 2015 as proxy for 2020. Thus, we calculate 43.4m
tonnes of hydrogen demand for the three chemical applications (ammonia, methanol, and other
chemicals) excluding refinery and others in 2020E.
Applying the calculated 6.5% CAGR for German chemical industry to become carbon-neutral by
2050 and adding a conservative 2% GDP growth number to it, hydrogen consumption in the global
chemical industry could increase by 11.6x, reaching 502m tonnes by 2050E (an 8.5% CAGR over
2020-50E).
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Chart 45: Hydrogen demand if global chemical industry becomes carbon-neutral by 2050E (m tonnes)
600.0
500.0
400.0
300.0
200.0
100.0
0.0
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Source: Kepler Cheuvreux
It remains to be seen whether this carbon neutrality goal will become a reality in all relevant
countries by 2050. What happens in China and the US will be key in terms of achieving this overall
target. China accounts for 36% of global chemical sales, and the US accounts for 14% of global
chemical industry. Both are highly involved in basic chemicals. While for the US, we have to wait
for the outcome of the upcoming elections, the Chinese government recently announced that it is
aiming for carbon neutrality by 2060 across the board.
The prospects for refineries is a big question mark. We outlined already that with the switch to
battery-based electric vehicles and fuel cell driven transport, the need for oil derived fuels may
shrink. We assume this will be a gradual process and will not happen suddenly. Nevertheless,
these refineries still emit CO2. If governments are serious about reaching carbon neutrality and
knowing that refineries produce over many decades, there is a need to make refineries green. If
they are green, they could produce e-fuels based on renewable energy, which makes sense for big
aircraft and large ships.
According to Dr. Rothermel from the German chemicals association VCI, electrolysers with a
capacity of 3GW (3,000MW) are necessary to provide all refineries in Germany with green
hydrogen. Today, the total amount of electrolysers in the world produce just 500MW. If we
extrapolate the refinery capacity exposure of Germany (2.1m barrels per day) to global capacity
(101.3m barrels per day; source: Statista) then electrolyser capacity of 146GW would be needed to
make all refineries in the world green. Using today’s ratio of 100MW for EUR150m capex in
electrolysers, total capex of EUR219bn is needed for electrolysers alone.
On top comes massive investments in windmills and solar parks. According to the German
ministry for education and R&D 50,000 Kwh (50MWh)of green energy is needed to produce 1 tonne
of green hydrogen. All refineries in the world require 21.56m tonnes of hydrogen. This requires
1,078m MWh energy. A very modern offshore windmill with 12MW installed capacity is expected
to produce 67GWh (67,000MWh) a year. Thus, we calculate that 16,090 very modern windmills are
necessary to make all refineries in the world green. As one modern windmill costs c. EUR750,000
per MW, we calculate capex of EUR9m per modern windmill. Multiplying this with the number of
required modern windmills, the required capex for windmills in total for this specific application
would be EUR145bn.
This raises two questions, which we cannot answer: 1) Who is willing to invest that amount of
money?; and 2) Where will all these windmill be located? Investors should be aware that on top of
all this capex for electrolysers and windmills, pipelines and storage capacity are needed, which
add billions more euros to the investment costs.
Opportunity number 3: transportation and storage of energy
Hydrogen is used to produce clean and silent energy for a variety of applications where doing so
meets an immediate need and offers a genuine benefit. This is the case for power supply to
isolated regions that are not connected to the power grid, sensitive sites that require reliable back-
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up energy systems, captive fleets (forklift trucks and buses), and portable power generators used
for outdoor events.
The energy system increasingly relies on renewables. Thus, hydrogen could also play a growing
role in the storage of renewable electricity and the production of clean electricity, according to
the Hydrogen Council. Hydrogen allows the efficient storage and transport of renewable
electricity over long periods and is therefore a key enabler of the transition to renewable energy.
By 2030E, 250-300TWh of surplus renewable electricity could be stored in the form of hydrogen. In
addition, more than 200TWh could be generated from hydrogen in large power plants to
accompany the transition to a renewable electricity system.
Massive investments are required
The Hydrogen Council expects that building the hydrogen economy would require annual
investments of USD20-25bn, leading to USD280bn by 2030. We pointed out in our primer report
that investments across the entire value chain including power generation would range from
USD180 to USD470m. We have narrowed this range to USD300-400m.
According to our ESG team, 70% of that capex is likely to be for renewable energy, which is
probably not the addressable market for industrial gas companies. However, our ESG team
believes that capex for electrolysers could account for 10% of total investments, while
transportation, storage, and refuelling could account for c. 17% and retrofit of grey to blue
hydrogen c. 3% of total capex over 2020-30E. Thus, c. 30% of the investments are available for
industrial gas companies, which equates to investment opportunities of USD90-120bn.
Chart 46: Breakdown of the necessary investment in the EU for 2020-30, according to the EU Commission
Retrofit grey to blue Electrolyzers
Transportation,
storage, refuelling
Renewables
generation
Source: ESG team Kepler Cheuvreux
Using the rule of thumb in the industrial gas space that investments of USD2 lead to sales of
USD1bn, the market potential for Linde, Air Liquide, and peers is USD45-60bn by 2030E. Compared
to their current hydrogen sales (Linde: above USD2bn, Air Liquide: c. EUR2bn), that offers the
opportunity for them to grow by 10-15x.
However, this is too simple. Other industrial gas companies such as Air Products will try to capture
a part of the market. Natural gas pipeline operators will try to get business in hydrogen transport.
Electrolyser producers such as Siemens and ThyssenKrupp as well as many start-up companies
(e.g. McPhy) and Chinese competitors will fight for lucrative orders for electrolysers.
Moreover, oil companies, who are used to produce hydrogen for many years as captive use, will
make investments in green hydrogen. Finally, also those chemical companies who want to replace
their grey hydrogen production with blue or green hydrogen manufacturing will also try to capture
market opportunities.
Potential market evolution and related CO2 emissions
Today, the hydrogen market is dominated by grey hydrogen c. 96%), while hydrogen as by-
product accounts in the chlor-alkali-process for c. 4% of hydrogen. Although the latter is produced
via an electrolyser, it is not necessarily green. This depends on the energy split in the grid. In many
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regions of the world, energy supply is not based on renewables but on other contributors such as
coal, gas, nuclear, etc.
The International Energy Agency (IEA) is rather conservative on the prospects for low-carbon
hydrogen (green and blue) in the years to come. Over 2015-19, there was hardly any increase.
Announced projects should lift the production capacity to 1.45m tonnes. The IEA expects low-
carbon hydrogen to reach nearly 8m tonnes by 2030. However, this would be just 11% of today’s
hydrogen market.
Chart 47: Low-carbon hydrogen production 2013-30E including projections in the Sustainable Development Scenario (m tonnes)
Source: IEA, Kepler Cheuvreux
We assume that gas and coal will be still important sources for hydrogen production until 2030.
However, we expect low-carbon hydrogen (green and blue) to contribute 50% to the market by
2030. The background is: 1) the rapid drop in costs for green hydrogen; and 2) a likely increase in
carbon costs. After 2030, when green hydrogen becomes competitive with blue hydrogen, we
expect green hydrogen to pick up sharply, while grey is set to diminish and finally vanish by 2040.
Green hydrogen should grow by a CAGR 2030-40E of 17% and a CAGR 2040-50E of c. 15%. Thus,
green hydrogen could account for 85% of the total hydrogen supply in 2050.
Chart 48: Likely evolution of hydrogen supply by sources (m tonnes)*
*we use the total market estimates by Hydrogen Council and apply our split assumptions Source: Kepler Cheuvreux
We assume that over time blue hydrogen will gradually replace grey hydrogen. The reason for this
is that grey hydrogen plants (similar to chemical facilities) require substantial capex. Once they
have been built, the capex spending is considered sunk costs. The same is true for customer plants
(e.g. ammonia, methanol or refineries). Plants are normally designed to run for 50 years, although
the assets are largely depreciated after c. 20 years. After that, the plants run for cash. The required
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capex for maintenance is modest. For an operator of such a plant, it makes sense to add CCS or
CCU technology as it does not require a major investment. In this case, such plants can continue
to produce for many years if not decades, even if green hydrogen plants have a lower levelized
cost of hydrogen and carbon costs are rising sharply.
In the event that Air Liquide’s new CCS technology with amines ends up reducing CO2 emissions
by nearly 100%, this will sharply increase the attractiveness of refurbished SMR plants with
CCS/CCU technology. Within grey hydrogen, the majority is produced via steam methane reformer
(SMR), using natural gas (methane). Coal-based hydrogen generates more than twice as much CO2
as gas-based hydrogen (20.2kg CO2/kg H2 vs. 8.9). The total hydrogen market generates 830m
tonnes of CO2 emissions, according to the IEA. Thus, we conclude that coal-based hydrogen is one
quarter of grey hydrogen and thus 24% of total hydrogen production today. A switch from coal-
based to gas-based hydrogen could eliminate 223m tonnes of CO2 emissions.
In the case of a 546m-tonne hydrogen market in 2050E with grey hydrogen accounting for zero
and blue hydrogen accounting for 15% of the market, we expect CO2 emission of 70m kg in 2050,
a decrease of 92% compared to the level in 2020, although hydrogen production would grow by
factor of 7.8x over the same period. As a consequence, the carbon intensity of hydrogen
production overall would shrink massively from nearly 12kg CO2/kg H2 now to less than 130g per
kg H2 in 2050E.
Chart 49: CO2 emissions from hydrogen production in 2020 and 2050 Chart 50: Carbon intensity in hydrogen production 2020 and 2050
(m tonnes)
Source: Hydrogen Council, IEA, Kepler Cheuvreux Source: Kepler Cheuvreux
A large part of coal gasification takes place in China, followed by India, and some also happens in
the US. Switching hydrogen technologies to green in these countries would massively reduce CO2
emissions and thus could have the strongest impact on the climate.
Company aspirations on hydrogen
It is no wonder that pressure is mounting on the management teams of Linde and Air Liquide to
provide a target for their own hydrogen activities. Linde’s CEO Steve Angel mentioned several
times that he expects hydrogen to become a “multi-billion USD business”. On another occasion, in
an interview in Handelsblatt, he said that Linde’s hydrogen business could quadruple. As the
timeline for all the hydrogen activities at Linde is 2028 and 2030, the ambition for the quadrupling
could be by the end of this decade (2030), which would imply an increase in sales from over
USD2bn in 2019 to USD8bn by 2030E.
However, during Linde’s latest conference call, CEO Steve Angel mentioned that he sees no
difficulty doubling Linde’s own hydrogen franchise by 2030 if the green hydrogen market reaches
USD100bn by end of this decade. Thus, it is not clear to us what hydrogen sales the company is
targeting for the next ten years.
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Asked at our autumn conference about the prospects for hydrogen, Air Liquide answered that this
business could double or triple, with the caveat that this is a conservative estimate. However, it
did not put a time line behind this number.
Air Liquide has been vocal about hydrogen for years, while Linde only started at the beginning of
the year. Thus, the perception among investors is that Air Liquide is more advanced in hydrogen
than Linde. But why then does Linde have higher expectations for its hydrogen business than Air
Liquide for the end of this decade? One explanation is certainly that US CEOs usually get more
excited about future opportunities while European CEOs are usually conservative by nature, as
they prefer to under-promise and over-deliver.
However, there might also be another reason. While Air Liquide mentioned that it sees some
acceleration in requests for hydrogen from customers, Linde disclosed that in its gas division, the
order backlog for hydrogen projects amounts for USD3bn, which is nearly one-third of its total
backlog of USD9.4bn. Applying the usual capex/sales ratio in industrial gas of 2x, the
corresponding sales associated with upcoming hydrogen activities could be USD1.5bn. However,
this is a bit misleading as some of the projects take place in the engineering business, where the
capex/sales ratio is completely different.
Air Liquide is currently not willing to provide a company target for its hydrogen business. We learnt
at our autumn conference that it wants to wait for this announcement until next year when it plans
a sustainability day. The next Capital Markets Day however, is planned for 2022.
Effects on ESG parameters
ESG effects at Air Liquide
As outlined before, a switch from grey to green or at least blue hydrogen would substantially
reduce CO2 emissions. Thus, now we analyse what carbon intensity could look like in the future.
We start with Air Liquide. Using our main base scenario until 2030 and a softening of the growth
rate thereafter, we expect hydrogen production volumes at Air Liquide to rise by c. 7x until 2050E
(a 6.6% CAGR over 2020-50E), keeping its c. 2% market share in hydrogen volumes in 2050.
We expect the strong growth in green and blue hydrogen at both industrial gas players to
overcompensate by far the diminishing revenues in grey hydrogen. Thus, both are likely to play
an important role in lowering GHG emissions.
While we believe that ESG investors will continue to play the hydrogen theme, in contrast to some
start-up companies, Linde and Air Liquide offer an attractive risk-reward profile given their
established presence and strong foothold in hydrogen.
Chart 51: Estimated hydrogen production at Air Liquide by type (m tonnes)
Source: Kepler Cheuvreux
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As a consequence, we expect CO2 emissions derived from hydrogen production at Air Liquide to
shrink by 83% overall, falling from 11.7m tonnes in 2020 to 2.3m tonnes in 2050. The CAGR over
2020-50E would be -5.8%.
Chart 52: Estimated CO2 emissions at Air Liquide’s hydrogen activities (m tonnes)
Source: Kepler Cheuvreux
We factor in ongoing efficiency measures and incorporate the acquisition of 14 ASUs from Sasol
for EUR440m. We estimate EBITDA of EUR40m for the acquired 14 ASUs, which emit more than 5m
tonnes of CO2, as the electricity is derived from coal. As a consequence, we expect Air Liquide’s
carbon intensity to rise from 4.6kg CO2/EUR EBITDA in 2019 to 5.3kg CO2/EUR EBITDA in 2021.
With the targeted CO2 reduction of 30-40% by 2030 due to a switch towards renewable electricity,
we expect Air Liquide to reduce its carbon intensity again thereafter.
Chart 53: Carbon intensity at Air Liquide (kg CO2/EUR EBITDA)
Source: company data, Kepler Cheuvreux
ESG effects at Linde
As Linde claims it is the market leader for hydrogen in volume terms, we assume the company to
have just marginally more volumes and market share than Air Liquide. The trajectory is basically
the same as for Air Liquide. We factor in a doubling of sales until 2020 and more modest growth
thereafter, such that Linde also maintains its c. 2% market share in hydrogen volumes by 2050E.
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Chart 54: Estimated hydrogen production at Linde by type (m tonnes)
Source: Kepler Cheuvreux
Also for Linde, hydrogen is derived from methane-based production. We expect (as for Air Liquide)
a gradual switch to blue and green hydrogen over time, while grey hydrogen is set to shrink in the
course of this decade and disappear completely by 2040E. As a consequence, we expect CO2
emissions related to Linde’s hydrogen production to shrink in the long term despite a nearly
seven-fold increase in hydrogen production by 2050E.
Chart 55: Estimated CO2 emissions at Linde’s hydrogen activities (m tonnes)
Source: Kepler Cheuvreux
As Linde’s hydrogen-related sales of more than USD2bn are lower than the figure at Air Liquide
given the current forex rate of 1.17, the average selling price at Linde must be lower than at Air
Liquide. We assume this is due to a lower price for grey hydrogen.
Given the high profitability of Linde, it has the same carbon intensity as Air Liquide despite higher
absolute CO2 emissions in 2019 (37.5m tonnes vs. 27.8m tonnes). Both stand at 4.6x for 2019. At
Linde, however, this is compared to US dollars, which is more favourable given the forex rate of
1.17 today. Linde expects its carbon intensity to shrink by 35% between 2018 and 2028, implying
a factor of 3.2x. Actually, this is in line with our estimates for 2028E.
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Chart 56: Carbon intensity at Linde (kg CO2/USD EBITDA)
Source: Kepler Cheuvreux
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Valuation, target prices, and risks
We lift our 2020-22 estimates for adj. EPS by 6-8% for Linde based on the group’s strong Q2
results and the favourable prospects for H2 (partly forex driven). In contrast, we cut our EPS
estimates for Air Liquide by 1-5%, due to adverse forex effects and the disposal of Schülke.
We lift our target price for Linde from EUR225 to EUR252 based on its higher earnings
estimates, which are partly diluted by the less favourable forex rates. For Air Liquide, we
raise our TP from EUR143 to EUR151 to incorporate the better valuation multiple and our
detailed estimates for 2022-30. We keep our Buy ratings on both stocks.
Change in earnings estimates at Linde
EPS changes for 2020-22E
Linde beat market expectations for adj. EPS in Q2 by 16% (18% above our estimate). Moreover,
the company is one of the very few companies in the chemical sector that was able to increase its
earnings in Q2 YOY. Adj. EPS advanced by 4% YOY to USD1.90 in Q2. Thus, Linde is guiding for an
adj. EPS of USD1.90-1.95 in Q3 and guides for an adj. EPS of USD7.60-7.80 in FY 2020. As a
consequence, we lift our EPS estimates by 6-8%.
Table 7: Change in earnings estimates
2020E 2021E 2022E
Old
New Old Change New Change New Old Change
27,323
Sales 26,096 25,956 1% 27,470 8,960 1% 28,933 28,778 1%
2% 9,074 5,932 1% 9,799
EBITDA 8,136 7,976 3% 6,045 3,892 2% 6,611 9,659 1%
-8% 4,005 4,533 3% 4,671
Adj. EBIT 5,276 5,118 6% 4,748 5.83 5% 5,248 6,473 2%
-1% 6.33 8.57 8% 7.46
Rep. EBIT 2,636 2,878 8% 9.10 6% 10.10 4,533 3%
Net income 4,100 3,862 5,004 5%
EPS reported 4.18 4.23 6.89 8%
EPS adjusted 7.79 7.22 9.50 6%
Source: Kepler Cheuvreux
We are 3-5% above consensus at EPS level.
Table 8: How we differ from consensus
2020E 2021E 2022E
Cons.
KECH est. Cons. Deviation KECH est. deviation KECH est. Cons. Deviation
28,269
Sales 26,096 25,594 2% 27,470 9,125 -3% 28,933 29,498 -2%
3% 9,074 6,118 -1% 9,799
EBITDA 8,136 7,890 1% 6,045 8.81 -1% 6,611 9,700 1%
5% 9.10 3% 10.10
Adj. EBIT 5,276 5,201 6,613 0%
EPS adjusted 7.79 7.43 9.69 4%
Source: Kepler Cheuvreux
Updated model for 2022-30
Given the favourable prospects for hydrogen, we now apply detailed earnings estimates for 2022-
30E. This makes a difference in our DCF analysis later on. So far, we have used our terminal growth
rate assumption of 3% for the period beyond 2022E. For 2022-30E, we now factor in 3.8% annual
top-line growth, 5.7% annual EBITDA growth, and 7.1% annual EPS growth. Our terminal growth
rate assumption of 3% remains the same but becomes effective as of 2031E (previously 2023E).
Change in earnings estimates at Air Liquide
EPS changes for 2020-22E
Air Liquide also beat market expectations with its H1 reporting. EPS rose by 2% YOY in H1 and thus
was 3% above market expectations (and 4% above our estimate). Air Liquide posted stable EBIT,
like Linde in Q2. However, assuming a similar trajectory to its peer and using the cashflow (before
working capital changes) performance in Q1 as a proxy, we assume that Air Liquide’s EBIT was
slightly down YOY in Q2.
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