Investors Have Cooled on Hydrogen. A Second Wave Is Coming.

Investors may want to give hydrogen a second look, but they’ll need to be patient.

There’s not a lot of love for the fuel on Wall Street. The Global X Hydrogen ETF is down 81% from its high in 2021, and other hydrogen stocks are well below their peaks.

Skeptics say the cleanest hydrogen is too pricey and still far away from becoming part of a viable marketplace. The government is still sorting out regulation and industry incentives. New infrastructure will be required, and it isn’t clear there will be enough customers once it’s built.

But even as investor enthusiasm faded, a raft of companies have been quietly exploring hydrogen as a clean-burning fuel that can be a building block in the energy transition. There are numerous corporate projects in development that could help propel the growth of a hydrogen economy and drive profits in the future. The Department of Energy is investing $8 billion in promoting clean hydrogen, with the creation of seven hydrogen hubs around the U.S. within the decade.

Many energy and petrochemical companies are studying or have hydrogen projects in the works as a way to decarbonise. One reason is that hydrogen is used in the refining process, and cleaner hydrogen could be used in industrial processes. Hydrogen can be turned into ammonia and is used in fertiliser. In its next wave, hydrogen could be widely used in industrial applications like steel making and for fuel in ships and aircraft.

Supporters believe all the money pouring in now will help bring costs down as hydrogen projects scale. Investors may want to look at traditional energy and industrial companies that are currently working on hydrogen projects as a way to play the long-term growth of a hydrogen market.

“All these companies…have decarbonisation aspirations,” said Marc Bianchi, managing director at TD Cowen. There’s a meaningful opportunity for companies that are already using thousands of tons of hydrogen a day to switch from dirtier to cleaner sources.

The U.S. uses about 10 million tons of hydrogen a year for applications such as refining and fertilizer. Hydrogen demand was about 2% of global energy consumption in 2020 and could grow to 20% to 30% in a net-zero economy, according to S&P Global Commodity Insights.

Hydrogen gas is colourless, but industry shorthand assigns colours based on how the fuel is produced. Green hydrogen is the most desirable. Electricity generated from solar or wind is used to split hydrogen from water molecules and produces no carbon byproducts. Blue hydrogen is made by using natural gas along with capture and storage technologies to limit CO2. Grey hydrogen is made with natural gas or methane and generates carbon dioxide.

S&P Global Commodity Insights projects the cleanest hydrogen, even with incentives, would be about three times more costly in parts of the country where renewable energy is more expensive, like the Northeast. In the best case, green hydrogen produced in Texas, using proposed tax incentives and credits, could be as low as $1 per kilogram, slightly less than the $1.3 per kilogram cost of grey hydrogen. In Europe, green hydrogen is $6 to $9 per kilogram.

The energy industry, however, is waiting to see the final structure of U.S. tax credits granted to clean hydrogen under the Inflation Reduction Act. The Internal Revenue Service issued a draft guidance on implementation.

It was viewed as too restrictive by many in the industry, and some industry executives say it put a chill on activity while they wait to see how deep incentives will be for their proposed processes. The comment period has just ended.

“Anyone in power generation wants to talk about hydrogen,” said Richard Voorberg, president of North America for Siemens Energy . “Now, we’ve seen that plateau over the last little while, meaning months. Everyone was excited about [the Inflation Reduction Act], but the guidance that came out Dec. 22 had people scratching their heads.”

Ernest Moniz, a former energy secretary, heads the consortium formed to organise a market for clean hydrogen, called the Hydrogen Demand Initiative. Moniz said recently that the guidance presented by the IRS was too narrow and could slow the industry’s growth if not changed.

“The philosophy has been to require upfront decarbonisation of the electrons that you’re supposed to be using for the electrolysis of water, and the fear—and I certainly fear it—is this will significantly inhibit the near-term demand creation,” Moniz said. “We might end up with a very low carbon grid, but a hydrogen market that’s way behind where it should be at that time.” He added that he’s watching for how the IRS adjusts its plans for the tax credits.

Investors looking at companies with hydrogen projects need to be sure the value is there for the company’s traditional businesses. Analysts say valuations don’t appear to reflect potential for hydrogen, even if some had in the past.

Hydrogen was once the “shiniest new toy” for investors, but disillusionment has set in, said Timm Schneider, CEO of Schneider Capital Group. “Not one investor has asked me about hydrogen at any company, like Chevron or Exxon, that has a hydrogen project, over the past 12 months,” he said.

One way to invest in the transition is through industrial gas companies. S&P Global is projecting that Air Products and Chemicals will be the leading industrial gas producer of hydrogen, in the amount of 5.2 million metric tons by 2030. Exxon Mobil is positioned to be the largest producer among oil-and-gas companies, with 1.5 MMT, S&P Global said.

Air Products CEO Seifi Ghasemi, speaking at the CERAWeek by S&P Global conference last month, said his company is currently the largest producer of grey hydrogen globally. He wants to be the leader in green and blue. The company began producing grey hydrogen at the request of the U.S. government in the 1950s for use in the space program.

Ghasemi said the company has two major projects in development. One is in northern Saudi Arabia, where the company will use wind and solar with its partners to create 650 tons of hydrogen a day. That project, he said, IS “30 times bigger than anything that exists today.”

Air Products has been collaborating with Baker Hughes , an energy services and technology company that has developed turbines and compressors. Baker is working on the hydrogen project in Saudi Arabia and the two have another project under way in Alberta, Canada that is expected to be operational next year. “Baker Hughes is interesting. It is supplying a turbine to that project in Alberta that’s going to run on 100% hydrogen. That’s been a bit of a challenge for the industry, to burn hydrogen in a turbine,” said Bianchi. Baker Hughes, he said, was the first to succeed.

The demand for hydrogen is still uncertain and the market is nascent. The anticipated supply of hydrogen is well ahead of demand, Enverus Intelligence Research said in a report last week. Only 30% of the U.S. projects expected by 2030 have disclosed customers.

But there was a bright note in the Enverus report. European Union decarbonisation targets could mean U.S. producers could find a significant export market.

Exports are what helped turn the U.S. into the leading producer of oil and gas. The energy industry might follow that playbook again with hydrogen.

For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.

Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.

Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.

Lowered Expectations

Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.

Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.

Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.

Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”

Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.

Behind the Malaise

For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.

The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.

The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.

Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.

Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.

“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.

Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.

For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.

Sticking Around

Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.

Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.

Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.

“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”

Corrections & Amplifications

Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.

Investors Have Cooled on Hydrogen. A Second Wave Is Coming.

Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.

Lowered Expectations

Behind the Malaise

Sticking Around