Bull Case for Chinese Commodities Enhanced by Stronger Yuan
Comment of the Day

September 16 2020

Commentary by Eoin Treacy

Bull Case for Chinese Commodities Enhanced by Stronger Yuan

This article from Bloomberg may be of interest to subscribers. Here is a section:

Elsewhere, Shanghai is taking steps to promote hydrogen vehicles, with a plan to get 10,000 cars on the road by 2023. Just this week, Sinopec has flagged its intention to include hydrogen in retail fuel stations, while top vehicle-maker SAIC Motor said it’s accelerating its push into the alternative energy source.

And also in the news, Cargill has bought a new soy-processing plant in China as the nation’s pig herd recovers from the ravages of swine fever. Hog numbers expanded for the seventh consecutive month in August, signaling growing confidence among breeders, according to the farm ministry.

Eoin Treacy's view

Hydrogen is the market which has long been promised but never really made it into commercial reality. The question today is whether all the good will in terms of investment in renewables and technological innovation can translate into reducing the cost of production to economic levels. The low price of natural gas is a big enabler but the green lobby won’t be happy until the process is fossil fuel free.

This report from Jeffries may be of interest. Here is a section:

Potential Tipping Points: Hydrogen is expected to become competitive for heating applications <$5/kg, for commercial vehicles <$3/kg, for passenger vehicles <$2.50/kg, and for low-carbon steel, glass and cement <$2/kg. For chemicals, the arbitrage will depend on the price of oil or natural gas: as a rule of thumb, 1 kg of H2 and 5-6 kg of CO2 can produce 4-5 kg of methanol or olefins. A carbon price, obviously, would shift this framework.

Dealing With Sticker Shock: Green hydrogen costs 6x-10x conventional hydrogen is an oft-cited shibboleth. Hydrogen made from natural gas can cost anywhere from $1/kg (US, Middle East) to ~$2/kg (Europe). Adding carbon capture and utilization can add $0.50-$1.00/kg to the cost, and each $10/t carbon tax could add $0.10/kg to the hydrogen cost. In 2019, the EIA pegged the cost of renewable or green hydrogen at $4-$7/kg, falling by ~30% by 2030, with particularly sunny and windy parts of the world moving <$2/kg longer-term (i.e., 15-20 years). Some industry participants peg the potential drop in production cost at 50%-60%, assuming economies of scale (e.g., the electrolysers could drop from ~$750/kW to <$350/kW). Learning rates (deflation in capex driven by cumulative industry experience) for electrolysers have been ~10%, compared to ~20% for wind and >30% for solar and batteries. Another element in the cost bridge is the cost of shipping the hydrogen in a distributed network. Compressing H2 costs ~$0.80/kg and liquefying it ~$1.60/kg -- these costs likely come down by 20%-30% over the course of a decade. Trucking the gas 250-315 miles costs ~$0.40/kg for liquid H2 and ~$1/kg for gaseous: cutting the distribution radius 50-60 miles can save ~$0.10/kg (non-linear). Fueling stations currently cost ~$5/kg: this is expected to come down to <$1/kg through aggressive deflation in equipment costs.

These figures which gel with other estimates I’ve seen suggest the only way a hydrogen economy is going to work is with a carbon tax. The success of renewable energy sectors suggest investors have concluded this is inevitable.

There are push and pull factors that support the transition. On one side governments are running huge deficits and can’t easily forego the taxes generated from transportation fuel. On the other the increasingly vocal young voting population are adamant they want a greener economy. Higher sin taxes are a logical solution which support the carbon taxation argument.

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