The Weekly JMP Report

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What we’ve been reading this week

Fortescue teams up with aero giant Airbus to accelerate green hydrogen planes

Michael Mazengarb 

A rendering of Airbus’ Airbus Zero E concept. Photo credit: Airbus.

 

Fortescue Future Industries says it wants to speed up the development of aircraft fuelled by green hydrogen, as part of a push to decarbonise the aviation industry, forming a new partnership with European aircraft giant Airbus.

The clean energy unit of resources giant Fortescue Metals Group signed the MoU with Airbus on Tuesday to cooperate on the development of zero emissions aircraft, fuelled by hydrogen.

The partnership will see the two companies identify the needs and potential boundaries to the use of green hydrogen as an aircraft fuel, covering government regulation, necessary infrastructure and how to best establish global supply chains.

 

According to a joint statement, FFI will provide technical expertise on the development of the necessary hydrogen supply chains, and Airbus will focus on assessing the energy needs and fuelling requirements of the aviation industry, as well as the aviation regulatory environment.

 

Fortescue founder Dr Andrew Forrest said the aviation industry was responsible for a significant proportion of global greenhouse gas emissions, and had so far proven elusive in decarbonisation efforts.

“The time is now for a green revolution in the aviation industry. This exciting collaboration brings together leaders in the aviation industry with leaders in green energy for a pollution-free future,” Forrest said.

“People want to travel, reunite with family and friends and explore new places without being forced to pollute the planet. The problem isn’t travel, the problem is how we fuel our planes and ships – all of that must turn emissions free. No greenwash, no mirage, just 100 per cent green.”

 

The aviation industry is responsible for around 2.5 per cent of global greenhouse gas emissions, but as yet, no readily available alternative to conventional fossil-fuel based aviation fuels has achieved wide-scale adoption.

Forrest added that he saw the recent devastating floods impacting parts of New South Wales and Queensland as underscoring the need to cut greenhouse gas emissions and their contribution to climate change.

“Look no further than my home country of Australia to see the disasters of our changing environment,” Forrest added.

“Australia’s climate has already warmed on average by almost 1.5°C since 1910, and these extreme events are going to occur more frequently if industry doesn’t come together to decarbonise quickly and completely.”

“I ask those remaining institutions who continue to invest in fossil fuels to think of their kids. In particular, those so-called entrepreneurs who are supporting fossil fuel assets, please consider your children’s future over your profits.”

Airbus has unveiled a number of zero emissions aircraft concepts and is hoping to launch its first hydrogen-fuelled commercial aircraft by 2035.

The company says that green hydrogen could be used through two key methods for reducing aviation emissions, including as an input in the production of synthetic fuels for use in current aircraft, as well as for direct use in next-generation aircraft using modified turbines and fuel cells.

 

Airbus Vice President for zero emissions aircraft, Glenn Llewellyn, said the company viewed the future of the aircraft industry as one fuelled by green hydrogen.

“Airbus has identified green hydrogen as the most promising option for decarbonisation to meet our environmental challenges. You heard it here first: We are starting the green aviation revolution,” Llewellyn said.

 

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CERAWEEK: Citing concerns over China, Manchin sours on EV deployment

Author: Brandon Mulder

Manchin hesitant to rely on foreign supply chain

Domestic hydrogen seen as more favourable

While offering measured support for the US energy transition, US Senator Joe Manchin said March 11 he was reluctant to support the proliferation of electric vehicles due to their overreliance on foreign supply chains.

Speaking during the CERAWeek by S&P Global energy conference in Houston, the West Virginia Democrat pinned his EV anxieties on China, which has dominated the global lithium-ion battery supply chain and controls around 80% of the world’s raw material refining.

“I’m very reluctant to go down the path of electric vehicles,” Manchin said. “I’m old enough to remember standing in line in 1974 trying to buy gas – I remember those days. I don’t want to have to be standing in line waiting for a battery for my vehicle, because we’re now dependent on a foreign supply chain – mostly China.”

China’s dominance of mineral mining and refining is thanks to years of investments and policy that has catapulted the country to become a world leader in less than 10 years. While the US has been slower to build out its EV supply chain, the Biden administration’s Infrastructure Investment and Jobs Act includes $7.5 billion to develop domestic supplies of key minerals. On March 9, Energy Secretary Jennifer Granholm described the matter as a national security concern.

“We have, as a nation, stood by and watched this global free trade environment allow all of our manufacturing and key pieces of our supply chain go overseas,” she said during the CERAWeek conference. “It has compromised our national security, our energy security, and certainly our economic security.”

“We need to have the full supply chain here,” she added.

Manchin also skewered his fellow Democrats’ idea to spend billions to deploy EV charging stations across the country. Last year, while Congress was refining the infrastructure bill, nearly 30 House Democrats proposed increasing the bill’s $7.5 billion expenditure for EV charging infrastructure to $85 billion. In addition to charging stations, the $85 billion would have been used to build more grid resilience in preparation for an electrified transportation sector.

Manchin said during the conference he has “a hard time understanding” the use of government money for charging stations.

“I’ve read history, and I remember Henry Ford inventing the Model-T, but I sure as hell don’t remember the US government building filling stations – the market did that,” he said. The crowd erupted with applause.

Manchin underscores hydrogen support

While the EV supply chain may be out of US control, that of hydrogen is not, which is one reason behind Manchin’s support of the clean fuel.

“I’m a big believer in hydrogen, because I don’t have to depend on a foreign supply chain to produce the horsepower we need to a carbon-free society as we move to transition,” he said.

Manchin has recently become a vocal supporter of the US hydrogen economy. During a February hearing of the Senate Energy and Natural Resources Committee, he expressed support for hydrogen subsides while indicating that the motivation behind his support is fears over the rising Chinese economy.

“We have to get off the dime and start doing something. Because if we don’t, we’re going to be left behind and totally subservient to China,” he said during the Feb. 15 hearing.

Hydrogen tax credits were a small but key feature within the Biden administration’s $1.7 trillion Build Back Better Act, yet they were left hanging in the balance after Manchin pulled his support from the bill over its high price tag.

As proposed, the bill would offer clean hydrogen companies the option to cut their costs via a production tax credit, which would offer up to $3/kg of clean hydrogen depending on the production method’s carbon footprint, or an investment tax credits, which would pay for up to 30% of the cost of electrolysers or other clean hydrogen production equipment.

 

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The outlook for real assets in a post COVID world – by AMP Capital

 

Around the table with AMP Capital Chief Executive Officer Shawn Johnson, Global Head of Real Estate Kylie O’Connor, and Global Co-Head of Core Infrastructure Michael Bessell.

As the world begins to move beyond the spectre of COVID-19, a return to business as usual appears unlikely. The pandemic has left its mark on both the way we live and the economic forces at play.

Facing the dual headwinds of rising inflation and increasing interest rates, AMP Capital Chief Executive Officer Shawn Johnson, Global Head of Real Estate Kylie O’Connor, and Global Co-Head of Core Infrastructure Michael Bessell discuss how these factors could affect real assets into the future, where the opportunities may lie over the next 12 months and the outlook for sectors that have been particularly affected by COVID-19.

When it comes to the impact of interest rate increases on the value of real assets, Mr Johnson says an important consideration is the reset rate on any asset as it relates to changes in inflation. He adds that questions over whether the Reserve Bank of Australia (RBA) will follow the Federal Reserve System (Fed) in the pace and magnitude of interest rate rises will also be a factor, as will movements in the A$/US$ exchange rate.

Shawn Johnson, Chief Executive Officer, AMP Capital

“An important consideration is the reset rate on any asset as it relates to changes in inflation.”

 

Through an infrastructure lens, Mr Bessell says rising inflation is likely to have three effects. “Firstly, for infrastructure assets that are heavily levered with base rates not hedged, borrowing costs will rise. We hedge base-rate risk on a lot of the assets in the portfolio, so that may have less of an impact, but certainly with newer acquisitions borrowing costs will be higher.”

“Secondly, inflation feeds into prices. Some assets can reprice relatively quickly, while with others, such as regulated utilities, we only get to reset prices every five years. It will take longer for rising inflation to impact those assets, but it will also take longer for pricing adjustments to flow through.”

“Thirdly, inflation will impact the discount rate that investors are prepared to value and buy assets at. But as we don’t price on a spot long-term rate and the long-term rate hasn’t reduced as part of the discount rate as much, there is a buffer there and it will take some time to come through into valuations.”

However, Ms O’Connor says rising inflation could play well for real estate assets, which are often viewed as an inflationary hedge. “We’re able to increase rent through the cash flow. It depends on the asset, but those increases are typically either linked to annual CPI increases plus a percentage, or a higher fixed percentage. In terms of borrowing costs, most of our core funds carry relatively conservative levels of gearing, and many have hedging policies in place.”

Michael Bessell, Global Co-Head of Core Infrastructure

“There is light at the end of the runway for the aviation industry with international borders reopening.”

Few sectors have felt the brunt of COVID-19 more than the aviation industry. But with international borders re-opening, Mr Bessell says there is light at the end of the runway, but he anticipates a “slow grind to get back to the long-term trend that’s always been there for aviation”.

“In terms of airport valuations in Australia, the Sydney Airport bid resulted in a re-rating of the sector, however airport valuations are based on long-term forecasts, and that bid simply underpinned the fact that these are good long-term assets, and they will recover.”

In the real estate space, there is no topic more hotly debated than the future of the office, with the pandemic driving workplace flexibility. Ms O’Connor believes a hybrid working model is here to stay. “Businesses are aware that to attract and retain staff, high-quality premises are important so we’re still seeing demand from tenants for space in well located, modern office assets. There may be some nervousness around what future space utilization looks like, but we’ve also seen strong transaction evidence recently, indicating capital demand for assets of this nature.

 

Kylie O’Connor Global Head of Real Estate

“Businesses are aware that to attract and retain staff, high-quality premises are important.”

Retail is another real estate sector that has been disrupted by the pandemic, which quickened the shift to online shopping. But Ms O’Connor says that with market penetration of online shopping at 16 per cent to 30 per cent in the US and UK¹, and just over 10 per cent in Australia², Australian retail is attracting attention from offshore investors. “We’ve seen renewed interest driven by the need for diversification from investors that pulled back from retail in recent years. Retail also has a relatively attractive return profile, particularly for high-quality, multi-use assets with diverse tenants.”

But while COVID-19 has been a headwind over the past two years there continues to be longer-term tailwinds at play. In the infrastructure space, Mr Bessell says he expects more investors to be looking up the risk curve to core-plus, value-add infrastructure, driven in part by super funds looking to restructure portfolios to outperform benchmarks. “For example, infrastructure health has been expanding and shifting into infrastructure portfolios, attracting longer-term investors driven by the potential they see in an ageing and wealthy population. Data and telecommunication is another area where a lot of smart money has been going. Working from home has driven dependence on fibre, telecommunication towers and data centres, but it’s still not a core asset class so that additional risk attracts a slightly higher return.”

“I think you’ll see more investment in different logistics assets as policy makers focus on trying to prevent the sort of supply chain bottlenecks that have been a hallmark of COVID-19.” Shawn Johnson, Chief Executive Officer, AMP Capital

In terms of where the top opportunities may lay for investors in the next 12 months, Ms O’Connor picks retail from a real estate perspective. “In particular mixed-use retail assets that can exploit themes that are a flow-on from the pandemic: experiences, connectivity and people getting together.”

Mr Bessell opts for both airports and core assets within infrastructure. “Airports will do better because their recovery will underpin their valuations. But in a rising inflationary and interest rate environment, core assets like regulated utilities, where returns have suffered over the last few years as interest rates fell, will recover. As interest rates start rising the revenue there should be higher.”

And Mr Johnson sees logistics, both from a real estate and infrastructure perspective, as a key winner in the build back from COVID-19. “Globally we’ve moved to just-in-time inventory over the last 30 years, but the last two years have shown that the world cannot handle supply chain interruption. I think you’ll see more investment in different logistics assets as policy makers focus on trying to prevent the sort of supply chain bottlenecks that have been a hallmark of COVID-19.”

 

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I hope you enjoy this week’s read, if you would like to discuss share trading or buying Tap Bonds, please feel free to contact me

Have a profitable week,

Chris Hagan,