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Key points
- ASX hydrogen shares have just come off a roaring year, but there're not without risks
- Acorn Capital portfolio manager Risk Squire warns the sector's participants will likely face growing pains
- He cautions would-be investors to keep an open mind and consider the risks of buying into a changing space
Hydrogen shares were all the rage in 2021, with some ASX small caps involved in the energy commodity surging as much as 1,300% – recorded by Province Resources Ltd (ASX: PRL) – last year.
But are shares focused on the low-carbon energy source still a good investment?
That question was recently addressed by Acorn Capital portfolio manager Rick Squire. Here's what Squire believes those that are bullish on hydrogen in 2022 should look out for.
What risks might face those investing in ASX hydrogen shares?
There's no denying the future for hydrogen looks bright. As the world looks to decarbonisation, hydrogen – particularly, 'green' hydrogen, made using renewable energy – appears to hold answers to many tricky questions.
But, while no investment can be guaranteed, there are certain risks that come from investing in new industries.
In a piece published by Livewire, Squire offered 2 key insights that could be useful for ASX investors looking to get involved before hydrogen shares go 'mainstream'.
The first, be aware of the market's need for growth and the time that growth will likely take.
As Squire said, the market for hydrogen is currently small and it's costly to manufacture the element.
While such issues are being actively addressed by those working in the space, others aren't as easy to get around. Squire commented:
[H]ydrogen gas is highly flammable, has very low density, requires ultra-low temperatures to keep it liquid and has a propensity to leak and to weaken metal or polyethylene pipes. This makes storage and long-distance transportation less efficient than for liquified natural gas.
Bypassing these fundamental challenges will likely take time. Additionally, applications for hydrogen in key sectors, and even methods to commercially produce the element, could be a while away. Squire wrote:
[Fortescue Metals Group Limited (ASX: FMG)] modified a dump truck to operate on green hydrogen, but it only ran for 20 minutes. Therefore, the initial application of green hydrogen will probably be very limited and small in scale. It will scale-up, but this will take time.
The second warning Squire gives to investors looking at ASX hydrogen shares points to the history of innovation. He noted:
When you look back at the adoption of major new technologies in the resources and energy sectors… the early movers were rarely the biggest winners.
Squire said his fund hasn't ruled out investing in ASX hydrogen shares. Rather, it's "consider[ing] the risks when playing with something very explosive".
He also advised keen market watchers to keep an open mind when deciding where in the hydrogen space to invest.
While green hydrogen is seemingly all the rage, blue hydrogen – created using natural gas or coal-fired power – may well be "an important and commercially viable stepping-stone for the sector," said Squire.
Paired with carbon capture and storage, he believes blue hydrogen could embody many of the emission-reduction benefits of its green sibling.
