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RWE, Thyssenkrupp Plan Hydrogen Production Partnership – Report

German utility RWE AG (RWEOY) seeks to mass produce hydrogen from renewable energy sources as part of a supply deal with Thyssenkrupp, Reuters reported on Wednesday.

The cooperation deal will enable Germany’s largest steel maker to gradually replace coal to power its blast furnaces.

As part of the collaboration, the two companies want to use green hydrogen, created by using power from renewable sources, for the commercial production of steel.

A 100 megawatt hydrogen plant RWE plans to build in the state of Lower Saxony could supply hydrogen to Thyssenkrupp’s steel operations in Duisburg by the middle of the decade, according to the Reuters report.

The plant could deliver 1.7 tonnes of hydrogen gas per hour, or about 70% needed by a blast furnace Thyssenkrupp plans to install with the specific purpose of running it on the fuel instead of highly polluting coal. This would be enough to produce 50,000 tonnes of climate neutral steel per year, roughly the amount needed to make as many cars.

The partnership comes amid an industry-wide shift that has seen rivals, including ArcelorMittal (MT), beginning to explore the technology. In addition, the German government has plans to commit 9 billion euros ($10.2 billion) of investments to expand hydrogen capacity at home and abroad as part of a national strategy to make the country a key supplier of the technology worldwide.

“Climate neutrality in the steel sector is possible and we’re accelerating the switch with regard to our production,” said Bernhard Osburg, CEO of Thyssenkrupp Steel Europe. “Nowhere can hydrogen be used with a similar impact on climate protection than in steel.”

The partnership is bringing both Thyssenkrupp and RWE closer to their target of becoming fully climate neutral by 2050 and 2040, respectively.

After hitting a low at the end of March, RWE shares have now recouped all of this year’s losses and are now trading about 10% higher than at the beginning of the year. The stock dropped 4% to $33.66 as of Tuesday’s close.

Four-star analyst Alberto Gandolfi at Goldman Sachs last month added RWE to his Conviction List with a Buy rating and a $41.97 price target.

“Ring-fencing the company’s lignite activities would leave RWE a near-pure play on renewables,” Gandolfi wrote in a note to investors, adding that he sees 30% upside in a sum-of-the-parts based valuation after analyzing the next phase in the utility’s transformation.

Indeed, RWE scores 4 Buy ratings versus 1 Hold rating adding up to a Strong Buy consensus. The $36.75 average price target is less bullish than Gandolfi’s and indicates 9% upside potential in the shares over the coming year. (See RWE stock analysis on TipRanks).

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