Infrastructure Key Themes For 2022

Fitch Solutions / Infrastructure / Global / Mon 06 Dec, 2021

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Key View

  • In 2022, we expect global construction industry real growth will moderate relative to 2021, as markets continue to recover from the Covid-19 pandemic gradually and base effects normalise.
  • We expect construction input prices to remain high in 2022, though we believe prices will start to decline later in the year and fall from 2021 highs, as global demand moderates and supply chain disruptions ease. 
  • Public investment efforts across Europe and North America, namely the European Union’s (EU) ‘NextGenerationEU’ and the United States’ Infrastructure Investment and Jobs Act (IIJA) and Build Back Better Act, are set to see a considerable increase in public investment in infrastructure, particularly green infrastructure, with a considerable portion of funds to be aimed at catalysing private investment.
  • Intensifying tensions between China and the West, led by the US, will shape investment in emerging market infrastructure by determining Chinese access to Western infrastructure funding and leading to the growth of rival infrastructure initiatives to China's Belt and Road Initiative (BRI).
  • Post-Covid-19 pandemic industry trends regarding the use of office space, e-commerce, and the onshoring of supply chains will begin to materially impact project activity in 2022, with considerable implications for investment in the non-residential building sector globally.
  • We expect 2022 will see a significant increase in opportunities for investment globally in hydrogen infrastructure needed to facilitate low-carbon hydrogen production amid decarbonisation drives across all sectors.
Theme Description Metric Winners Losers
Global Construction Growth To Moderate, Diverge Across DMs & EMs Global construction industry real growth will moderate relative to 2021, though will remain above the pre-Covid-19 pandemic average due to fiscal stimulus efforts Fitch Solutions growth forecasts, quarterly national accounts data All developers, contractors and financiers with financial capacity to take on new projects, especially in developed markets  Existing project owners in emerging markets 
Global Construction Input Prices To Remain High, But Lower Than 2021 The price of building materials will start declining by mid-2022, remaining high by historical standards but lower than 2021 Respective national Producer Price Indices (PPI) for construction materials and components, Fitch Solutions global metal price forecasts As prices fall later in 2022: construction project owners, contractors. While prices remain high early in 2022: contractors and property developers already facing project delays and cost overruns
Public Investment Efforts Across North America and Europe To Catalyse Private Green Infrastructure Investment Public investment efforts, particularly the EU's NextGenerationEU and the US' Infrastructure Investment and Jobs Act and Build Back Better Act will catalyse ongoing efforts by private investors to raise green infrastructure investment levels Fitch Solutions Infrastructure Key Projects Data (KPD), disbursement of BIF, BBB Act and NextGenerationEU funding, public investment announcements for green infrastructure Contractors capable of undertaking green infrastructure projects, renewable energy companies, sustainable financiers Contractors ill-equipped to deliver projects with a low-emission profile, financiers with relatively concentrated investments in high-emission activities
US-China Tensions To Shape Global Infrastructure Development And Financing Landscape Intensifying tensions between China and the West, led by the US, will shape investment in emerging market infrastructure by determining Chinese access to Western infrastructure funding and growing rival infrastructure initiatives No. of Belt and Road Initiative projects added to Fitch Solutions Infrastructure KPD; no. of US-sanctioned Chinese construction firms; no. of countries partaking in B3W/Global Gateway Near-term: emerging market governments with diversified infrastructure development options; European infrastructure financiers with access to investment guarantees Chinese construction firms with restricted access to Western financing sources; Western companies planning to cooperate with Chinese firms
Post-Covid-19 Pandemic Trends In Non-Residential Building Industry To Crystallise Post-Covid-19 pandemic industry trends regarding the use of office space, e-commerce, and the onshoring of supply chains will begin to materially impact project activity Fitch Solutions Infrastructure KPD, company reports Construction companies specialising in industrial buildings, markets in CEE and Asia (exc. China) with competitive industry environments Large-scale office developers
Hydrogen Infrastructure Development To Accelerate To Support Hydrogen Adoption Across Sectors We expect a significant increase in  opportunities for investment in hydrogen infrastructure aimed at facilitating low-carbon hydrogen production amid decarbonisation drives across all sectors Fitch Solutions Infrastructure KPD, public investment announcements, government hydrogen roadmaps and funding Oil & Gas operators, LNG operators, hydrogen project developers and contractors, renewable energy companies, sustainable financiers, ammonia producers Companies in traditionally high-emission sectors with high use-case for hydrogen such as power generators, steel manufacturers 
Source: Fitch Solutions

Global Construction Growth To Moderate, Diverge Across DMs & EMs 

In 2022, we expect global construction industry real growth will moderate relative to 2021, as markets continue to recover from the Covid-19 pandemic gradually and base effects normalise. We believe that growth will remain slightly above the pre-Covid-19 pandemic average over the coming years, as fiscal stimulus efforts by many governments use infrastructure investment as a way to stimulate economic recovery. Going forward, we expect to see an increasing divergence between developed markets (DMs) and emerging markets (EMs) in their ability to invest in infrastructure, given broader macroeconomic conditions. Markets with stronger fiscal positions and access to capital will be able to provide continued stimulus to the sector to support growth, such as in the United States and European Union (see below). In contrast, markets with weaker fiscal positions and more limited access to capital will face rising debt loads and increased fiscal constraints, limiting public investment capacity. In addition, while most markets will likely raise interest rates across 2022, the policy space and extent will differ across EMs and DMs, resulting in varying degrees of policy support for infrastructure projects. Our Country Risk team believes that most DM central banks will not hike as aggressively as markets expect, while we expect EMs to face further pressure to tighten monetary policy in 2022, with some EMs already hiking aggressively in 2021. This has already been evident in emerging Europe and Latin America, but we expect more pressure on EMs in Asia to tighten monetary policy in 2022, particularly as the region's economic growth outperforms.

Construction Industry Growth To Moderate In 2022

Global - Construction Industry Value Real Growth, % y-o-y

e/f = Fitch Solutions estimate/forecast. Source: National Sources, Fitch Solutions

From a regional perspective, we expect most regions to recover and return to pre-Covid-19 industry value by 2022, with Latin America being a notable exception. Within the region, we expect the pace of recovery to continue to vary greatly, with several markets including Peru, Argentina and Brazil having recovered or nearly recovered to pre-pandemic levels of activity in 2021, while numerous other markets in the region including Mexico, Panama and Colombia will see a more prolonged return to 2019 levels of activity. This is as limited public spending on infrastructure and building construction projects in these markets will undermine growth in the region overall, while elevated political risks in a number of markets will also negatively impact construction investment, holding private construction investment below potential.

All Regions Except Latin America Returning To Pre-Pandemic Levels

Global - Real Construction Industry Value, 2019 = 100

e/f = Fitch Solutions estimate/forecast. Source: National Sources, Fitch Solutions

Global Construction Input Prices To Remain High, But Lower Than 2021

In 2022, we expect construction input prices to remain high, supported by sustained construction demand, though price levels will nonetheless broadly fall compared to elevated levels seen in 2021 as global demand moderates and supply chain disruptions ease. As the economy normalises, risks related to high input prices, such as cost overruns and project delays, will decrease over the year.

US Construction Costs At Multi-Decade High

United States - Producer Price Index, Materials & Components for Construction, % y-o-y

Source: US Bureau of Labor Statistics

While prices will generally remain elevated by historical standards, we expect them to be lower in 2022 compared with 2021. On the demand side, residential building and home renovation activity, particularly in the US, will be among the drivers pushing up the price for construction inputs. This price increase is reflected by the United States Producer Price Index (PPI) for construction materials and components, which averaged a yearly increase of 18.8% between May and October 2021. We believe that some of these demand pressures will ease over 2022 as the economy rebalances, and households can shift their excess savings from home renovation to the services sector though increased infrastructure investment in the market will likely counter such demand relief, contributing to prices for raw materials staying relatively high compared to historical levels.

That said, we do expect growth of China's demand for construction inputs to moderate in 2022, being one of the main factors why we believe average global prices for construction materials will be lower than 2021. China’s demand for building materials will be notably impacted by the rising risks to China's property market, due to prolonged uncertainty stemming from debt woes in the sector. Although Chinese authorities recently announced new measures to ease funding curbs and allow financially sound developers to resume the issuance of asset-backed securities, we still believe that some Chinese real estate developers will face financial risks in 2022, negatively impacting demand for construction materials.

Global Steel Prices To Weaken Into 2022

Global Steel Price Averages & Forecasts (USD/tonne)

Note: Prices are an average of Longs and Flats. Source: Bloomberg, Fitch Solutions

On the supply side, we expect supply chain disruptions to ease over the next year as Covid-19 risks fade. This will allow building materials companies to replenish stock and start lowering sale prices by H222. We expect prices to decline as mobility restrictions are lifted, current supply chain bottlenecks are progressively unblocked, and labour shortage issues are resolved, prompting mills and factories to work closer to capacity. Supply chain factors have affected building materials' provisioning on a global scale, causing prices to soar in recent months. For instance, rising energy prices dented industrial steel production in China, transport bottlenecks in Europe were caused by Covid-19 mitigation measures such as quarantine requirements for drivers, and labour shortages have impacted lumber sawmills in North America.

Public Investment Efforts Across North America and Europe To Catalyse Private Green Infrastructure Investment

Public investment efforts across Europe and North America, namely the European Union’s (EU) ‘NextGenerationEU’ and the United States’ Infrastructure Investment and Jobs Act (IIJA) and Build Back Better Act, are set to see a considerable increase in public investment in infrastructure broadly and in particular in green infrastructure, with a considerable portion of funds to be aimed at catalysing private investment. 2022 will see the efforts of authorities in developed markets to increase green infrastructure investment begin to come to fruition, with decarbonisation increasingly forming a key part of economic stimulus plans in recent months. This will see a substantial injection of public investment which in turn will drive considerable construction activity on green infrastructure projects in 2022 and subsequent years. Additionally, with much of the funding to be used to spur private sector involvement in green infrastructure investment, stimulus efforts will serve to intensify continued private investment in this field, while also ensuring that authorities’ short-term economic priorities are aligned with their long-term decarbonisation efforts. Though both developed and emerging markets continue to pursue decarbonisation in the long term, albeit to differing degrees, we expect the EU and the United States to exhibit this Key Theme most markedly amid the disbursement of their respective economic stimulus packages.

The continued disbursement of the EU’s ‘NextGenerationEU’ recovery funding to member states, which began in mid-2021, will complement private investment across transport infrastructure for the facilitation of low-emission travel, renewable energy assets, and investment in the decarbonisation of building stock. Given the funding’s primary aim to ensure a cohesive economic recovery across the bloc, priority will be given to smaller-scale, more immediate infrastructure projects capable to boost near-term growth. At the time of writing, all member states except the Netherlands have submitted their respective Recovery and Resilience Plan for approval by the European Commission (EC), outlining their spending plan for the allocation of grants and loans that constitute the Recovery and Resilience Facility. As such, data compiled by Bruegel regarding the submitted Recovery and Resilience Plans show over EUR226bn (USD253bn) of funding allocated for green infrastructure investments across the bloc. Within this, EUR87bn (USD98bn) has been allocated for low-emission transport infrastructure, EUR55bn (USD62bn) for renewable energy, and EUR50bn (USD56bn) for investment in the energy efficiency of buildings.  This directly reflects our initial expectations for the recovery funding’s investments, given the EC’s stipulation that 37% of the total expenditure per member state should be towards climate change-related investment. Further highlighting the ambition of authorities across the EU to incentivise green infrastructure investment; close to 40% of the total expenditure per member state is allocated for climate change-related investment on average.

Over EUR220bn Allocated For Green Investments Across EU

EU - Total Recovery And Resilience Facility Allocation Amount, EURbn

Source: Bruegel, based on submitted national recovery plans

In terms of the geographic spread of the funding allocated for green infrastructure investments, Italy has allocated the largest figure of any member state; EUR88bn (USD99bn), given the fact that it received the largest overall Recovery and Resilience Facility allocation of any member state. Spain, Poland, and France have also allocated substantive funding for green infrastructure; EUR29bn (USD32bn), EUR21bn (USD24bn), and EUR20bn (USD22bn) respectively.

The primary risk to this Key Theme playing out in the EU relates to whether domestic authorities can ensure the timely absorption of the funding and positively impact infrastructure activity. We at Fitch Solutions have successively highlighted the varied ability of authorities across the EU in planning and disbursing EU investment funds in recent years, namely due to overarching bureaucratic and operational hurdles that challenge member states’ ability to allocate funding efficiently. Exemplifying this, we highlight the disparity between member states in planning and spending their respective funding allocated for Network Infrastructures in Transport and Energy under the European Structural and Investment Funds (ESIF) 2014-2020. Whereas Hungary spent 76% of its planned funding allocation in this area; the highest of any member state, Spain spent just 24% of its allocation; the lowest of any member state.

In the US, green infrastructure investment will receive a substantial boost over the coming years from new public investment included in the USD550bn Infrastructure Investment and Jobs Act (IIJA) passed by the US Congress and signed into law in November 2021, and also likely from the Build Back Better (BBB) Act, which we expect will be passed and signed into law over the coming weeks. The IIJA, also known as the Bipartisan Infrastructure Framework (BIF), and the BBB Act combined stand to dramatically raise public infrastructure investment across the market and broaden the scope of new contract opportunities across infrastructure sub-sectors, together representing the most significant boost to US public infrastructure investment in recent decades. In the case of the IIJA, the law predominantly comprises funding for transport infrastructure; including USD110bn for roads and bridges, USD66bn for rail, and USD39bn for public transit. Notably, the IIJA also features funding for more nascent transport infrastructure, namely EV charging infrastructure and electric buses, which will especially serve to catalyse continuing efforts by private investors to establish a comprehensive, nationwide charging network to facilitate low-emission travel. Aside from transport infrastructure, the IIJA also allocates USD73bn for power and grid infrastructure and USD55bn for water infrastructure. Specifically, this will target investment in the upgrade of existing transmission infrastructure including via weatherization and resilience and the adoption of smart grid technologies, as well as investments in research and development.

With the IIJA already having been passed and signed into law, federal agencies are now tasked with the IIJA’s implementation, including the Department of Transportation, Department of Energy, and the Environmental Protection Agency, which will involve overseeing an array of new and existing programs and grants to disburse the IIJA’s funding from H1 2022. State and local authorities, many of which will have never before experienced such a funding boost, will undertake the identification and ultimate realisation of the projects. Similar to the EU’s ‘NextGenerationEU’ recovery funding, the primary risk to the IIJA’s implementation would be if federal, state and local authorities are unable to disburse the funding in a timely manner.

US Transport Infrastructure To Receive Significant Funding Boost

Infrastructure Investment and Jobs Act - New Spending By Segment (USDbn)

Source: The White House

While the IIJA does include significant green infrastructure investments, much more prominent for future green infrastructure development is the BBB Act, passed by the US House of Representatives on November 19, 2021, and pending passage by the US Senate. If passed in its current form, the BBB Act would include a total investment of USD1.75tn over ten years, including USD555bn to go for climate-change related investments. Among key proposals included in the climate segment of the bill are tax credits and other tax incentives meant to spur decarbonisation, including tax credits for clean electricity projects including solar, wind and nuclear power, as well as tax credits for EV purchases. We note that uncertainty remains around the final contents of the BBB Act given the potential for additional changes to be made to the bill prior to passage by the US Senate. Additionally, there is still risk that the bill will not pass at all, as it is still unclear whether the bill will have support from all Democratic senators, a necessity for passage given the Democrats’ slim majority in the chamber and the lack of any Republican support for the bill. Nonetheless, if passed as expected, the bill would almost certainly see the largest increase in federal funding for green infrastructure investments in US history and would have provide a large-scale boost to private investment in green infrastructure.

US-China Tensions To Set Tone For EM Infrastructure Financing

We expect that US-China relations will deteriorate further in 2022, with China likely to be especially sensitive to external criticism ahead of the 20th Communist Party of China (CPC) Congress in Q4 2022, at which President Xi Jinping will likely begin his third five-year term as general secretary of the CPC, followed by the start of a third five-year term as President at the next National People's Congress in March 2023. In anticipation of intensifying tensions between China and the US, as well as other Western states, we expect that US scrutiny of Chinese contractors and pressure on countries to limit Chinese involvement in infrastructure development, as well as the advance of Western alternatives to China's Belt and Road Initiative (BRI), including Build Back Better World (B3W) and Global Gateway Plan, may impact the global infrastructure industry and financing landscape throughout 2022.

The possibility of greater US scrutiny of the involvement of Chinese contractors in infrastructure development globally, including the potential for more US sanctions against Chinese contractors as well as enhanced US diplomatic pressure on other governments to limit cooperation with China on infrastructure projects, poses a considerable challenge to Chinese companies. In particular, the potential for additional sanctions that would reduce their access to alternative sources of financing threatens to curb these contractors' ability to fully leverage their increased competitiveness in open competitive tenders, thus exposing Chinese contractors to an anticipated slow-down in Chinese infrastructure investment across the globe. We have been highlighting a slowdown of Chinese BRI-related infrastructure spending abroad, underpinned by domestic economic and political pressures, as well as more diligent project selection, and expect that this trend will continue. This development will likely gradually reduce the number of financially unsustainable large-scale infrastructure projects that Chinese contractors have implemented abroad enabled by Chinese financing. While such projects have contributed significantly to the global activities of Chinese contractors, we expect that associated downside risks to the market shares held by Chinese infrastructure construction firms globally will be limited by their increased capacity and competitiveness, which will enable them to compete for a growing number of construction roles in open competitive tenders. In addition, acquisitions like China Communication Construction Company's purchase of Australian contractor John Holland and a ca. 30% stake in Portuguese contractor Mota-Engil—one of the most active construction firms in Sub-Saharan Africa—will lend additional stability to the market shares held by Chinese construction firms despite a slow-down of Chinese lending.

The possibility of more US-sanctions against Chinese contractors that would reduce their access to alternative sources of financing threaten to curb these contractors' ability to fully leverage their increased competitiveness in open competitive tenders. This would expose Chinese construction firms to a reduction of Chinese lending abroad. The Biden administration has been placing sanctions against Chinese companies—a continuation of similar actions by the previous Trump administration. Chinese construction firms were sanctioned with reference to their perceived roles in the South China Sea conflict. As we expect the conflict to remain a major source of tension, the risk of such sanctions will remain high throughout 2022.

In addition to sanctions, broader diplomatic pressure by the US on governments to limit ties with China could also weigh on the involvement of Chinese firms in infrastructure markets globally, dissuading governments from working with Chinese infrastructure developers or contracting loans from Chinese institutions for infrastructure projects.

We expect that increased Western-Chinese competition over influence across emerging markets will support the implementation of Western alternatives to China's Belt and Road Initiative and provide emerging market governments with slightly more options for infrastructure development—albeit limited by the overall reduction of Chinese financing and by Western initiatives' challenging plan to crowd private sector financing into high-risk infrastructure markets. In the long term, we expect a reduction of infrastructure development options for emerging markets, as they will likely be compelled to choose between China and the West. In June 2021, the US led the G7 in establishing the Build Back Better World (B3W) initiative as an alternative to China's BRI. The B3W programme aims to support infrastructure development globally and thereby follows the previously established Blue Dot Network, an initiative launched in 2018 by the US under the Trump administration alongside Japan and Australia. Because B3W was launched by the current US administration and enjoys wider support, including from key European states, due in part to its 'green' trajectory, we expect attention to shift towards B3W at the expense of the Blue Dot Network. The financial scope of B3W remains unclear. In December 2021, the European Union launched its Global Gateway initiative, which reportedly aims to mobilise up to EUR300bn in infrastructure investment between 2021 and 2027. A breakdown of the initiative's stated financial scope underpins our muted outlook on its capacity to significantly increase Europe's role in global infrastructure financing and development: The initiative comprises EUR145bn in already planned investment by European development finance institutions (DFIs). Another EUR130bn signify the maximum amount of private and public infrastructure financing that may be mobilised by means of investment guarantees specified in the EU's 2021-27 multiannual financial framework, which was adopted in December 2020. Although the launch of these initiatives fills a persistent gap in efforts by the US and allies to counter China's BRI, our outlook on their potential impact is muted by the lack of clarity around the financial scope of B3W and the fact that the Global Gateway initiative appears to largely consist in already and independently planned DFI spending, as well as traditionally reluctant private-sector infrastructure financing that must still be mobilised using funds that had already been specified as part of existing development programmes within the current EU budget.


Post-Covid-19 Pandemic Trends In Non-Residential Building Industry To Crystallise

Post-Covid-19 pandemic industry trends regarding the use of office space, e-commerce, and the onshoring of supply chains will begin to materially impact project activity during 2022. Across these three areas, we outline our expectations for how the impact on project activity will transpire:

Office Space: The persistence of hybrid working beyond the Covid-19 pandemic, whereby workers split their time between their usual place of work and home, will see companies begin to act to meet their long-term real estate needs during 2022. We at Fitch Solutions expect hybrid working to structurally reduce overall demand for fresh office space in developed markets, as companies adjust to permitting their workers to spend a portion of their workweek away from their usual place of work. 2022 will see the impact of this on non-residential building activity commence, as companies conclude their respective assessments of the purpose and scope of their existing real estate presence and adjust this accordingly to reflect their long-term needs. This overall reduction in the time spent by workers in a centralised workplace will effectively cap demand for fresh office space and dampen the non-residential building project pipeline, which we expect to be borne out in our Infrastructure Key Projects Data during 2022.

A need for a collaborative workspace environment or for a presentable workspace to receive external visitors will remain for some companies, which may lead to the repurposing of existing office space, rather than downsizing outright. Also offering some upside, we highlight the potential for the provision of office space in residential settings, such as co-working spaces. This would offer local access to an office environment for a decentralised workforce, which would appeal to companies that permit the relocation of their workers further away from their pre-Covid-19 pandemic workplace.

E-Commerce: The Covid-19 pandemic’s role in accelerating the growth of e-commerce will see commercial building activity begin to pivot in 2022; away from the construction of large-scale, urban retail premises towards smaller, localised buildings to facilitate the delivery of online orders. As highlighted by our Consumer team, consumer-facing businesses have expanded their e-commerce offerings throughout the Covid-19 pandemic, driving mass adoption of e-commerce services by both retailers and consumers. This has seen internet sales as a percentage of total retail sales rise substantially across developed and emerging markets alike, while retail footfall has remained structurally below pre-Covid-19 pandemic levels despite the gradual removal of social distancing measures.

As a result, demand for e-commerce will remain structurally higher and begin to materially shift commercial and industrial building activity during 2022. Companies will look to capitalise on the lower fixed costs generated by reduced commercial building space and the scalability of e-commerce operations, while consumers will remain accustomed to the convenience and choice offered by e-commerce. This shift will reduce investment in large, urban retail premises to accommodate vast consumer-facing inventories, and instead create demand for small-scale stores, in both urban and suburban locations to act as collection points in conjunction with warehouse space situated elsewhere. The proliferation of same-day delivery providers will also provide demand for small-scale warehouse space, so-called dark stores, to facilitate ultra-fast delivery in urban environments.

Onshoring of Supply Chains: The Covid-19 pandemic’s widespread disruption to global trade will last beyond the pandemic itself, and spur upside for industrial building activity via the onshoring of manufacturing. We at Fitch Solutions have successively highlighted that globalisation reached a plateau towards the end of the previous decade, driven primarily by greater geopolitical tensions regarding trade, with the Covid-19 pandemic now having pushed globalisation towards a reversal. 2022 will see the impact of this global trend on the industrial building project pipeline play out, as captured in our KPD, as companies act to enhance the resiliency of their respective supply chains against future external shocks. This will play out most markedly as the ongoing disruption to global supply chains alleviates by H2 2022, and as the viability of large-scale investment improves.

For industrial building activity, markets in Central and Eastern Europe (CEE) are particularly well-placed to accommodate the onshoring of autos manufacturers’ supply chains, particularly the burgeoning electric vehicle (EV) battery manufacturing industry. European authorities and companies alike are acutely aware of the current reliance on Chinese EV battery production, exemplified by efforts including the EU’s European Battery Alliance and the broader European Industrial Strategy. Poland and Hungary are particularly well placed to bolster their existing autos manufacturing capacity, leveraging this expertise with CEE’s favourable macroeconomic factors such as low labour costs relative to Western Europe. Asian markets, such as Vietnam, Malaysia and Taiwan, will also exhibit elevated industrial building activity during the year. These markets will especially benefit from companies pursuing a ‘China+1’ strategy, whereby they maintain a manufacturing presence in China alongside a small but significant presence in a nearby market. While we note that the onshoring of manufacturing remains a long-term process that naturally will not complete during 2022, we nonetheless expect this trend to begin its most-pronounced impact on industrial building project activity during the year.

Hydrogen Infrastructure Development To Accelerate To Support Hydrogen Adoption Across Sectors

We expect significant growth in low-carbon hydrogen production over the coming decade, therefore opportunities for investment in hydrogen infrastructure to facilitate this will prove significant. Western Europe's favourable industry environment for the development of hydrogen infrastructure will see the region emerge as a global hotspot for the nascent technology, with infrastructure investment key for the effective utilisation of the region's growing pipeline of electrolyser projects. Europe is largely going via a two-phased approach, with "hydrogen hubs" and colocated facilities being the initial phase. The EU's Hydrogen Strategy, which outlines its support for the realisation 6GW of electrolyser projects by 2024, will also benefit project activity during 2022 and provide direction for hydrogen project efforts across the region. Leverage on existing natural gas networks with blending of hydrogen gas is likely with the actions of existing operators in Europe's natural gas sector crucial to provide scale for the development of hydrogen infrastructure.

Australia Dominates Electrolyser Pipeline

Global Top 10 Markets - Green Hydrogen Projects By Capacity, MW

Source: Fitch Solutions Infrastructure Key Projects Data

Concurrently, Australia remains a key bright spot for green hydrogen and has the largest project pipeline globally by a significant margin, although many of these projects are developed with the intention of eventually exporting the hydrogen produced. As such, we believe that the development of international hydrogen supply chains will be crucial to support the growth of the green hydrogen industry in Asia, as production will be concentrated largely in areas distant from key demand centers. This will spur the development of extensive logistical supply infrastructure and networks, with investments concentrated around trade-enabling infrastructure. At present, liquefied hydrogen offers the most viable mode of transportation in the region, where hydrogen is converted into more stable compounds and organic liquids, such as ammonia, and transported via gas carriers. As such, these markets will likely leverage on existing liquefied natural gas (LNG) infrastructure and expertise, with corresponding investment into liquefication, regasification terminals and large-scale storage facilities for hydrogen. We will also see the development of suitable port infrastructure that is closely connected with existing gas networks and other regasification terminals. We expect this momentum of hydrogen development to continue, given that demonstrations to export hydrogen (in collaboration with Japan) have registered strong progress and shows commercial viability in recent months. Kawasaki Heavy Industries completed construction of the Kobe LH2 Terminal earlier in 2021, which is the world’s first liquefied hydrogen receiving terminal. This will be supported by the liquefied hydrogen carrier, the Suiso Frontier, which is expected to arrive in Australia before March 2022. 

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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