Research from Water Tower Research, Water Tower Research

Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Thematic (Sector/Industry)

<h3>KEY HIGHLIGHTS</h3>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;The sell-off continued last week, with the S&amp;P 500 losing 5.8% and the broader Russell 2000 Index giving up 7.5%. Our WTR-CMI index of 30 chemicals and materials technology companies underperformed the broader market by declining 9.9%, with all the stocks in the index posting W/W losses. ECVT (down 2.1%) and PKE (down 2.3%) outperformed relative to other names, as the raw material cost pressure they are experiencing is more moderate compared with companies heavily reliant on pet-chem-based inputs. PPG also outperformed by declining 5.1%, likely bolstered by its recent investor day. KOP, CMP, and LTHM were the worst performers, as concerns over construction markets grew and investors became more concerned over the impact on inflation on economic growth, including consumers’ ability to purchase more expensive EVs, especially as several manufacturers had to raise prices to offset higher metal and graphite costs.</li>
<li>Farmer concerns grow.&nbsp;The&nbsp;Rural Mainstreet Index (RMI) from Creighton University&nbsp;reading for June dropped to 49.8 from May’s 57.7, with 50 being a growth-neutral reading, implying US farmers’ growing concerns over the economy, the impact of rising intertest rates, and ongoing supply chain bottlenecks. Nearly 93% of rural banks surveyed now put the likelihood of a recession at more than 50%.</li>
<li>Efforts to domesticate lithium supply continue.&nbsp;Cypress Development Corp. (OTC: CYDVF), an advanced lithium development company focused on commercializing lithium projects in Nevada, provided an update on the ongoing&nbsp;feasibility study&nbsp;for the company’s Clayton Valley lithium project in Nevada, as well as&nbsp;progress on its pilot plant operations, which have delivered samples to two laboratories in Canada for further testing.</li>
<li>Coatings markets growing above GDP rates.&nbsp;According to a recent report, the&nbsp;waterborne coatings market&nbsp;is expected to grow at a 3.5% CAGR over the next five years, while&nbsp;the low volatile organic compounds (VOC) segment&nbsp;of the coatings industry is expected to post an even faster 6.2% CAGR through 2026, driven by tighter emission regulations and consumers’ growing awareness of VOC’s health and environmental impact. Over the mid-term, this should be a positive for SHW, PPG, AXTA, and RPM.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/282/497/original/image_22915513821656025927561.png?1656025930" class="editor-image img-responsive" data-smartkarma-image-id="282497"></figure>
<p>Source: YCharts; June 19 close</p>
<h2>Automotive &amp; Transportation Market</h2>
<p>Automotive doldrums continue.&nbsp;ASEA’s May report on new car registrations in the EU&nbsp;showed an 11.2% drop in May, the 11th&nbsp;straight month of Y/Y declines, bringing the YTD decline to 13.7%. We expect June numbers to continue to comp negatively versus the year-ago period, with 2H22 comps easing, which may allow the European market to finally break what would be a year-long string of declines. However, we caution that while comps will get easier in July and beyond, higher auto prices, higher interest rates, and souring consumer sentiment, exacerbated by the continuing war in Ukraine, may constrain whatever recovery may take place. Meanwhile, on a more positive note,&nbsp;auto production lost to semiconductor chip shortages&nbsp;appears to be slowing down, with less than 28,000 added to the tally of losses last week, mostly in APAC region outside of China. Nonetheless, 2.26 million vehicles have already been removed from production expectations for 2022.</p>
<h2>EVs &amp; Battery Ecosystem</h2>
<p>As EV growth continues, solutions are sought to combat high battery metal prices.&nbsp;While China’s overall new vehicle sales continue to decline, the&nbsp;NEV segment is still posting strong Y/Y growth, with May sales of new energy vehicles (NEVs) rising 111.5% and YTD sales increasing 117.4%. However, both investors’ and consumers’ concerns are shifting from availability of materials for EV batteries to the costs of said materials, at least in the near to mid-term. Consequently, it is not surprising to see ongoing efforts to find and develop alternate battery chemistries, or whole new technologies to address both concerns. One company leading these efforts is Michigan-based privately held battery start-up Our Next Energy (ONE), which&nbsp;will supply an early prototype of its Gemini “Dual-Chemistry” battery to BMW&nbsp;(whose investment arm was part of the latest funding round of ONE) for testing under real world conditions. The testing is expected to start by the end of 2022 and will focus on proving ONE’s claim of doubling the typical lithium battery range, while also prolonging battery life, all while using cheaper and more plentiful iron and manganese to reduce the need for higher-cost cobalt and nickel in battery cathodes. Meanwhile, Alsym Energy, a Massachusetts-based start-up, is working on battery chemistry and a design that would further reduce, if not&nbsp;eliminate lithium and cobalt from EV battery cathodes, making them both safer and about 50% cheaper versus current designs. And in Europe, work continues on developing solid-state batteries for the EV market, with a consortium of Spanish companies launching the&nbsp;Basquevolt initiative, with the Basque government researching, developing, and producing solid-state batteries, with pilot plant operations targeted to begin in 2025 and ramp up to a 10 GWh annual production rate by 2027.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>With planting progress on track, weather concerns rise.&nbsp;Better conditions allowed US farmers to essentially catch up to five-year averages when it comes to&nbsp;corn and soybean plantings. However, while current crop conditions are rated mostly good to excellent, recent scorching weather across the farm belt regions may raise the possibility of less than optimal yields and we will watch these developments over the next several weeks. One thing to keep in mind is the lessons from Brazil, where drought conditions led to angst over yield expectations. However,&nbsp;the country’s second corn crop, also known as safrinha, is now expected to be up 45% Y/Y, driven by higher planted acreage and higher yield expectations versus the drought affected 2021-22 second crop season. This may help alleviate the production shortfall experienced during the first crop period earlier in the year. The news could not come at a better time, as the world is getting increasingly pessimistic regarding&nbsp;the impact of the Russian invasion of Ukraine on the global food market, not just in 2022-23, but also longer term.</p>
<p>Doing their part to ensure adequate supply.&nbsp;Against this backdrop of food security concerns, crop input companies are stepping up efforts to ensure their products are made available and at an affordable price to help offset expected declines in Russian, Belorussian, and Ukrainian supply. Nutrien (NYSE: NTR) followed up its recent announcement of production capacity expansion with even more aggressive plans to&nbsp;ramp up production of phosphate and nitrogen fertilizers, both through brownfield expansions and new capacity addition projects expected to come online through 2025 and 2027, respectively.</p>
<h2>In Other News</h2>
<p>Expanding markets served to cushion expected declines.&nbsp;One company in our WTR-CMI index—Valvoline (NYSE: VVV)—has been fielding questions and fighting investor perception of a sun-setting business for several years now, as EVs continue to grow their share of annual car sales and investors grow concerned over the company’s ability to continue to deliver superior growth in what many are seeing as a sun-setting market (lube oil for ICE passenger vehicles). However, the company is not taking these expectations lying down. Earlier, VVV announced its intentions to monetize its bulk and industrial lubes business and concentrate on growing its company-owned and franchised Valvoline Instant Oil Change (VIOC) network. More recently, the company announced that it has opened its first&nbsp;company-owned heavy-duty fleet service center&nbsp;to provide the same high-touch customer service as it currently does through its VIOC network to service to Class 5-8 vehicles that can weigh more than 30,000 pounds. We believe this move will significantly expand VVV’s addressable market in the near to mid-term, while providing a longer tail over the long term, which may ease investor concerns over the stock’s valuation levels.</p>
<p>M&amp;A deal flow continues.&nbsp;The chemicals and materials technology industry has been characterized by considerable M&amp;A activity over the last two to three decades and despite, or perhaps because of the slowing economic outlook and inflationary pressures, portfolio optimization efforts are continuing. Recently,&nbsp;PPG announced&nbsp;that it has completed the divestiture of Eberle Design, Inc. (EDI) to Vance Street Capital. Terms of the transaction were not disclosed. Meanwhile, global chemical and plastic distributor Brenntag (OTC: BNTGY) recently&nbsp;announced that it has entered a partnership&nbsp;with Saudi Al-Azzaz Chemicals Co. via a 75/25 joint venture. Looking to expand its geographic footprint and keep up with the M&amp;A-driven growth of SHW and PPG, AkzoNobel (OTC: AKZOY) recently&nbsp;announced that it reached an agreement&nbsp;with Kansai Paint to acquire the latter’s paints &amp; coatings business in Africa, which generates approximately $300 million in annual sales, with completion expected in 2023, subject to regulatory approvals.</p>
<h2>Rating and Price Target Changes</h2>
<p>EMN –&nbsp;Jefferies downgraded the stock to Hold from Buy and reduced its price target (PT) to $87 from $150.</p>
<p>FMC –&nbsp;CFRA upgraded the stock to Hold from Sell, maintaining its $126 PT.</p>
<p>SHW –&nbsp;UBS lowered its PT to $265 from $279 and maintained its Neutral rating.</p>
<p>VVV –&nbsp;Jefferies lowered its PT to $40 from $44 and reiterated its Buy rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Marrone Bio Innovations CEO Kevin Helash</p>
<p>Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;The sell-off continued last week, with the S&amp;P 500 losing 5.8% and the broader Russell 2000 Index giving up 7.5%. Our WTR-CMI index of 30 chemicals and materials technology companies underperformed the broader market by declining 9.9%, with all the stocks in the index posting W/W losses. ECVT (down 2.1%) and PKE (down 2.3%) outperformed relative to other names, as the raw material cost pressure they are experiencing is more moderate compared with companies heavily reliant on pet-chem-based inputs. PPG also outperformed by declining 5.1%, likely bolstered by its recent investor day. KOP, CMP, and LTHM were the worst performers, as concerns over construction markets grew and investors became more concerned over the impact on inflation on economic growth, including consumers’ ability to purchase more expensive EVs, especially as several manufacturers had to raise prices to offset higher metal and graphite costs.
Farmer concerns grow.&nbsp;The&nbsp;Rural Mainstreet Index (RMI) from Creighton University&nbsp;reading for June dropped to 49.8 from May’s 57.7, with 50 being a growth-neutral reading, implying US farmers’ growing concerns over the economy, the impact of rising intertest rates, and ongoing supply chain bottlenecks. Nearly 93% of rural banks surveyed now put the likelihood of a recession at more than 50%.
Efforts to domesticate lithium supply continue.&nbsp;Cypress Development Corp. (OTC: CYDVF), an advanced lithium development company focused on commercializing lithium projects in Nevada, provided an update on the ongoing&nbsp;feasibility study&nbsp;for the company’s Clayton Valley lithium project in Nevada, as well as&nbsp;progress on its pilot plant operations, which have delivered samples to two laboratories in Canada for further testing.
Coatings markets growing above GDP rates.&nbsp;According to a recent report, the&nbsp;waterborne coatings market&nbsp;is expected to grow at a 3.5% CAGR over the next five years, while&nbsp;the low volatile organic compounds (VOC) segment&nbsp;of the coatings industry is expected to post an even faster 6.2% CAGR through 2026, driven by tighter emission regulations and consumers’ growing awareness of VOC’s health and environmental impact. Over the mid-term, this should be a positive for SHW, PPG, AXTA, and RPM.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; June 19 close
Automotive &amp; Transportation Market
Automotive doldrums continue.&nbsp;ASEA’s May report on new car registrations in the EU&nbsp;showed an 11.2% drop in May, the 11th&nbsp;straight month of Y/Y declines, bringing the YTD decline to 13.7%. We expect June numbers to continue to comp negatively versus the year-ago period, with 2H22 comps easing, which may allow the European market to finally break what would be a year-long string of declines. However, we caution that while comps will get easier in July and beyond, higher auto prices, higher interest rates, and souring consumer sentiment, exacerbated by the continuing war in Ukraine, may constrain whatever recovery may take place. Meanwhile, on a more positive note,&nbsp;auto production lost to semiconductor chip shortages&nbsp;appears to be slowing down, with less than 28,000 added to the tally of losses last week, mostly in APAC region outside of China. Nonetheless, 2.26 million vehicles have already been removed from production expectations for 2022.
EVs &amp; Battery Ecosystem
As EV growth continues, solutions are sought to combat high battery metal prices.&nbsp;While China’s overall new vehicle sales continue to decline, the&nbsp;NEV segment is still posting strong Y/Y growth, with May sales of new energy vehicles (NEVs) rising 111.5% and YTD sales increasing 117.4%. However, both investors’ and consumers’ concerns are shifting from availability of materials for EV batteries to the costs of said materials, at least in the near to mid-term. Consequently, it is not surprising to see ongoing efforts to find and develop alternate battery chemistries, or whole new technologies to address both concerns. One company leading these efforts is Michigan-based privately held battery start-up Our Next Energy (ONE), which&nbsp;will supply an early prototype of its Gemini “Dual-Chemistry” battery to BMW&nbsp;(whose investment arm was part of the latest funding round of ONE) for testing under real world conditions. The testing is expected to start by the end of 2022 and will focus on proving ONE’s claim of doubling the typical lithium battery range, while also prolonging battery life, all while using cheaper and more plentiful iron and manganese to reduce the need for higher-cost cobalt and nickel in battery cathodes. Meanwhile, Alsym Energy, a Massachusetts-based start-up, is working on battery chemistry and a design that would further reduce, if not&nbsp;eliminate lithium and cobalt from EV battery cathodes, making them both safer and about 50% cheaper versus current designs. And in Europe, work continues on developing solid-state batteries for the EV market, with a consortium of Spanish companies launching the&nbsp;Basquevolt initiative, with the Basque government researching, developing, and producing solid-state batteries, with pilot plant operations targeted to begin in 2025 and ramp up to a 10 GWh annual production rate by 2027.
Ag-Chem and Ag-Tech
With planting progress on track, weather concerns rise.&nbsp;Better conditions allowed US farmers to essentially catch up to five-year averages when it comes to&nbsp;corn and soybean plantings. However, while current crop conditions are rated mostly good to excellent, recent scorching weather across the farm belt regions may raise the possibility of less than optimal yields and we will watch these developments over the next several weeks. One thing to keep in mind is the lessons from Brazil, where drought conditions led to angst over yield expectations. However,&nbsp;the country’s second corn crop, also known as safrinha, is now expected to be up 45% Y/Y, driven by higher planted acreage and higher yield expectations versus the drought affected 2021-22 second crop season. This may help alleviate the production shortfall experienced during the first crop period earlier in the year. The news could not come at a better time, as the world is getting increasingly pessimistic regarding&nbsp;the impact of the Russian invasion of Ukraine on the global food market, not just in 2022-23, but also longer term.
Doing their part to ensure adequate supply.&nbsp;Against this backdrop of food security concerns, crop input companies are stepping up efforts to ensure their products are made available and at an affordable price to help offset expected declines in Russian, Belorussian, and Ukrainian supply. Nutrien (NYSE: NTR) followed up its recent announcement of production capacity expansion with even more aggressive plans to&nbsp;ramp up production of phosphate and nitrogen fertilizers, both through brownfield expansions and new capacity addition projects expected to come online through 2025 and 2027, respectively.
In Other News
Expanding markets served to cushion expected declines.&nbsp;One company in our WTR-CMI index—Valvoline (NYSE: VVV)—has been fielding questions and fighting investor perception of a sun-setting business for several years now, as EVs continue to grow their share of annual car sales and investors grow concerned over the company’s ability to continue to deliver superior growth in what many are seeing as a sun-setting market (lube oil for ICE passenger vehicles). However, the company is not taking these expectations lying down. Earlier, VVV announced its intentions to monetize its bulk and industrial lubes business and concentrate on growing its company-owned and franchised Valvoline Instant Oil Change (VIOC) network. More recently, the company announced that it has opened its first&nbsp;company-owned heavy-duty fleet service center&nbsp;to provide the same high-touch customer service as it currently does through its VIOC network to service to Class 5-8 vehicles that can weigh more than 30,000 pounds. We believe this move will significantly expand VVV’s addressable market in the near to mid-term, while providing a longer tail over the long term, which may ease investor concerns over the stock’s valuation levels.
M&amp;A deal flow continues.&nbsp;The chemicals and materials technology industry has been characterized by considerable M&amp;A activity over the last two to three decades and despite, or perhaps because of the slowing economic outlook and inflationary pressures, portfolio optimization efforts are continuing. Recently,&nbsp;PPG announced&nbsp;that it has completed the divestiture of Eberle Design, Inc. (EDI) to Vance Street Capital. Terms of the transaction were not disclosed. Meanwhile, global chemical and plastic distributor Brenntag (OTC: BNTGY) recently&nbsp;announced that it has entered a partnership&nbsp;with Saudi Al-Azzaz Chemicals Co. via a 75/25 joint venture. Looking to expand its geographic footprint and keep up with the M&amp;A-driven growth of SHW and PPG, AkzoNobel (OTC: AKZOY) recently&nbsp;announced that it reached an agreement&nbsp;with Kansai Paint to acquire the latter’s paints &amp; coatings business in Africa, which generates approximately $300 million in annual sales, with completion expected in 2023, subject to regulatory approvals.
Rating and Price Target Changes
EMN –&nbsp;Jefferies downgraded the stock to Hold from Buy and reduced its price target (PT) to $87 from $150.
FMC –&nbsp;CFRA upgraded the stock to Hold from Sell, maintaining its $126 PT.
SHW –&nbsp;UBS lowered its PT to $265 from $279 and maintained its Neutral rating.
VVV –&nbsp;Jefferies lowered its PT to $40 from $44 and reiterated its Buy rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended June 19, 2022

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;Last week saw the stock market lose most of the gains of the previous two weeks, with the Russell 2000 dropping 4.4% and the S&amp;P 500 losing 5.1%, flirting with a technical bear market territory. Our WTR-CMI index of 30 chemicals and materials technology companies trailed both broader indexes, losing 5.9% last week.</li>
<li>Winners and losers.&nbsp;Only one of our stocks—PKE—posted a positive return last week, as the stock continues to benefit from improving investor sentiment toward the aerospace industry. Strong demand necessitating capacity expansion was likely the driver behind NGVT’s relative outperformance, as the stock declined 2.5%. Similarly, HXL’s loss of 3.7% made the stock a relative outperformer, driven by similar improvements in investor sentiment toward the aerospace industry reflected in PKE’s performance.</li>
<li>Lack of chips still an issue for automotive markets.&nbsp;Even as the worst of the&nbsp;chip crunch may be behind, owing to a drop in consumer electronics demand as inflation and potential recession fears hold down consumer spending, the expected&nbsp;production losses due to the shortage&nbsp;are now expected to exceed 2 million vehicles worldwide. Furthermore, the underlying issues with chip availability may need to be addressed on a more fundamental level, than hoping competition from consumer electronics subsides, which may require changes in how&nbsp;the auto industry deals with its semiconductor suppliers, as well as with internal design decisions.</li>
<li>EU’s sticking to its guns on ICE phaseout.&nbsp;Hopes that EU may ease up on its 2035 goals for an ICE vehicle production hard stop faded as the Union’s Parliament&nbsp;voted to keep the ban in place. The decision may be seen as a victory for EV battery ecosystem and related industries, but a disappointment for renewable fuel industry and a concern for&nbsp;auto manufacturers and other industry groups&nbsp;who see the timetable as too aggressive and disruptive.</li>
<li>Domestic graphite production gets one step closer.&nbsp;Westwater Resources, Inc. (NYSE: WWR) announced the&nbsp;receipt of an air permit&nbsp;from the Alabama Department of Environmental Management, an important step in constructing a graphite processing plant in Alabama.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/281/375/original/image_97929112221655423221717.png?1655423224" class="editor-image img-responsive" data-smartkarma-image-id="281375"></figure>
<p>Source: YCharts; June 10 close</p>
<h2>Automotive &amp; Transportation Market</h2>
<p>Passenger vehicle markets decline shows no signs of reversing.&nbsp;As May new car registrations data continues to come in, results remain uniformly disappointing. Although better than the 19% drop predicted earlier in the month, China’s sales declined&nbsp;17% Y/Y (or maybe 13%), depending on who you believe).&nbsp;UK sales of new passenger vehicles&nbsp;tumbled 21% Y/Y in May, although HEV and BEV sales rose in the mid-teens compared with the year-ago period.&nbsp;Sales in Germany&nbsp;also declined, albeit at a more modest 10% level, while order backlog reached an all-time high, suggesting pent-up demand may push sales higher over the next two to four months, as shortages of chips and other critical components ease and assuming higher prices and fears of recession do not overwhelm consumers. In Russia, the price of war with Ukraine now includes an&nbsp;84% drop in new car sales in May&nbsp;in that country, as foreign companies abandon the market and wind down their operations and stock in the region. As a result of its growing isolation, Russian new car sales are&nbsp;expected to decline 51% in 2022&nbsp;versus 2021 levels. While not as dramatic,&nbsp;LMC Automotive expects European new car sales&nbsp;to decline to below 10 million units in 2022, which would put it down 7.4% Y/Y and would be off 22.5% compared with 2020.</p>
<p>Although May 2022 represents the last difficult Y/Y comp of 2022, going against high double-digit growth a year ago, the pessimism implied by Russian and European full-year forecasts suggests the automotive industry is not out of the woods yet. The negative impact of semiconductor shortages may be easing, only to be replaced by consumer angst over skyrocketing prices and concerns of a global recession. Caution being the better part of valor, we would remain cautious on suppliers into the automotive industry in our sector, such as PPG and AXTA, who are already dealing with margin compression as a result of rapidly escalating raw material costs and may continue to face volume growth challenges as their main end-markets—automotive OEM and collision repair—continue to remain under pressure; with there being a close correlation between gasoline prices and miles driven and between the latter and collisions. Other companies that face similar auto/gasoline-related headwinds include VVV and NewMarket (NYSE: NEU).</p>
<h2>EVs &amp; Battery Ecosystem</h2>
<p>A step forward for battery technology.&nbsp;Colorado-based Solid Power Inc. (NASDAQ: SLDP) looks to ship its first&nbsp;solid state pre-production battery cells&nbsp;to BMW and Ford by year-end 2022. These cells will be produced at the company’s pilot plant facility for validation testing by its automotive partners. The&nbsp;pilot plant&nbsp;will have the capacity to produce 300 cells/week, or about 15,000/year, enough to continue to supply validation trials with SLDP’s existing and potential future partners. The company is also looking for a manufacturer to ramp up commercial production of battery cells using the company’s proprietary sulfide-based solid electrolyte material, with intentions to ramp up commercial scale production in 2026.</p>
<p>Battery technology players continue to team up.&nbsp;Li-Cycle Holdings Corp. (NYSE: LICY), a lithium-ion battery recycler in North America, has established&nbsp;long-term commercial agreements&nbsp;with Swiss provider of primary metals for the production of EV batteries, Glencore, with the latter also completing its previously announced $200 million investment in LICY. Li-Cycle says it also has appointed Kunal Sinha, Glencore’s head of recycling, to Li-Cycle’s board of directors. Meanwhile, lithium battery manufacturer LG Chem formed a&nbsp;joint venture with B&amp;M, a subsidiary of the Chinese company Huayou Cobalt, to produce cathode materials and another&nbsp;JV with Kemco&nbsp;to manufacture precursors for cathodes.</p>
<p>Disjointed government regulatory policies working at cross purposes to announced goals.&nbsp;Governments across the globe, including the US, are setting ambitious (some would say unachievable) goals for cutting transportation-associated carbon emissions, settling on lithium battery-based EVs as the preferred method to achieve their targets. Unfortunately, it is also governments that are putting obstacles in front of companies trying to develop sufficient supply infrastructure of critical materials to meet the expected needs of the EV industry; from restrictive water permits and outright threat of nationalization of lithium assets in Chile and Argentina, to environmental groups’ lawsuits seeking to stop development of lithium mines in North America, to the drive to classify lithium derivatives as dangerous for human health, implying a more restrictive regulatory framework for their use in Europe. Should the latter come to pass, ALB, the world’s largest producer of lithium-based chemicals for the EV battery industry, may be looking to terminate its&nbsp;lithium production in Germany, just as the region is expecting a steep ramp-up in EV production and sales. This would be likely result in lithium production being moved out of EU states, requiring the region to import the material, extending the supply chain and leaving the Union vulnerable to geopolitical and logistical disruptions.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Farmers feeling the cost bite.&nbsp;Purdue University and CME group’s Ag Economy Barometer&nbsp;took a tumble in May, coming in at 99, the lowest reading since April 2020 and only the ninth time since 2015 the monthly score fell below 100. The culprit of deteriorating sentiment is, no surprise, elevated production costs; everything from farmland rents to gasoline and diesel to fertilizers and crop chemicals. With most costs already sunk in, as&nbsp;plantings of corn and soybean have finally caught up to five-year averages&nbsp;and crop conditions looking mostly solid, a lot of the pain farmers are feeling may be behind. Post-emergent rescue ag products, such as insecticide and fungicides still possibly left to be purchased, fuel costs will continue to be a problem through harvest and grain drying, as well as delivery, all of which rely on energy whose costs are likely to continue to increase. The one positive remaining is the high global commodity grain prices, which may be sustainable given the disruptions to the supply chain caused by Russia’s invasion of Ukraine. In fact,&nbsp;wheat supplies may be particularly at risk, a situation that may affect the global economies and societies in ways that are difficult to predict at this time, but that are likely to result in sustained high ag commodity prices at least through 2023-24.</p>
<p>Bio-based alternatives may become critical.&nbsp;Given the above, and with fertilizer prices already falling from their panic buying peaks, US farmers may find themselves in a slightly worse cash income position at the end of this season compared with 2021, but in a position to benefit from declining input costs and still high crop prices in 2023. Such an environment would be a positive for crop chemical suppliers like FMC, CTV and AVD, as well as provide momentum for further penetration of drought resistant seeds, like the HB-4 wheat and soybeans developed and marketed by BIOX and bio-based crop protection, soil health and bio-nutrient companies, such as MBII (which is soon to merge with BIX). A rationalization and harmonization of regulatory requirements to get&nbsp;genetically modified seeds into farmers’ hands&nbsp;in a timely manner and at more affordable prices may be needed and that is something government agencies may be in the position to do, as their efforts in all other areas of inflation fighting and food security remain largely ineffective.</p>
<h2>In Other News</h2>
<p>Adhesives’ growth to continue and perhaps accelerate.&nbsp;The adhesives &amp; sealants market has grown at above-GDP rates historically, driven in large part by continuing substitution of adhesives in place of mechanical or welded joints, allowing the industry to outgrow its end-markets as a result. This trend is expected to continue, with the&nbsp;market for structural adhesives&nbsp;projected to grow at a 6.9% CAGR (2021-2030) to reach a value of $27.9 billion worldwide by 2030. The industry also continues to&nbsp;spend heavily on R&amp;D&nbsp;to ensure its products not only meet current and expected future needs of its end-customers, but do so while minimizing the environmental impact of adhesives production and enabling is customers to reach their respective ESG goals as well.</p>
<p>While higher raw material costs and possible slowdown of the global economy as a result of sanctions against Russia, inflation, and central banks’ efforts to combat it are a concern, secular drivers, such as increased use of adhesives in place of mechanical joining, may allow companies such as FUL, RPM and NGVT to outperform their peers in chemicals and materials sector.</p>
<p>Coatings market consolidation.&nbsp;Last week PPG held its annual&nbsp;investor day&nbsp;in Helsinki, Finland, during which the company highlighted its recently completed acquisition of Tikkurila, a leading European paints &amp; coatings company. Meanwhile, PPG’s peer—Sherwin Williams—announced an&nbsp;agreement to acquire Gross &amp; Perthun GmbH, a developer, manufacturer, and distributor of coatings primarily for the heavy equipment and transportation industries with approximately $50 million in annual sales, bolstering SHW’s industrial and transportation coatings business in Europe. The deal is expected to close by the end of 3Q22.</p>
<h2>Recent WTR Publications and Upcoming Events:</h2>
<p>Management Series Report – Marrone Bio Innovations CEO Kevin Helash</p>
<p>Westwater Resources, Inc. (NYSE: WWR) Fireside Chat</p>
<h2>Rating and Price Target Changes</h2>
<p>EAF –&nbsp;Citigroup downgraded the stock to Neutral from Buy, with a price target (PT) set at $10.</p>
<p>ECL –&nbsp;Deutsche Bank lowered its PT to $195 from $200 but reiterated its Buy recommendation.</p>
<p>SHW –&nbsp;Evercore ISI lowered its PT to $305 from $310 but reiterated its Outperform rating.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;Last week saw the stock market lose most of the gains of the previous two weeks, with the Russell 2000 dropping 4.4% and the S&amp;P 500 losing 5.1%, flirting with a technical bear market territory. Our WTR-CMI index of 30 chemicals and materials technology companies trailed both broader indexes, losing 5.9% last week.
Winners and losers.&nbsp;Only one of our stocks—PKE—posted a positive return last week, as the stock continues to benefit from improving investor sentiment toward the aerospace industry. Strong demand necessitating capacity expansion was likely the driver behind NGVT’s relative outperformance, as the stock declined 2.5%. Similarly, HXL’s loss of 3.7% made the stock a relative outperformer, driven by similar improvements in investor sentiment toward the aerospace industry reflected in PKE’s performance.
Lack of chips still an issue for automotive markets.&nbsp;Even as the worst of the&nbsp;chip crunch may be behind, owing to a drop in consumer electronics demand as inflation and potential recession fears hold down consumer spending, the expected&nbsp;production losses due to the shortage&nbsp;are now expected to exceed 2 million vehicles worldwide. Furthermore, the underlying issues with chip availability may need to be addressed on a more fundamental level, than hoping competition from consumer electronics subsides, which may require changes in how&nbsp;the auto industry deals with its semiconductor suppliers, as well as with internal design decisions.
EU’s sticking to its guns on ICE phaseout.&nbsp;Hopes that EU may ease up on its 2035 goals for an ICE vehicle production hard stop faded as the Union’s Parliament&nbsp;voted to keep the ban in place. The decision may be seen as a victory for EV battery ecosystem and related industries, but a disappointment for renewable fuel industry and a concern for&nbsp;auto manufacturers and other industry groups&nbsp;who see the timetable as too aggressive and disruptive.
Domestic graphite production gets one step closer.&nbsp;Westwater Resources, Inc. (NYSE: WWR) announced the&nbsp;receipt of an air permit&nbsp;from the Alabama Department of Environmental Management, an important step in constructing a graphite processing plant in Alabama.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; June 10 close
Automotive &amp; Transportation Market
Passenger vehicle markets decline shows no signs of reversing.&nbsp;As May new car registrations data continues to come in, results remain uniformly disappointing. Although better than the 19% drop predicted earlier in the month, China’s sales declined&nbsp;17% Y/Y (or maybe 13%), depending on who you believe).&nbsp;UK sales of new passenger vehicles&nbsp;tumbled 21% Y/Y in May, although HEV and BEV sales rose in the mid-teens compared with the year-ago period.&nbsp;Sales in Germany&nbsp;also declined, albeit at a more modest 10% level, while order backlog reached an all-time high, suggesting pent-up demand may push sales higher over the next two to four months, as shortages of chips and other critical components ease and assuming higher prices and fears of recession do not overwhelm consumers. In Russia, the price of war with Ukraine now includes an&nbsp;84% drop in new car sales in May&nbsp;in that country, as foreign companies abandon the market and wind down their operations and stock in the region. As a result of its growing isolation, Russian new car sales are&nbsp;expected to decline 51% in 2022&nbsp;versus 2021 levels. While not as dramatic,&nbsp;LMC Automotive expects European new car sales&nbsp;to decline to below 10 million units in 2022, which would put it down 7.4% Y/Y and would be off 22.5% compared with 2020.
Although May 2022 represents the last difficult Y/Y comp of 2022, going against high double-digit growth a year ago, the pessimism implied by Russian and European full-year forecasts suggests the automotive industry is not out of the woods yet. The negative impact of semiconductor shortages may be easing, only to be replaced by consumer angst over skyrocketing prices and concerns of a global recession. Caution being the better part of valor, we would remain cautious on suppliers into the automotive industry in our sector, such as PPG and AXTA, who are already dealing with margin compression as a result of rapidly escalating raw material costs and may continue to face volume growth challenges as their main end-markets—automotive OEM and collision repair—continue to remain under pressure; with there being a close correlation between gasoline prices and miles driven and between the latter and collisions. Other companies that face similar auto/gasoline-related headwinds include VVV and NewMarket (NYSE: NEU).
EVs &amp; Battery Ecosystem
A step forward for battery technology.&nbsp;Colorado-based Solid Power Inc. (NASDAQ: SLDP) looks to ship its first&nbsp;solid state pre-production battery cells&nbsp;to BMW and Ford by year-end 2022. These cells will be produced at the company’s pilot plant facility for validation testing by its automotive partners. The&nbsp;pilot plant&nbsp;will have the capacity to produce 300 cells/week, or about 15,000/year, enough to continue to supply validation trials with SLDP’s existing and potential future partners. The company is also looking for a manufacturer to ramp up commercial production of battery cells using the company’s proprietary sulfide-based solid electrolyte material, with intentions to ramp up commercial scale production in 2026.
Battery technology players continue to team up.&nbsp;Li-Cycle Holdings Corp. (NYSE: LICY), a lithium-ion battery recycler in North America, has established&nbsp;long-term commercial agreements&nbsp;with Swiss provider of primary metals for the production of EV batteries, Glencore, with the latter also completing its previously announced $200 million investment in LICY. Li-Cycle says it also has appointed Kunal Sinha, Glencore’s head of recycling, to Li-Cycle’s board of directors. Meanwhile, lithium battery manufacturer LG Chem formed a&nbsp;joint venture with B&amp;M, a subsidiary of the Chinese company Huayou Cobalt, to produce cathode materials and another&nbsp;JV with Kemco&nbsp;to manufacture precursors for cathodes.
Disjointed government regulatory policies working at cross purposes to announced goals.&nbsp;Governments across the globe, including the US, are setting ambitious (some would say unachievable) goals for cutting transportation-associated carbon emissions, settling on lithium battery-based EVs as the preferred method to achieve their targets. Unfortunately, it is also governments that are putting obstacles in front of companies trying to develop sufficient supply infrastructure of critical materials to meet the expected needs of the EV industry; from restrictive water permits and outright threat of nationalization of lithium assets in Chile and Argentina, to environmental groups’ lawsuits seeking to stop development of lithium mines in North America, to the drive to classify lithium derivatives as dangerous for human health, implying a more restrictive regulatory framework for their use in Europe. Should the latter come to pass, ALB, the world’s largest producer of lithium-based chemicals for the EV battery industry, may be looking to terminate its&nbsp;lithium production in Germany, just as the region is expecting a steep ramp-up in EV production and sales. This would be likely result in lithium production being moved out of EU states, requiring the region to import the material, extending the supply chain and leaving the Union vulnerable to geopolitical and logistical disruptions.
Ag-Chem and Ag-Tech
Farmers feeling the cost bite.&nbsp;Purdue University and CME group’s Ag Economy Barometer&nbsp;took a tumble in May, coming in at 99, the lowest reading since April 2020 and only the ninth time since 2015 the monthly score fell below 100. The culprit of deteriorating sentiment is, no surprise, elevated production costs; everything from farmland rents to gasoline and diesel to fertilizers and crop chemicals. With most costs already sunk in, as&nbsp;plantings of corn and soybean have finally caught up to five-year averages&nbsp;and crop conditions looking mostly solid, a lot of the pain farmers are feeling may be behind. Post-emergent rescue ag products, such as insecticide and fungicides still possibly left to be purchased, fuel costs will continue to be a problem through harvest and grain drying, as well as delivery, all of which rely on energy whose costs are likely to continue to increase. The one positive remaining is the high global commodity grain prices, which may be sustainable given the disruptions to the supply chain caused by Russia’s invasion of Ukraine. In fact,&nbsp;wheat supplies may be particularly at risk, a situation that may affect the global economies and societies in ways that are difficult to predict at this time, but that are likely to result in sustained high ag commodity prices at least through 2023-24.
Bio-based alternatives may become critical.&nbsp;Given the above, and with fertilizer prices already falling from their panic buying peaks, US farmers may find themselves in a slightly worse cash income position at the end of this season compared with 2021, but in a position to benefit from declining input costs and still high crop prices in 2023. Such an environment would be a positive for crop chemical suppliers like FMC, CTV and AVD, as well as provide momentum for further penetration of drought resistant seeds, like the HB-4 wheat and soybeans developed and marketed by BIOX and bio-based crop protection, soil health and bio-nutrient companies, such as MBII (which is soon to merge with BIX). A rationalization and harmonization of regulatory requirements to get&nbsp;genetically modified seeds into farmers’ hands&nbsp;in a timely manner and at more affordable prices may be needed and that is something government agencies may be in the position to do, as their efforts in all other areas of inflation fighting and food security remain largely ineffective.
In Other News
Adhesives’ growth to continue and perhaps accelerate.&nbsp;The adhesives &amp; sealants market has grown at above-GDP rates historically, driven in large part by continuing substitution of adhesives in place of mechanical or welded joints, allowing the industry to outgrow its end-markets as a result. This trend is expected to continue, with the&nbsp;market for structural adhesives&nbsp;projected to grow at a 6.9% CAGR (2021-2030) to reach a value of $27.9 billion worldwide by 2030. The industry also continues to&nbsp;spend heavily on R&amp;D&nbsp;to ensure its products not only meet current and expected future needs of its end-customers, but do so while minimizing the environmental impact of adhesives production and enabling is customers to reach their respective ESG goals as well.
While higher raw material costs and possible slowdown of the global economy as a result of sanctions against Russia, inflation, and central banks’ efforts to combat it are a concern, secular drivers, such as increased use of adhesives in place of mechanical joining, may allow companies such as FUL, RPM and NGVT to outperform their peers in chemicals and materials sector.
Coatings market consolidation.&nbsp;Last week PPG held its annual&nbsp;investor day&nbsp;in Helsinki, Finland, during which the company highlighted its recently completed acquisition of Tikkurila, a leading European paints &amp; coatings company. Meanwhile, PPG’s peer—Sherwin Williams—announced an&nbsp;agreement to acquire Gross &amp; Perthun GmbH, a developer, manufacturer, and distributor of coatings primarily for the heavy equipment and transportation industries with approximately $50 million in annual sales, bolstering SHW’s industrial and transportation coatings business in Europe. The deal is expected to close by the end of 3Q22.
Recent WTR Publications and Upcoming Events:
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Westwater Resources, Inc. (NYSE: WWR) Fireside Chat
Rating and Price Target Changes
EAF –&nbsp;Citigroup downgraded the stock to Neutral from Buy, with a price target (PT) set at $10.
ECL –&nbsp;Deutsche Bank lowered its PT to $195 from $200 but reiterated its Buy recommendation.
SHW –&nbsp;Evercore ISI lowered its PT to $305 from $310 but reiterated its Outperform rating.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended June 12, 2022

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;For the second week in a row, the market posted positive gains for the week, with the Russell 2000 leading with a 2.4% improvement, double the 1.2% appreciation of the S&amp;P 500. Our WTR-CMI index nearly kept pace with the large cap index by appreciating 0.9% last week.
Winners and losers.&nbsp;KOP and KWR led the stocks in our index with a 7.6% and 7.5% improvement, respectively. VVV also had a good week with a 5.2% appreciation, likely driven by the news that the company bought out its 50% JV partner in&nbsp;VCA Solutions, as well as reports that&nbsp;Saudi Aramco approached VVV&nbsp;about buying its industrial and fleet lube oil business. While lithium stocks were the top performers the prior week, with&nbsp;LAC announcing a collaboration agreement&nbsp;with Arena Minerals,&nbsp;PLL announcing positive results&nbsp;from a feasibility study of its Canadian spodumene property,&nbsp;LTHM announcing a collaboration&nbsp;with Lilium N.V. (NASDAQ: LILM), and&nbsp;ALB raising its 2022 guidance&nbsp;for the second time, last week saw these stocks at the bottom of the list as investors took profit and concerns over a lithium pricing peak were annunciated by a bulge bracket bank.
Another month of pain for the auto industry and its suppliers.&nbsp;After an ugly April, early May data on new car sales offer little hope of an improvement before 2H22. New car sales in&nbsp;France declined 10% Y/Y,&nbsp;Chinese sales&nbsp;look to be down 19% Y/Y, and companies still reporting monthly&nbsp;US sales&nbsp;indicate the domestic market in May was down 31% Y/Y. We therefore remain cautious on PPG and AXTA, given their high exposure to the automotive industry.
Organic food popularity continues to grow.&nbsp;Organic food sales&nbsp;grew 6% Y/Y in 2021&nbsp;and are expected to continue to grow at above-market rates. With organic farming being the first and still most important market for bio-based ag input products, the trend is especially beneficial to MBII and BIOX, as well as other ag-chem companies focused on bio-based alternatives.
End of a saga.&nbsp;Cruiser Capital was the winner of the proxy fight with AVD management, as&nbsp;all three of its board member nominees won shareholder approval. Cruiser, an activist shareholder focused on unlocking value, may now influence AVD’s future direction and strategy.

WTR-CMI WEEKLY PERFORMANCE

Automotive &amp; Transportation Market
Commercial vehicle market’s struggles continue.&nbsp;The European&nbsp;ACEA released its new commercial vehicle sales&nbsp;data for April, which showed a 27% Y/Y decline (20% reduction YTD) in monthly sales of commercial vehicles in the region, going against tough post-pandemic bounce in demand in 2021. While comps should get easier in June, May results may continue to see double-digit declines in sales (and by extension, production) of commercial vehicles. Furthermore, with Europe struggling with the economic impact of Russian sanctions, demand may not improve in 2H22 as we previously hoped, suggesting that negative monthly comps may continue through the summer months, and it may be 4Q22 before markets stabilize and demand turns positive.
Passenger vehicle markets decline.&nbsp;Although the Chinese government&nbsp;lifted the lockdown mandate in Shanghai&nbsp;earlier this month and cut taxes on new vehicle purchases in half to 5% through the end of 2022, the moves aren’t likely to reverse the multi-month trend of Y/Y sales declines of new passenger vehicles in the country in the short term. While the tax cut may spur a buying spree in 2H22, as a similar move did in 2015, it’s likely to come at the expense of future growth by pulling forward demand into 2022 and resulting in slower growth in 2023, as the tax regime returns to normal levels. But with the continuation of the zero tolerance policy when it comes to COVID cases, the Chinese economy may remain sluggish, suggesting the world’s largest automotive market is not out of the woods yet.
June starts off on a low note.&nbsp;Meanwhile,&nbsp;Toyota blamed parts shortages&nbsp;due to the Shanghai lockdowns for its reduction in June production targets to 850,000 vehicles worldwide, down from 950,000 expected previously. The company hopes to maintain that rate of production through August, but unless Shanghai ramps up its production activities rapidly in June, summer targets may be subject to further reductions. Similarly,&nbsp;Stellantis announced&nbsp;that its Jeep production plant in Southern Italy will stop production for a week due to semiconductor chip shortages, as that problem continues to persist in global markets, placing a limit on the speed of production recovery in the automotive industry in 2022. Consequently, 2Q22 may continue to see Y/Y declines in automotive and transportation markets affecting key suppliers to the industry, which in our sector include companies like PPG and AXTA, the two leading automotive coatings companies, as well as other suppliers, such as FUL (adhesives &amp; sealants), AVNT (specialty plastics and composites), and HXL (composites), among others.
Lithium &amp; EV Ecosystem
Domestic EV supply chain continues to evolve.&nbsp;Stellantis announced plans,&nbsp;in conjunction with its partner, Samsung SDI, to invest $2.5 billion in a new EV battery plant in Indiana, with production slated for 2025. To ensure adequate supply of lithium for the battery plant,&nbsp;Stellantis also announced an agreement&nbsp;with Controlled Thermal Resources Ltd. (CTR) to supply the company with up to 25,000 metric tons per year of lithium hydroxide over the 10-year term of the agreement. Meanwhile, even as the EV industry looks at a potential shortage of batteries needed to fully meet consumer demand by 2024-25,&nbsp;Panasonic is looking to triple the size of its battery business in North America&nbsp;by 2029 to try to meet the expected market demand in the region, as consumers here are expected to show a greater appetite for EVs, given the exorbitant gasoline prices in the wake of misguided federal policies and repercussions of Russian sanctions.
EV game is not for the faint of heart.&nbsp;The EV battery industry may be entering an early consolidation phase, as the UK’s&nbsp;Britishvolt said it will buy German battery cell developer and manufacturer EAS&nbsp;from Bulgaria’s Monbat for €36 million ($38.6 million) to help it scale up its own production of EV batteries. Meanwhile, another British company, Johnson Matthey, is getting out of the EV battery business by&nbsp;selling its related operations&nbsp;to EV Metals Group (European operations) and Nano One Materials (North American operations). Pooling resources and technological know-how may result in faster investments in battery production around the world, as well as accelerate improvements in battery technologies that can potentially close the industry’s lithium and other critical materials supply gap&nbsp;looming just over the horizon. One answer to the lithium and other battery materials expected shortage is to ramp up lithium battery recycling capacity. To that end,&nbsp;BMW’s Brilliance Automotive (BBA) joint venture has established a closed cycle recycling operation in China&nbsp;for the reuse of the raw materials nickel, lithium, and cobalt from high-voltage batteries. Although still in in the pilot stage, end-of-life battery recycling will be an essential part of the EV battery supply chain, driven by both critical material scarcity and environmental concerns, as recycling batteries reduces CO2&nbsp;emissions by up to 70% compared with mining, processing, and converting virgin materials for the battery industry.
African countries getting into the EV act.&nbsp;Not content to be relegated to a raw material supplier for critical metals such as cobalt and copper, The Democratic Republic of Congo and Zambia concluded a&nbsp;cooperation agreement&nbsp;to help develop a battery and electric materials industry in the region, rather than continue supplying the more developed parts of the world with the critical metals, losing out on the value creation that accompanies the processing of these metals into higher-value products for the battery and electrical components industries. It remains to be seen how successful these efforts are and what, if any, role China will play in developing the required infrastructure, but we are encouraged to see countries with primary metal deposits attempting to improve their economies by developing downstream capabilities, rather than exporting raw metals with economic benefits accruing to other regions.
Ag-Chem and Ag-Tech
Best cure for high prices is high prices (part 1).&nbsp;Sky-high fertilizer prices may have resulted in demand destruction, as farmers look for alternatives, like manure, minimize per ace use, and look for other ways to reduce their input costs. As a result, CF Industries (NYSE: CF) led a&nbsp;recent 30% price drop&nbsp;for nitrogen (ammonia) fertilizers. While the price reduction isn’t likely to positively affect farmers’ costs in the current season, it may begin a trend of input prices returning to more reasonable levels, which would set up US farmers for better incomes in 2023, provided commodity prices remain elevated, which appears likely given the disruptions to the global crop markets caused by Russia’s invasion of Ukraine and resulting disruptions not just to shipments of stored grains, but to this year’s plantings and therefore next year’s crop supplies.
US plantings finally catching up to five-year averages.&nbsp;Over the past two weeks, US farmers were able to take advantage of drier and warmer weather to&nbsp;almost catch up with their plantings of corn and soybeans, which now stand at just 1% below five-year averages. However, it may be too soon to declare victory, as soybean emergence stands at only 39% at the end of May 2022, compared with 59% last year and the five-year average of 43%. Finally, only 73% of the US spring wheat crop is in the ground. Normally 92% of it is planted by late May. We have yet to find out how much acreage was actually planted in the US compared with the USDA’s estimates and how much more acreage will be left fallow or planted with cover crops awaiting a better year next year (hopefully). Bottom line, we believe even with superior yields, US and LATAM harvests may fall short of meeting the global need for row crops and cereals, given the continuing war in Ukraine and disrupted supply chain as a result. This suggests commodity crop prices will remain elevated into the 2022-23 planting season, allowing US farmers to absorb the inflation seen in ag inputs from seeds to ag-chemicals to fertilizers. In turn, this should be a positive for ag-chem companies such as FMC, AVD, and CTVA, as well as bio-based crop protection companies such as MBII and BIOX.
In Other News
Bio-based inputs find applications beyond ag markets.&nbsp;The global market for&nbsp;bio-adhesives, or those products that use intermediates such as starch or gelatin, reached nearly $2.2 billion in 2021. Looking forward, IMARC Group expects the market to reach $4.81 billion by 2027, expanding at a CAGR of 13.9% from 2022-2027. Yet another industry being affected by improved performance of&nbsp;bio-based alternatives is plastics, specifically bio-based polyethylene and polypropylene made from renewable resources such as sugar cane, non-edible plants, and biogenic fats and oils. These and other similar developments highlight the chemical industry’s leading role in helping the global economy reach government-set mandates for carbon emission, minimized environmental impact of plastics and enable zero emissions and circular economy trends.
In the world of paints &amp; coatings.&nbsp;Chinese chloride-based TiO2&nbsp;historically has been a poor cousin to sulfate-based production in Europe and North America, which results in higher purity pigment that can be used in more demanding applications. However, most of TiO2&nbsp;capacity expansions to serve the paints &amp; coatings industry (TiO2’s primary end-market) have occurred in China. As the Chinese housing market stalled,&nbsp;more of this volume found a home in export markets. As chloride-based technology improves and the performance gap between chloride and sulfate processes narrows, price differences between the two sources are narrowing as well. Should China’s construction market recover, higher domestic demand may result in less export volumes, which has the potential to drive up TiO2&nbsp;prices and put further pressure on paints &amp; coatings companies’ margins, even as volume growth remains elusive and consumer tolerance of higher prices erodes. We therefore remain cautious on SHW, PPG, AXTA, and RPM for the time being. Speaking of PPG,&nbsp;a recent story&nbsp;suggests the company may be looking at joining forces with AXTA, something that’s been rumored on and off for the past two years. While we believe antitrust issues related to automotive OEM and collision repair coatings may make the combination difficult (we believe SHW to be a more natural acquirer of AXTA, given its lack of sizable transportation coatings business), a merger and subsequent divestitures of some of the businesses could be a solution PPG may be willing to entertain.
Best cure for high prices is high prices (part 2).&nbsp;Subdued demand and full warehouses are resulting in&nbsp;commodity resin prices, such as those of polyethylene and polypropylene, to decline recently for the first time in several months. While it remains to be seen if the trend can hold, given rising oil and natural gas prices, the reduction in spot and contract prices may be a positive for large commodity plastic consumers, such as AVNT, as well companies that utilize plastic packaging in their products (everyone from ECL to MBII), which may see their margins improve ahead of expectations over the next one to two quarters.
Recent WTR Publications and Upcoming Events
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Westwater Resources (NYSE: WWR) Fireside Chat – June 9
Rating and Price Target Changes
ALB –&nbsp;KeyBank raised its price target (PT) to $217 from $215 and reiterated its Underweight rating; Wells Fargo raised its PT to $320 from $285 and reiterated its Outperform rating; RBC raised its PT to $314 from $300 and reiterated its Outperform rating; Deutsche Bank raised its PT to $320 from $290 and reiterated its Buy recommendation; Berenberg Bank raised its PT to $260 from $250 and reiterated its Buy rating; UBS downgraded the stock to Neutral from Buy and reduced its PT to $260 from $300.
CMP –&nbsp;Deutsche Bank lowered its PT to $55 from $73 but reiterated its Buy recommendation.
CTVA –&nbsp;Deutsche Bank raised its PT to $72 from $64 and reiterated its Buy rating; Barclays initiated coverage with an Overweight recommendation and $71 PT.
ECL –&nbsp;Argus lowered its PT to $200 from $230 but reiterated its Buy recommendation; UBS on the other hand upgraded the stock to Buy from Neutral and raised its PT to $205 from $186; Credit Suisse upgraded the stock to Outperform from Neutral and raised its PT to $195 from $180.
EMN –&nbsp;Credit Suisse initiated coverage with Outperform and $130 PT.
FMC –&nbsp;Credit Suisse initiated coverage with Underperform and $109 PT.
PLL –&nbsp;Cowen initiated coverage with Outperform and $90 PT.
PPG –&nbsp;Credit Suisse initiated coverage with Underperform and $115 PT.
SHW –&nbsp;Credit Suisse initiated coverage with Underperform and $245 PT; Evercore ISI raised its PT to $310 from $290 and reiterated its Outperform rating.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended June 5, 2022

<h2>KEY HIGHLIGHTS</h2>
<ul>
<li>WTR-CMI last week.&nbsp;Our WTR-CMI index of 30 chemicals and materials technology stocks continued to outperform the broader indexes in an overall down week for the market.<br>WTR-CMI declined 1.7%, which still beat both the S&amp;P 500’s (3.3%) and Russell 2000’s (3.9%) returns for the week.</li>
<li>Winners and losers. Better-than-expected 1Q22 results drove SHW to the top of our list last week with a 12.3% gain, followed by SCL’s 4.4% improvement, also driven by better 1Q22 performance vs. expectations. Earnings disappointment and a CEO change were likely responsible for ECVT’s 9.1% decline in value last week, with lithium stocks LAC (down 6.6%) and PLL (down 5.6%) posting another weekly decline, despite both companies making positive announcements (see below) relative to their longer-term goals of developing a diversified lithium source portfolio.</li>
<li>Winning a fight for IP rights.&nbsp;FMC announced that a Chinese court ruled in its favor in a&nbsp;patent infringement suit&nbsp;against Hangzhou Udragon Chemical Co., Ltd and Zhejiang Udragon Bioscience Co., Ltd. related to FMC’s proprietary intermediate used in the manufacturing of chlorantraniliprole. IP protection has long been an issue in dealing with Chinese contract manufacturers and it is good to see a court in China siding with a Western company in these cases.</li>
<li>Niche market growth looks to accelerate. According to Future Market Insights, the&nbsp;market for biaxially oriented polyamide&nbsp;(polyamide is otherwise known as nylon) is expected to grow at a 5.3% CAGR through 2030, driven by existing and new applications in food and healthcare markets. While clearly a niche market (2030 market size estimated at $1.6 billion), these engineered plastics are a key contributor to growth of such companies as AVNT, which either compound these raw resins with proprietary blends of colorants and performance additives or provide masterbatch concentrates of such additives to third-party compounders.</li>
<li>Ag economy continues to hold.&nbsp;Creighton University’s RMI&nbsp;index indicates the rural economy continued its growth in April for the 17th&nbsp;straight month. However, the business confidence index, which reflects bank CEO expectations for the economy six months out, plummeted to 39.1 from 54 in March.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/272/103/original/image_35966415121651708154369.png?1651708157" class="editor-image img-responsive" data-smartkarma-image-id="272103"></figure>
<p>Source: YCharts, April 29 close</p>
<h2>Automotive &amp; Transportation</h2>
<p>Auto industry struggles continue. New car registrations are&nbsp;expected to decline 32% Y/Y in April in China&nbsp;and to be down as&nbsp;much as 20% Y/Y in the US, pointing to continued issues facing the industry, including COVID-related production halts, supply chain disruptions, chip shortages, and logistics bottlenecks. In Europe,&nbsp;commercial vehicle registrations&nbsp;do not paint a better picture, which are down 25% Y/Y in March and down 18% Y/Y for all of 1Q22. AutoForecast Solutions estimates&nbsp;removed another 87,500 vehicles from the global production forecast&nbsp;due to ongoing semiconductor shortages, bringing total volume loss so far this year to more than 1.5 million units. As chip production continues to trail demand from the auto industry, it appears likely that the negative trend will continue, building on the +12 million vehicles that have been lost to production due to lack of semiconductor availability since the issue surfaced in 2020. On a slightly more positive note,&nbsp;the VW plant in Shanghai&nbsp;appears to be resuming production, albeit slowly, following the COVID lockdown implemented by the Chinese government in late March.</p>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>Lithium companies continue to pursue diversification of resources. Both junior lithium names in our WTR-CMI index – PLL and LAC – were in the news last week.&nbsp;LAC announced making a $10 million equity investment&nbsp;in Green Technology Metals Ltd. (ASX: GT1), a North American-focused lithium exploration and development company with hard rock spodumene assets in northwest Ontario, Canada. Meanwhile, PLL’s partner, Sayona Mining Limited (ASX: SYA),&nbsp;announced positive initial drilling results&nbsp;from the lithium pegmatite zone at the Moblan Lithium Project in Québec. While lithium deposits are not a rarity in the Earth’s crust, economically exploitable deposits are more so, and economics of lithium mining, converting and transportation, as well as production know-how of battery grade lithium carbonate and hydroxide will eventually differentiate successful lithium exploration and development companies from the also-rans.</p>
<p>New technologies get their shot. A GM-backed battery startup Soelect and South Korean chemical company Lotte Chemical plan to invest more than $200 million in a joint venture to build a factory for battery materials for use in electric vehicles in the US by 2025. The joint venture will look to commercialize Soelect’s pilot plant technology for producing lithium anodes for EV batteries, which, if successful, can produce batteries that charge faster than current batteries with graphite or silicone-based anodes.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Grain prices may linger at elevated levels. While grain prices have been on an upward trend throughout 2021, the Russian invasion of Ukraine has sent them to new levels. On a positive note, higher grain prices help farmers absorb higher input costs, such as fertilizers, crop chemicals, and seeds themselves, which have all inflated in recent months. The RMI Index’s still positive reading despite the inflation in the price of inputs has much to do with that fact. Growing demand, driven by a growing middle class and resulting protein consumption in emerging economies, as well as disruptions likely to be caused by reshuffling of export flows due to anti-Russian sanctions, combined with a limited ability to rapidly expand supply, are therefore&nbsp;likely to keep prices at near current levels&nbsp;(if not send them higher) for several years to come. In the near term, concerns over&nbsp;drought conditions in Brazil, which may affect both corn and soybean production, may be underappreciated, as the industry focuses on North American planting season. However, a reduction in production expectations from Brazil can have a profound impact on global gain prices this year and perhaps into next. Given this dynamic and the 8.8% inflation in Y/Y food prices seen in March 2022, we would not be surprised to see&nbsp;the USDA revise upward its food inflation outlook, which was already increased by 1% in April from earlier projections to 5-6%, as drivers of higher food prices remain in place and do not look to subside this year.</p>
<h2>Rating and Price Target Changes</h2>
<p>ASH&nbsp;– UBS raised its price target (PT) to $127 from $125 and reiterated its Buy rating; Deutsche Bank raised its PT to $122 from $120 and reiterated its Buy rating.</p>
<p>AXTA&nbsp;– Deutsche Bank raised its PT to $28 from $27 and maintained its Hold rating; BofA raised its PT to $37 from $36 and reiterated its Buy rating; BMO raised its PT to $34 from $33 and reiterated its Outperform rating.</p>
<p>CTVA&nbsp;– Mizuho raised its PT to $67 from $60 and reiterated its Buy recommendation.</p>
<p>ECL&nbsp;– CFRA downgraded the stock to Sel from Hold and lowered its PT to $169 from $196; conversely, JM Morgan upgraded the stock to Overweight from Neutral, while trimming its PT from $191 to $190; Mizuho also lowered its PT to $$198 from $210 and maintained its Neutral rating; UBS raised its PT to $186 from $182, while maintaining its Neutral rating.</p>
<p>FMC&nbsp;– Mizuho raised its PT to $155 from $136 and reiterated its Buy rating.</p>
<p>HXL&nbsp;– RBC raised its PT to $60 from $55, but maintained its Sector Perform rating; Wells Fargo also raised its PT to $60 from $53 and maintained its Equal Weight rating; UBS likewise raised its PT to $57 from $52, while maintaining its Neutral rating; Goldman Sacs raised its PT to $47 from $45 but reiterated its Sell recommendation.</p>
<p>PPG&nbsp;– Deutsche Bank lowered its PT to $155 from $180, while reiterating its Buy recommendation; CFRA upgraded the stock to Buy from Hold, keeping its PT unchanged at $165; DA Davidson lowered its PT to $166 from $191, reiterating its Buy recommendation; RBC raised its PT to $162 from $158 and reiterated its Outperform rating.</p>
<p>SHW&nbsp;– Wells Fargo raised its PT to $285 from $275 but maintained its Equal Weight rating; BofA raised its PT to $313 from $286 and reiterated its Buy rating; UBS trimmed its PT to $279 from $280 and maintained its Neutral rating; RBC raised its PT to $342 from $315, reiterating its Outperform rating; Deutsche Bank lowered its PT to $315 from $330, reiterating its Buy recommendation.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

WTR-CMI last week.&nbsp;Our WTR-CMI index of 30 chemicals and materials technology stocks continued to outperform the broader indexes in an overall down week for the market. WTR-CMI declined 1.7%, which still beat both the S&amp;P 500’s (3.3%) and Russell 2000’s (3.9%) returns for the week.
Winners and losers. Better-than-expected 1Q22 results drove SHW to the top of our list last week with a 12.3% gain, followed by SCL’s 4.4% improvement, also driven by better 1Q22 performance vs. expectations. Earnings disappointment and a CEO change were likely responsible for ECVT’s 9.1% decline in value last week, with lithium stocks LAC (down 6.6%) and PLL (down 5.6%) posting another weekly decline, despite both companies making positive announcements (see below) relative to their longer-term goals of developing a diversified lithium source portfolio.
Winning a fight for IP rights.&nbsp;FMC announced that a Chinese court ruled in its favor in a&nbsp;patent infringement suit&nbsp;against Hangzhou Udragon Chemical Co., Ltd and Zhejiang Udragon Bioscience Co., Ltd. related to FMC’s proprietary intermediate used in the manufacturing of chlorantraniliprole. IP protection has long been an issue in dealing with Chinese contract manufacturers and it is good to see a court in China siding with a Western company in these cases.
Niche market growth looks to accelerate. According to Future Market Insights, the&nbsp;market for biaxially oriented polyamide&nbsp;(polyamide is otherwise known as nylon) is expected to grow at a 5.3% CAGR through 2030, driven by existing and new applications in food and healthcare markets. While clearly a niche market (2030 market size estimated at $1.6 billion), these engineered plastics are a key contributor to growth of such companies as AVNT, which either compound these raw resins with proprietary blends of colorants and performance additives or provide masterbatch concentrates of such additives to third-party compounders.
Ag economy continues to hold.&nbsp;Creighton University’s RMI&nbsp;index indicates the rural economy continued its growth in April for the 17th&nbsp;straight month. However, the business confidence index, which reflects bank CEO expectations for the economy six months out, plummeted to 39.1 from 54 in March.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts, April 29 close
Automotive &amp; Transportation
Auto industry struggles continue. New car registrations are&nbsp;expected to decline 32% Y/Y in April in China&nbsp;and to be down as&nbsp;much as 20% Y/Y in the US, pointing to continued issues facing the industry, including COVID-related production halts, supply chain disruptions, chip shortages, and logistics bottlenecks. In Europe,&nbsp;commercial vehicle registrations&nbsp;do not paint a better picture, which are down 25% Y/Y in March and down 18% Y/Y for all of 1Q22. AutoForecast Solutions estimates&nbsp;removed another 87,500 vehicles from the global production forecast&nbsp;due to ongoing semiconductor shortages, bringing total volume loss so far this year to more than 1.5 million units. As chip production continues to trail demand from the auto industry, it appears likely that the negative trend will continue, building on the +12 million vehicles that have been lost to production due to lack of semiconductor availability since the issue surfaced in 2020. On a slightly more positive note,&nbsp;the VW plant in Shanghai&nbsp;appears to be resuming production, albeit slowly, following the COVID lockdown implemented by the Chinese government in late March.
Lithium &amp; EV Ecosystem Developments
Lithium companies continue to pursue diversification of resources. Both junior lithium names in our WTR-CMI index – PLL and LAC – were in the news last week.&nbsp;LAC announced making a $10 million equity investment&nbsp;in Green Technology Metals Ltd. (ASX: GT1), a North American-focused lithium exploration and development company with hard rock spodumene assets in northwest Ontario, Canada. Meanwhile, PLL’s partner, Sayona Mining Limited (ASX: SYA),&nbsp;announced positive initial drilling results&nbsp;from the lithium pegmatite zone at the Moblan Lithium Project in Québec. While lithium deposits are not a rarity in the Earth’s crust, economically exploitable deposits are more so, and economics of lithium mining, converting and transportation, as well as production know-how of battery grade lithium carbonate and hydroxide will eventually differentiate successful lithium exploration and development companies from the also-rans.
New technologies get their shot. A GM-backed battery startup Soelect and South Korean chemical company Lotte Chemical plan to invest more than $200 million in a joint venture to build a factory for battery materials for use in electric vehicles in the US by 2025. The joint venture will look to commercialize Soelect’s pilot plant technology for producing lithium anodes for EV batteries, which, if successful, can produce batteries that charge faster than current batteries with graphite or silicone-based anodes.
Ag-Chem and Ag-Tech
Grain prices may linger at elevated levels. While grain prices have been on an upward trend throughout 2021, the Russian invasion of Ukraine has sent them to new levels. On a positive note, higher grain prices help farmers absorb higher input costs, such as fertilizers, crop chemicals, and seeds themselves, which have all inflated in recent months. The RMI Index’s still positive reading despite the inflation in the price of inputs has much to do with that fact. Growing demand, driven by a growing middle class and resulting protein consumption in emerging economies, as well as disruptions likely to be caused by reshuffling of export flows due to anti-Russian sanctions, combined with a limited ability to rapidly expand supply, are therefore&nbsp;likely to keep prices at near current levels&nbsp;(if not send them higher) for several years to come. In the near term, concerns over&nbsp;drought conditions in Brazil, which may affect both corn and soybean production, may be underappreciated, as the industry focuses on North American planting season. However, a reduction in production expectations from Brazil can have a profound impact on global gain prices this year and perhaps into next. Given this dynamic and the 8.8% inflation in Y/Y food prices seen in March 2022, we would not be surprised to see&nbsp;the USDA revise upward its food inflation outlook, which was already increased by 1% in April from earlier projections to 5-6%, as drivers of higher food prices remain in place and do not look to subside this year.
Rating and Price Target Changes
ASH&nbsp;– UBS raised its price target (PT) to $127 from $125 and reiterated its Buy rating; Deutsche Bank raised its PT to $122 from $120 and reiterated its Buy rating.
AXTA&nbsp;– Deutsche Bank raised its PT to $28 from $27 and maintained its Hold rating; BofA raised its PT to $37 from $36 and reiterated its Buy rating; BMO raised its PT to $34 from $33 and reiterated its Outperform rating.
CTVA&nbsp;– Mizuho raised its PT to $67 from $60 and reiterated its Buy recommendation.
ECL&nbsp;– CFRA downgraded the stock to Sel from Hold and lowered its PT to $169 from $196; conversely, JM Morgan upgraded the stock to Overweight from Neutral, while trimming its PT from $191 to $190; Mizuho also lowered its PT to $$198 from $210 and maintained its Neutral rating; UBS raised its PT to $186 from $182, while maintaining its Neutral rating.
FMC&nbsp;– Mizuho raised its PT to $155 from $136 and reiterated its Buy rating.
HXL&nbsp;– RBC raised its PT to $60 from $55, but maintained its Sector Perform rating; Wells Fargo also raised its PT to $60 from $53 and maintained its Equal Weight rating; UBS likewise raised its PT to $57 from $52, while maintaining its Neutral rating; Goldman Sacs raised its PT to $47 from $45 but reiterated its Sell recommendation.
PPG&nbsp;– Deutsche Bank lowered its PT to $155 from $180, while reiterating its Buy recommendation; CFRA upgraded the stock to Buy from Hold, keeping its PT unchanged at $165; DA Davidson lowered its PT to $166 from $191, reiterating its Buy recommendation; RBC raised its PT to $162 from $158 and reiterated its Outperform rating.
SHW&nbsp;– Wells Fargo raised its PT to $285 from $275 but maintained its Equal Weight rating; BofA raised its PT to $313 from $286 and reiterated its Buy rating; UBS trimmed its PT to $279 from $280 and maintained its Neutral rating; RBC raised its PT to $342 from $315, reiterating its Outperform rating; Deutsche Bank lowered its PT to $315 from $330, reiterating its Buy recommendation.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended May 1, 2022

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;In a down week for the market, the Russell 2000 posted a (4.6%) return and our WTR-CMI index of 30 chemical and material technology stocks didn’t do much better at (4.0%). Both underperformed the large cap S&amp;P 500, which delivered a 1.3% drop for the week.</li>
<li>Winners and losers. Only eight of the 30 stocks in our index posted a positive return last week, led by FMC’s 5.5% appreciation, driven by high expectations for the ag-chem market, which was also a factor in CTVA’s 2.3% improvement. RPM’s stronger than expected F3Q22 drove the stock up 3.5%, with read-across possibly likely contributing to SHW’s 3.4% performance and also benefiting AXTA and PPG. On the other hand, after a previous pop on expectations of greater financial support from the federal government, lithium names corrected last week, with LAC down 20.2%, PLL giving up 9.5%, and ALB and LTHM seeing their prices correct (6.2%) and (8.8%) respectively. KOP’s dropped 10.4% for the week, continuing the correction begun mid-March.</li>
<li>EV growth drives lithium demand. Although lithium stocks lost ground last week as the euphoria over the federal government’s stated intentions dissipated, the industry’s prospects remain bright. As EV volumes continue to soar availability of key battery materials remains a concern, prompting ALB’s joint venture to&nbsp;accelerate the timetable for the restart&nbsp;of the Wodgina spodumene mine in Australia.</li>
<li>Farmer sentiment sours on war in Ukraine. CME/Perdue’s&nbsp;Ag Economy Barometer&nbsp;reported a sharp drop in March in American farmers’ expectations to levels not seen since 2016. Growing concerns about the war in Ukraine and its potential impact on the flow of agricultural inputs, and therefore their prices, were top of farmers’ minds when the survey was taken. And for good reason, as we examine below.</li>
<li>Packaging adhesives growth outlook. A typically GDP-minus growth market, packaging adhesives are expected to see a stronger 3.4% CAGR through 2027, driven by post-Covid changes in consumer preferences and innovation, particularly around sustainability. This is good news for FUL, a pure-play adhesives company, as well as companies like AVNT, which supply specialty plastics to the packaging industry.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/268/644/original/image_328564352131649900560762.png?1649900562" class="editor-image img-responsive" data-smartkarma-image-id="268644"></figure>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>EV growth puts pressure on the supply chain to catch up. While overall 1Q22 performance of the automotive industry continued to suffer from supply disruptions and, as the quarter ended, the impact of the war in Ukraine, EVs remain a bright spot. As battery-based power-train adoption gains momentum in Europe and North America,&nbsp;BMW reported&nbsp;more than a doubling of its EV sales in 1Q22, while&nbsp;Mercedes posted&nbsp;even better 210% Y/Y growth in EVs in its 1Q22. We are sure these strong results are not an exception, but rather an indication of the overall expansion of EVs’ role in the transportation of the future, as evidenced by the continuing growth of Tesla volumes, which saw another doubling in Germany in 1Q22. Meanwhile, companies up and down the supply chain are gearing up to keep up with the expected ramp-up in demand. To that end, CATL, China’s largest battery supplier for electric vehicles,&nbsp;received permission last week&nbsp;from the German state of Thuringia to produce eight gigawatt-hours of battery cells a year at a new plant the company has been building since 2019. It will allow CATL to begin commercial production of battery cells at this plant by the end of this year. However, this and other battery plants ramping up production across the world in the next 2-3 years will need critical materials, mainly metals, such as lithium, cobalt, and nickel, but also other materials, such as graphite, in order to produce. With metal resources, particularly cobalt and nickel, being in limited supply, and with deposits occurring in geographies that are not always easy to operate in, automotive and battery companies are seeking to ensure their share of the (so far) limited supply. China, the leader in EV adoption and therefore production,&nbsp;is moving rapidly&nbsp;to do just that.</p>
<h2>Automotive &amp; Transportation</h2>
<p>Another tough month for the industry. As we expected, March 2022 results being reported by automotive companies, besides comping against post-pandemic recovery in pent-up demand, continue to be impacted by supply chain disruptions, logistics, and lack of availability of semiconductors. Putin’s war in Ukraine has only clouded and complicated the picture further.&nbsp;German sales declined 18%&nbsp;in March, resulting in a 4.6% decline for 1Q22.&nbsp;UK saw new car sales decline 14%&nbsp;Y/Y in March, with 1Q22 being down 1.9%. March sales were the lowest for the month since 1998.&nbsp;Canadian market fared even worse, with March sales down 20% and 1Q22 down 12% Y/Y. Impacted directly by frequent and extended Covid-related lockdowns,&nbsp;China auto sales slumped 11%&nbsp;in March, although 1Q22 eked out a 0.5% Y/Y growth. The latest lockdowns in Shanghai are having a predictably adverse impact on auto production in the region, with&nbsp;Tesla and BMW feeling the pinch. Supply disruptions, unfortunately, are not limited to China, or companies operating there. Citing supply chain issues,&nbsp;Toyota recently lowered&nbsp;its production outlook for North America by 6%. We are concerned that this may indicate the hope for a 2H22 recovery (and we previously mentioned that April and May 2022 comps will be almost as difficult as March’s) could be optimistic. We therefore remain cautious on stocks in our index with significant exposure to the automotive industry, including PPG AXTA, FUL, AVNT, and HXL, among others.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Biologics gaining market acceptance. While representing only a mid-teens share of the broader crop protection market, bio-based products are continuing to make inroads into the market. Recently, Argentina—the second largest producer and exporter of ag products in LATAM— played host to the&nbsp;first event on bio-based inputs, where the industry’s players were able to gather and exchange ideas and strategies. The event was timely as Argentinian bio-based companies are expanding their operations globally. As we mentioned in our previous Mat-Chem Notes, Marrone Bio Solutions (NASDAQ: MBII) is currently working on a merger with Argentinian Bioceres Crop Solutions (NASDAQ: BIOX).</p>
<p>Cost and availability of inputs top of mind this season. US farmers are planning to plant 4% fewer acres of major crops (soybean, corn, wheat and cotton) compared to last year, largely due to fertilizer prices. But while price is the main concern when it comes to fertilizer,&nbsp;availability tops the list of worries&nbsp;when it comes to herbicides. And the situation isn’t expected to get much better in 2023, with the&nbsp;war in Ukraine and inflationary pressures&nbsp;on input costs, farmland prices, and equipment and labor costs expected to continue to impact the market.</p>
<p>No poop for you. Speaking of fertilizer prices, the last time the industry saw prices at this level, it created significant demand destruction among US farmers, as they either lowered their application rates per acre, or substituted an old standby—manure—in order to meet their needs. However, in this cycle we’re seeing prices go up both because of increases in energy and other input costs, and also because of availability concerns. Consequently, the once reliable&nbsp;supply of manure is being stressed as well, with prices doubling in some cases and availability becoming an issue too. Given the precarious outlook for supply availability of inputs, and consequently the quantity and quality of crops to be harvested this year and next, is it any surprise that&nbsp;China is back in the US&nbsp;market buying up grain?</p>
<p>Whether one believes we’ve entered an uncharted territory of a super cycle in the ag market, or not, it is becoming increasingly clear that the war between two of the largest ag producer and exporter nations, not to mention major suppliers of fertilizers, will have a profound and protracted impact on commodity grain and ag-input markets. Consequently, it appears likely that performance of FMC, CTVA, AVD, CF and others will continue to surprise to the upside.</p>
<h2>In Other Chemicals and Materials News</h2>
<p>Commodity prices continue to soar. Commodity plastic resins, such as high density polyethylene (HDPE) and polypropylene (PP) are&nbsp;continuing to see higher prices in April. And despite the cost advantage of domestic producers vs. Asian counterparts, American manufacturers are unable to take full advantage of the fact, as export logistics remain convoluted, keeping export volumes below the levels needed to alleviate warehouse crowding. If shipping issues remain unresolved, curtailing domestic production at some point this year may become necessary, regardless of global demand. Higher oil and gas prices and lower volumes do not make for good margins for commodity chemical companies, such as DOW, LYB, CE, among others. Tread with caution. Another area of inflating raw materials is the TiO2&nbsp;market. Since China entered the industry in a big way over a decade ago, TiO2 price cycles have largely followed Chinese capacity expansion announcements and realizations. And while there has been a slew of announcements over the past several months, capacity additions in the country are uncertain and the&nbsp;producers’ ability to profitably manufacture and export&nbsp;the pigment is even more so. It therefore appears likely that high pigment prices will remain a feature of the market for months, if not a year or more, to come. As a major input cost for paint manufacturers, ongoing elevated TiO2&nbsp;prices do not bode well for paint companies’ margins. And while the inflation cycle we’re experiencing may be unprecedented in recent decades, historically margin pressures driven by raw material costs have not been positive for coating companies’ stock prices. We therefore remain cautious on SHW, PPG, RPM, and AXTA, among others.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB&nbsp;– KeyBank raised its price target (PT) to $198 from $163 but reiterated its Underweight recommendation; UBS lowered its PT to $288 from $320 but reiterated its Buy rating.</p>
<p>ASH&nbsp;– UBS lowered its PT to $125 from $136 and reiterated its Buy rating.</p>
<p>AXTA&nbsp;– UBS lowered its PT to $33 from $39 and reiterated its Buy rating.</p>
<p>CTVA&nbsp;– KeyBank raised its PT to $63 from $58 and reiterated its Overweight recommendation; UBS raised its PT to $67 from $58 and reiterated its Buy rating.</p>
<p>ECL&nbsp;– Atlantic Securities initiated coverage with an Outperform rating and $2,210 PT; UBS lowered its PT to $177 from $196 and reiterated its Buy rating.</p>
<p>EMN&nbsp;– KeyBank lowered its PT to $142 from $150 and reiterated its Overweight rating; Wells Fargo also lowered its PT to $128 from $138, while reiterating its Overweight rating.</p>
<p>FMC&nbsp;– Wells Fargo raised its PT to $150 from $130 and reiterated its Overweight recommendation; UBS also raised its PT to $149 from $136 and reiterated its Buy.</p>
<p>LAC&nbsp;– Deutsche Bank raised its PT to $40 from $34 and reiterated its Buy rating.</p>
<p>RPM&nbsp;– CFRA upgraded the stock to Neutral from Sell; Wells Fargo lowered its PT to $95 from $100 and maintained its Equal Weight recommendation; UBS lowered its PT to $106 from $115, but reiterated its Buy rating.</p>
<p>SHW&nbsp;– Evercore ISI raised its PT to $325 from $320 and reiterated its Outperform rating; Loop Capital lowered its PT to $300 from $345, but reiterated its Buy recommendation; UBS also lowered its PT to $280 from $325, maintaining its Neutral rating.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;In a down week for the market, the Russell 2000 posted a (4.6%) return and our WTR-CMI index of 30 chemical and material technology stocks didn’t do much better at (4.0%). Both underperformed the large cap S&amp;P 500, which delivered a 1.3% drop for the week.
Winners and losers. Only eight of the 30 stocks in our index posted a positive return last week, led by FMC’s 5.5% appreciation, driven by high expectations for the ag-chem market, which was also a factor in CTVA’s 2.3% improvement. RPM’s stronger than expected F3Q22 drove the stock up 3.5%, with read-across possibly likely contributing to SHW’s 3.4% performance and also benefiting AXTA and PPG. On the other hand, after a previous pop on expectations of greater financial support from the federal government, lithium names corrected last week, with LAC down 20.2%, PLL giving up 9.5%, and ALB and LTHM seeing their prices correct (6.2%) and (8.8%) respectively. KOP’s dropped 10.4% for the week, continuing the correction begun mid-March.
EV growth drives lithium demand. Although lithium stocks lost ground last week as the euphoria over the federal government’s stated intentions dissipated, the industry’s prospects remain bright. As EV volumes continue to soar availability of key battery materials remains a concern, prompting ALB’s joint venture to&nbsp;accelerate the timetable for the restart&nbsp;of the Wodgina spodumene mine in Australia.
Farmer sentiment sours on war in Ukraine. CME/Perdue’s&nbsp;Ag Economy Barometer&nbsp;reported a sharp drop in March in American farmers’ expectations to levels not seen since 2016. Growing concerns about the war in Ukraine and its potential impact on the flow of agricultural inputs, and therefore their prices, were top of farmers’ minds when the survey was taken. And for good reason, as we examine below.
Packaging adhesives growth outlook. A typically GDP-minus growth market, packaging adhesives are expected to see a stronger 3.4% CAGR through 2027, driven by post-Covid changes in consumer preferences and innovation, particularly around sustainability. This is good news for FUL, a pure-play adhesives company, as well as companies like AVNT, which supply specialty plastics to the packaging industry.

WTR-CMI WEEKLY PERFORMANCE

Lithium &amp; EV Ecosystem Developments
EV growth puts pressure on the supply chain to catch up. While overall 1Q22 performance of the automotive industry continued to suffer from supply disruptions and, as the quarter ended, the impact of the war in Ukraine, EVs remain a bright spot. As battery-based power-train adoption gains momentum in Europe and North America,&nbsp;BMW reported&nbsp;more than a doubling of its EV sales in 1Q22, while&nbsp;Mercedes posted&nbsp;even better 210% Y/Y growth in EVs in its 1Q22. We are sure these strong results are not an exception, but rather an indication of the overall expansion of EVs’ role in the transportation of the future, as evidenced by the continuing growth of Tesla volumes, which saw another doubling in Germany in 1Q22. Meanwhile, companies up and down the supply chain are gearing up to keep up with the expected ramp-up in demand. To that end, CATL, China’s largest battery supplier for electric vehicles,&nbsp;received permission last week&nbsp;from the German state of Thuringia to produce eight gigawatt-hours of battery cells a year at a new plant the company has been building since 2019. It will allow CATL to begin commercial production of battery cells at this plant by the end of this year. However, this and other battery plants ramping up production across the world in the next 2-3 years will need critical materials, mainly metals, such as lithium, cobalt, and nickel, but also other materials, such as graphite, in order to produce. With metal resources, particularly cobalt and nickel, being in limited supply, and with deposits occurring in geographies that are not always easy to operate in, automotive and battery companies are seeking to ensure their share of the (so far) limited supply. China, the leader in EV adoption and therefore production,&nbsp;is moving rapidly&nbsp;to do just that.
Automotive &amp; Transportation
Another tough month for the industry. As we expected, March 2022 results being reported by automotive companies, besides comping against post-pandemic recovery in pent-up demand, continue to be impacted by supply chain disruptions, logistics, and lack of availability of semiconductors. Putin’s war in Ukraine has only clouded and complicated the picture further.&nbsp;German sales declined 18%&nbsp;in March, resulting in a 4.6% decline for 1Q22.&nbsp;UK saw new car sales decline 14%&nbsp;Y/Y in March, with 1Q22 being down 1.9%. March sales were the lowest for the month since 1998.&nbsp;Canadian market fared even worse, with March sales down 20% and 1Q22 down 12% Y/Y. Impacted directly by frequent and extended Covid-related lockdowns,&nbsp;China auto sales slumped 11%&nbsp;in March, although 1Q22 eked out a 0.5% Y/Y growth. The latest lockdowns in Shanghai are having a predictably adverse impact on auto production in the region, with&nbsp;Tesla and BMW feeling the pinch. Supply disruptions, unfortunately, are not limited to China, or companies operating there. Citing supply chain issues,&nbsp;Toyota recently lowered&nbsp;its production outlook for North America by 6%. We are concerned that this may indicate the hope for a 2H22 recovery (and we previously mentioned that April and May 2022 comps will be almost as difficult as March’s) could be optimistic. We therefore remain cautious on stocks in our index with significant exposure to the automotive industry, including PPG AXTA, FUL, AVNT, and HXL, among others.
Ag-Chem and Ag-Tech
Biologics gaining market acceptance. While representing only a mid-teens share of the broader crop protection market, bio-based products are continuing to make inroads into the market. Recently, Argentina—the second largest producer and exporter of ag products in LATAM— played host to the&nbsp;first event on bio-based inputs, where the industry’s players were able to gather and exchange ideas and strategies. The event was timely as Argentinian bio-based companies are expanding their operations globally. As we mentioned in our previous Mat-Chem Notes, Marrone Bio Solutions (NASDAQ: MBII) is currently working on a merger with Argentinian Bioceres Crop Solutions (NASDAQ: BIOX).
Cost and availability of inputs top of mind this season. US farmers are planning to plant 4% fewer acres of major crops (soybean, corn, wheat and cotton) compared to last year, largely due to fertilizer prices. But while price is the main concern when it comes to fertilizer,&nbsp;availability tops the list of worries&nbsp;when it comes to herbicides. And the situation isn’t expected to get much better in 2023, with the&nbsp;war in Ukraine and inflationary pressures&nbsp;on input costs, farmland prices, and equipment and labor costs expected to continue to impact the market.
No poop for you. Speaking of fertilizer prices, the last time the industry saw prices at this level, it created significant demand destruction among US farmers, as they either lowered their application rates per acre, or substituted an old standby—manure—in order to meet their needs. However, in this cycle we’re seeing prices go up both because of increases in energy and other input costs, and also because of availability concerns. Consequently, the once reliable&nbsp;supply of manure is being stressed as well, with prices doubling in some cases and availability becoming an issue too. Given the precarious outlook for supply availability of inputs, and consequently the quantity and quality of crops to be harvested this year and next, is it any surprise that&nbsp;China is back in the US&nbsp;market buying up grain?
Whether one believes we’ve entered an uncharted territory of a super cycle in the ag market, or not, it is becoming increasingly clear that the war between two of the largest ag producer and exporter nations, not to mention major suppliers of fertilizers, will have a profound and protracted impact on commodity grain and ag-input markets. Consequently, it appears likely that performance of FMC, CTVA, AVD, CF and others will continue to surprise to the upside.
In Other Chemicals and Materials News
Commodity prices continue to soar. Commodity plastic resins, such as high density polyethylene (HDPE) and polypropylene (PP) are&nbsp;continuing to see higher prices in April. And despite the cost advantage of domestic producers vs. Asian counterparts, American manufacturers are unable to take full advantage of the fact, as export logistics remain convoluted, keeping export volumes below the levels needed to alleviate warehouse crowding. If shipping issues remain unresolved, curtailing domestic production at some point this year may become necessary, regardless of global demand. Higher oil and gas prices and lower volumes do not make for good margins for commodity chemical companies, such as DOW, LYB, CE, among others. Tread with caution. Another area of inflating raw materials is the TiO2&nbsp;market. Since China entered the industry in a big way over a decade ago, TiO2 price cycles have largely followed Chinese capacity expansion announcements and realizations. And while there has been a slew of announcements over the past several months, capacity additions in the country are uncertain and the&nbsp;producers’ ability to profitably manufacture and export&nbsp;the pigment is even more so. It therefore appears likely that high pigment prices will remain a feature of the market for months, if not a year or more, to come. As a major input cost for paint manufacturers, ongoing elevated TiO2&nbsp;prices do not bode well for paint companies’ margins. And while the inflation cycle we’re experiencing may be unprecedented in recent decades, historically margin pressures driven by raw material costs have not been positive for coating companies’ stock prices. We therefore remain cautious on SHW, PPG, RPM, and AXTA, among others.
Rating and Price Target Changes
ALB&nbsp;– KeyBank raised its price target (PT) to $198 from $163 but reiterated its Underweight recommendation; UBS lowered its PT to $288 from $320 but reiterated its Buy rating.
ASH&nbsp;– UBS lowered its PT to $125 from $136 and reiterated its Buy rating.
AXTA&nbsp;– UBS lowered its PT to $33 from $39 and reiterated its Buy rating.
CTVA&nbsp;– KeyBank raised its PT to $63 from $58 and reiterated its Overweight recommendation; UBS raised its PT to $67 from $58 and reiterated its Buy rating.
ECL&nbsp;– Atlantic Securities initiated coverage with an Outperform rating and $2,210 PT; UBS lowered its PT to $177 from $196 and reiterated its Buy rating.
EMN&nbsp;– KeyBank lowered its PT to $142 from $150 and reiterated its Overweight rating; Wells Fargo also lowered its PT to $128 from $138, while reiterating its Overweight rating.
FMC&nbsp;– Wells Fargo raised its PT to $150 from $130 and reiterated its Overweight recommendation; UBS also raised its PT to $149 from $136 and reiterated its Buy.
LAC&nbsp;– Deutsche Bank raised its PT to $40 from $34 and reiterated its Buy rating.
RPM&nbsp;– CFRA upgraded the stock to Neutral from Sell; Wells Fargo lowered its PT to $95 from $100 and maintained its Equal Weight recommendation; UBS lowered its PT to $106 from $115, but reiterated its Buy rating.
SHW&nbsp;– Evercore ISI raised its PT to $325 from $320 and reiterated its Outperform rating; Loop Capital lowered its PT to $300 from $345, but reiterated its Buy recommendation; UBS also lowered its PT to $280 from $325, maintaining its Neutral rating.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended April 10, 2022

United States

Ecolab Inc. is a global provider of water, hygiene, and energy technologies and services for customers in foodservice, food processing, hospitality, healthcare, industrial, and oil and gas markets. The Company's services include water treatments, cleaning and sanitizing solutions, pest elimination, and kitchen repair and maintenance services.

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Ecolab Inc (ECL US)

Mat-Chem Notes for the Week Ended June 19, 2022

KEY HIGHLIGHTS WTR-CMI last week. The sell-off continued last week, with the S&P 500 losing 5.8% and the broader Russell 2000 Index giving up...

Water Tower Research

Mat-Chem Notes for the Week Ended June 12, 2022

KEY HIGHLIGHTS WTR-CMI last week. Last week saw the stock market lose most of the gains of the previous two weeks, with the Russell 2000 dropping...

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Mat-Chem Notes for the Week Ended June 5, 2022

KEY HIGHLIGHTS WTR-CMI last week. For the second week in a row, the market posted positive gains for the week, with the Russell 2000 leading with...

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Mat-Chem Notes for the Week Ended May 1, 2022

KEY HIGHLIGHTS WTR-CMI last week. Our WTR-CMI index of 30 chemicals and materials technology stocks continued to outperform the broader indexes in...

Water Tower Research

Mat-Chem Notes for the Week Ended April 10, 2022

KEY HIGHLIGHTS WTR-CMI last week. In a down week for the market, the Russell 2000 posted a (4.6%) return and our WTR-CMI index of 30 chemical and...

Water Tower Research

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