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;Reversing the prior week’s trend, the stock market pulled back last week following the release of disappointing inflation data, with the Russell 2000 and the S&amp;P 500 losing 4.5% and 4.8% of their value, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks underperformed the broader market by declining 7.2% for the week.&nbsp;EMN’s preannouncement&nbsp;of lower 3Q22 and 2022 expectations drove the stock down nearly 15% and eight of the 30 stocks in our index posted double-digit declines. With all stocks in our WTR-CMI index losing value last week, PKE, AVD, and CTVA delivered relative outperformance by declining less than 2%.</li>
<li>Even ag-chem majors are retrenching.&nbsp;While the overall tone of&nbsp;CTVA’s Investor Day&nbsp;held last week was positive, highlighted by the rollout of a robust R&amp;D pipeline and an announcement of additional $2 billion in share repurchases (on top of existing $1.5 billion authorization), management also laid out plans for&nbsp;coping with slowing economic growth and high inflation expectations&nbsp;by exiting 35 countries and trimming its workforce by 5%.</li>
<li>Tale of two regions.&nbsp;While US passenger vehicle sales in August edged up Y/Y and new&nbsp;car registrations in the EU&nbsp;grew by 4.4% last month,&nbsp;Y/Y growth of passenger vehicles in China was 36% in August&nbsp;following the end of a two-month lockdown of Shanghai and a reduction in the gasoline tax at the end of June. Although the remaining four months of 2022 will feature easy Y/Y comps, given the depressed state of the global auto industry at the end of 2021, slowing economic growth and high energy prices may keep the recovery muted, with questions remaining with respect to 2023. PPG and AXTA may therefore continue to underperform, given their large exposure to the automotive and transportation markets.</li>
<li>CMP stepping up its lithium game.&nbsp;Having previously previewed its ambitions of becoming a lithium supplier to the EV battery industry using its existing Salt Lake resources,&nbsp;CMP picked EnergySource Minerals&nbsp;as its direct lithium extraction (DLE) technology provider and announced a $252 million&nbsp;strategic investment&nbsp;by Koch Minerals &amp; Trading, LLC (KM&amp;T) to help finance Phase 1 of its lithium project.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/299/221/original/image_26154726621663790447378.png?1663790451" class="editor-image img-responsive" data-smartkarma-image-id="299221"></figure>
<h2>Ag-Tech and Bio-Ag</h2>
<p>September USDA report acknowledges reality.&nbsp;We recently highlighted the disconnect between the August USDA Crop Production Report and the boots-on-the-ground crop tour that implied much lower commodity grain expectations. Last week, the USDA released its&nbsp;September report, which reflected the crop tour’s findings and lowered its outlook for soybean and corn production by lowering the three main components:&nbsp;planted acre, harvested acres, and yield per acre. Weather pressures and challenges securing sufficient and timely quantities of fertilizers and pesticides may have been behind the reduction in productivity expectations for US farmers reflected in the report. Lower expected Brazilian crop and what appears to be lower-than-anticipated US production are likely to result in stable, if not higher, commodity crop prices, which would go a long way in helping US farmers deal with still-elevated input costs in the 2022-23 season. Also mitigating lower production is&nbsp;lower demand from industrial end markets, such as ethanol and biofuels, which are slowing due to the overall slowdown in the US economy and miles driven.</p>
<p>Farmers remain cautious.&nbsp;Creighton University’s Rural Mainstreet Index&nbsp;(RMI) reading for September improved somewhat from August’s reading of 44 to 46.3, marking the fifth straight month of readings under 50, with 50 being a growth-neutral outlook, signaling that US farmers are bracing for another difficult year and a downturn in economic activity. Supply chain disruptions and inflationary pressures for everything from inputs to fuel to equipment to land values continue to weigh on farmers’ minds. Farmers and bankers are now also bracing for escalating interest rates, even higher farm input costs, and drought. Higher expected crop values as mentioned above may help mitigate some of the cost pressures farmers will be facing, but high energy and natural gas costs constraining fertilizer and pesticide production and leading to their higher costs and still-snarled logistics may result in even greater scarcity of needed inputs, suggesting ag-chem companies such as CTVA, FMC, and AVD, as well as CF and MOS may continue to enjoy strong demand. It may also provide opportunities for companies offering different technologies, such as bio-based pesticides, seed treatment, and soil conditioning to expand their geographic and crop reach, as farmers look for every advantage and avenue to facilitate their production. This would be a positive for emerging bio-ag companies such as BIX and BHIL.</p>
<h2>Battery and Energy Technology</h2>
<p>EV growth spurs demand and drives higher metal prices.&nbsp;As EV growth continues to accelerate, supply of metals required to build EV batteries is barely keeping pace, driving metal prices higher as a result,&nbsp;with lithium carbonate prices in China&nbsp;setting a new record at just over $71/kg. Nor is lithium an exception. Brazilian mining company&nbsp;Vale expects nickel demand&nbsp;to surge 44% by 2030 from current levels, with most new supply coming from Indonesia, Canada, and Australia. The company also expects there to be a structural deficit of the metal even when factoring in current announced production and mining expansions. An emerging player with the potential to become the second-largest nickel supplier in the world in the mid-term and the largest in the longer term is a Canadian late-stage development company&nbsp;The Metals Company&nbsp;(NASDAQ: TMC), which is getting ready to commercialize undersea collection and processing of polymetallic nodules found in ocean depths between Mexico and Hawaii.</p>
<p>Working at cross purposes.&nbsp;We recently wrote about the disconnect between national governments’ efforts to expand and domesticate the sourcing and production of materials critical in enabling the EV and energy storage transformation on the one hand and local government agencies and NGOs doing their best to push “not in my back yard” agenda when it comes to mines, processing plants, and other facilities needed to support green energy goals. We previously highlighted the issues PLL is having in securing the permits needed to begin mining and processing lithium in North Carolina. Another development-stage lithium player running into similar NGO obstacles is LAC, which is facing strong opposition to its&nbsp;Nevada mine development from environmental groups and other NGOs. While Tesla CEO thinks mining is “relatively easy” compared with lithium refining competencies and is exploring&nbsp;Tesla getting into the lithium processing business, the fact remains that additional sources of lithium, whether by direct lithium extraction from brine à la CMP and LAC, spodumene mines, or expansion of brine extraction in the Andes, are sorely needed to decouple our dependence on China and other geopolitically sensitive neighborhoods. That means governments will need to rethink their approach to incentivizing domestic development of mine and processing plant resources.</p>
<h2>Chemicals and Materials News</h2>
<p>N.I.M.B.Y.&nbsp;Everyone wants a more sustainable world. Everyone wants less plastic and other pollution. But it seems nobody wants plants and facilities that can deliver on those wants in their neighborhood—Not in My Back Yard syndrome—at least not in developed countries with a strong NGO ecosystem. The problem goes beyond permitting new mineral and metal mines, processing plants, or refineries. Even scrap plastic sorting facilities are frowned upon. Just ask PureCycle Technologies’ (NASDAQ: PCT) CEO Dustin Olson, who has received a&nbsp;letter signed by 50 different NGOs&nbsp;requesting the company abandon its plans for a new plastic sorting facility in Florida.</p>
<h2>Rating and Price Target Changes</h2>
<p>ASH –&nbsp;Credit Suisse initiated coverage of the stock with an Outperform rating and $210 price target (PT).</p>
<p>CTVA –&nbsp;KeyBanc raised its PT to $72 from $64 and reiterated its Overweight rating; BMO raised its PT to $72 from $66 and reiterated its Outperform rating; JP Morgan raised its PT to $65 from $63 and reiterated its Outperform rating; Jefferies raised its PT to $77 from $70 and reiterated its Buy recommendation; Deutsche Bank raised its PT to $75 from $68 and reiterated its Buy recommendation.</p>
<p>EMN –&nbsp;Jefferies lowered its PT to $94 from $97 and maintained its Hold rating; Tudor Pickering lowered its PT to $98 from $105 and maintained its Hold rating; Stifel Nicolaus lowered its PT to $112 from $134 and reiterated its Buy recommendation; CFRA lowered its PT to $110 rom $115 and reiterated its Buy rating; Wells Fargo downgraded the stock to Equal Weight from Overweight and lowered its PT to $95 from $110; KeyBanc lowered its PT to $111 from $125 and reiterated its Overweight rating; Citigroup lowered its PT to $93 from $102 and maintained its Neutral rating; RBC lowered its PT to $82 from $97 and maintained its Sector Perform rating; Deutsche Bank lowered its PT to $95 from $115 and reiterated its Buy recommendation.</p>
<p>LTHM –&nbsp;Vertical Research downgraded the stock to Hold from Buy, despite raising its PT to $35 from $33.</p>
<p>PPG –&nbsp;Wells Fargo lowered its PT to $130 from $135 and maintained its Equal Weight rating.</p>
<p>SHW –&nbsp;Evercore ISI lowered its PT to $260 from $285 and reiterated its Outperform rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)</p>
<p>Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)</p>
<p>Initiation of Coverage – Westwater Resources (NYSE: WWR)</p>
<h3>DISCLOSURES</h3>
<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 BioEconomy and Chemicals &amp; Materials Technology 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;Reversing the prior week’s trend, the stock market pulled back last week following the release of disappointing inflation data, with the Russell 2000 and the S&amp;P 500 losing 4.5% and 4.8% of their value, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks underperformed the broader market by declining 7.2% for the week.&nbsp;EMN’s preannouncement&nbsp;of lower 3Q22 and 2022 expectations drove the stock down nearly 15% and eight of the 30 stocks in our index posted double-digit declines. With all stocks in our WTR-CMI index losing value last week, PKE, AVD, and CTVA delivered relative outperformance by declining less than 2%.
Even ag-chem majors are retrenching.&nbsp;While the overall tone of&nbsp;CTVA’s Investor Day&nbsp;held last week was positive, highlighted by the rollout of a robust R&amp;D pipeline and an announcement of additional $2 billion in share repurchases (on top of existing $1.5 billion authorization), management also laid out plans for&nbsp;coping with slowing economic growth and high inflation expectations&nbsp;by exiting 35 countries and trimming its workforce by 5%.
Tale of two regions.&nbsp;While US passenger vehicle sales in August edged up Y/Y and new&nbsp;car registrations in the EU&nbsp;grew by 4.4% last month,&nbsp;Y/Y growth of passenger vehicles in China was 36% in August&nbsp;following the end of a two-month lockdown of Shanghai and a reduction in the gasoline tax at the end of June. Although the remaining four months of 2022 will feature easy Y/Y comps, given the depressed state of the global auto industry at the end of 2021, slowing economic growth and high energy prices may keep the recovery muted, with questions remaining with respect to 2023. PPG and AXTA may therefore continue to underperform, given their large exposure to the automotive and transportation markets.
CMP stepping up its lithium game.&nbsp;Having previously previewed its ambitions of becoming a lithium supplier to the EV battery industry using its existing Salt Lake resources,&nbsp;CMP picked EnergySource Minerals&nbsp;as its direct lithium extraction (DLE) technology provider and announced a $252 million&nbsp;strategic investment&nbsp;by Koch Minerals &amp; Trading, LLC (KM&amp;T) to help finance Phase 1 of its lithium project.

WTR-CMI WEEKLY PERFORMANCE

Ag-Tech and Bio-Ag
September USDA report acknowledges reality.&nbsp;We recently highlighted the disconnect between the August USDA Crop Production Report and the boots-on-the-ground crop tour that implied much lower commodity grain expectations. Last week, the USDA released its&nbsp;September report, which reflected the crop tour’s findings and lowered its outlook for soybean and corn production by lowering the three main components:&nbsp;planted acre, harvested acres, and yield per acre. Weather pressures and challenges securing sufficient and timely quantities of fertilizers and pesticides may have been behind the reduction in productivity expectations for US farmers reflected in the report. Lower expected Brazilian crop and what appears to be lower-than-anticipated US production are likely to result in stable, if not higher, commodity crop prices, which would go a long way in helping US farmers deal with still-elevated input costs in the 2022-23 season. Also mitigating lower production is&nbsp;lower demand from industrial end markets, such as ethanol and biofuels, which are slowing due to the overall slowdown in the US economy and miles driven.
Farmers remain cautious.&nbsp;Creighton University’s Rural Mainstreet Index&nbsp;(RMI) reading for September improved somewhat from August’s reading of 44 to 46.3, marking the fifth straight month of readings under 50, with 50 being a growth-neutral outlook, signaling that US farmers are bracing for another difficult year and a downturn in economic activity. Supply chain disruptions and inflationary pressures for everything from inputs to fuel to equipment to land values continue to weigh on farmers’ minds. Farmers and bankers are now also bracing for escalating interest rates, even higher farm input costs, and drought. Higher expected crop values as mentioned above may help mitigate some of the cost pressures farmers will be facing, but high energy and natural gas costs constraining fertilizer and pesticide production and leading to their higher costs and still-snarled logistics may result in even greater scarcity of needed inputs, suggesting ag-chem companies such as CTVA, FMC, and AVD, as well as CF and MOS may continue to enjoy strong demand. It may also provide opportunities for companies offering different technologies, such as bio-based pesticides, seed treatment, and soil conditioning to expand their geographic and crop reach, as farmers look for every advantage and avenue to facilitate their production. This would be a positive for emerging bio-ag companies such as BIX and BHIL.
Battery and Energy Technology
EV growth spurs demand and drives higher metal prices.&nbsp;As EV growth continues to accelerate, supply of metals required to build EV batteries is barely keeping pace, driving metal prices higher as a result,&nbsp;with lithium carbonate prices in China&nbsp;setting a new record at just over $71/kg. Nor is lithium an exception. Brazilian mining company&nbsp;Vale expects nickel demand&nbsp;to surge 44% by 2030 from current levels, with most new supply coming from Indonesia, Canada, and Australia. The company also expects there to be a structural deficit of the metal even when factoring in current announced production and mining expansions. An emerging player with the potential to become the second-largest nickel supplier in the world in the mid-term and the largest in the longer term is a Canadian late-stage development company&nbsp;The Metals Company&nbsp;(NASDAQ: TMC), which is getting ready to commercialize undersea collection and processing of polymetallic nodules found in ocean depths between Mexico and Hawaii.
Working at cross purposes.&nbsp;We recently wrote about the disconnect between national governments’ efforts to expand and domesticate the sourcing and production of materials critical in enabling the EV and energy storage transformation on the one hand and local government agencies and NGOs doing their best to push “not in my back yard” agenda when it comes to mines, processing plants, and other facilities needed to support green energy goals. We previously highlighted the issues PLL is having in securing the permits needed to begin mining and processing lithium in North Carolina. Another development-stage lithium player running into similar NGO obstacles is LAC, which is facing strong opposition to its&nbsp;Nevada mine development from environmental groups and other NGOs. While Tesla CEO thinks mining is “relatively easy” compared with lithium refining competencies and is exploring&nbsp;Tesla getting into the lithium processing business, the fact remains that additional sources of lithium, whether by direct lithium extraction from brine à la CMP and LAC, spodumene mines, or expansion of brine extraction in the Andes, are sorely needed to decouple our dependence on China and other geopolitically sensitive neighborhoods. That means governments will need to rethink their approach to incentivizing domestic development of mine and processing plant resources.
Chemicals and Materials News
N.I.M.B.Y.&nbsp;Everyone wants a more sustainable world. Everyone wants less plastic and other pollution. But it seems nobody wants plants and facilities that can deliver on those wants in their neighborhood—Not in My Back Yard syndrome—at least not in developed countries with a strong NGO ecosystem. The problem goes beyond permitting new mineral and metal mines, processing plants, or refineries. Even scrap plastic sorting facilities are frowned upon. Just ask PureCycle Technologies’ (NASDAQ: PCT) CEO Dustin Olson, who has received a&nbsp;letter signed by 50 different NGOs&nbsp;requesting the company abandon its plans for a new plastic sorting facility in Florida.
Rating and Price Target Changes
ASH –&nbsp;Credit Suisse initiated coverage of the stock with an Outperform rating and $210 price target (PT).
CTVA –&nbsp;KeyBanc raised its PT to $72 from $64 and reiterated its Overweight rating; BMO raised its PT to $72 from $66 and reiterated its Outperform rating; JP Morgan raised its PT to $65 from $63 and reiterated its Outperform rating; Jefferies raised its PT to $77 from $70 and reiterated its Buy recommendation; Deutsche Bank raised its PT to $75 from $68 and reiterated its Buy recommendation.
EMN –&nbsp;Jefferies lowered its PT to $94 from $97 and maintained its Hold rating; Tudor Pickering lowered its PT to $98 from $105 and maintained its Hold rating; Stifel Nicolaus lowered its PT to $112 from $134 and reiterated its Buy recommendation; CFRA lowered its PT to $110 rom $115 and reiterated its Buy rating; Wells Fargo downgraded the stock to Equal Weight from Overweight and lowered its PT to $95 from $110; KeyBanc lowered its PT to $111 from $125 and reiterated its Overweight rating; Citigroup lowered its PT to $93 from $102 and maintained its Neutral rating; RBC lowered its PT to $82 from $97 and maintained its Sector Perform rating; Deutsche Bank lowered its PT to $95 from $115 and reiterated its Buy recommendation.
LTHM –&nbsp;Vertical Research downgraded the stock to Hold from Buy, despite raising its PT to $35 from $33.
PPG –&nbsp;Wells Fargo lowered its PT to $130 from $135 and maintained its Equal Weight rating.
SHW –&nbsp;Evercore ISI lowered its PT to $260 from $285 and reiterated its Outperform rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)
Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)
Initiation of Coverage – Westwater Resources (NYSE: WWR)
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 BioEconomy and Chemicals &amp; Materials Technology 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 September 18, 2022

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;Last week, the broader market recovered from the previous week’s swoon, with the S&amp;P 500 posting a 2.5% return, while the broader Russell 2000 Index gained 3.3%. Our WTR-CMI index of 30 chemicals and materials technology companies outperformed both market indexes by delivering a 4.2% improvement for the week. The prior week’s culprits, lithium stocks, were last week’s winners, with ALB, LAC, LTHM, and PLL all delivering double-digit gains following the sell-off. IOSP, SCL, and PKE were the only stocks finishing the week in the red.</li>
<li>US farmers breathe a little easier.&nbsp;Following the USDA farm income projections mentioned last week, Purdue University/CME Group’s&nbsp;Ag Economy Barometer, a survey-driven measure of farmer sentiment, recovered from multi-year lows last month to reach a reading of 117 (versus 103 in the prior month). While concerns over input costs were still weighing on respondents’ minds, the summer rally in corn and soybean prices and expectations that cost increases will moderate next year were the biggest drivers of the change in sentiment.</li>
<li>Auto sales’ tepid recovery proceeding.&nbsp;New car registrations in&nbsp;Germany&nbsp;increased 3% Y/Y in August, breaking a long string of Y/Y monthly declines, as BEV sales increased 11% Y/Y.&nbsp;UK August sales&nbsp;also edged up 1.2%, driven by 35% growth in EVs. Meanwhile,&nbsp;Mexico’s auto production&nbsp;surged 31% Y/Y, driven largely by exports.</li>
<li>Electronic adhesives market growth expected.&nbsp;According to a recent report from ResearchandMarkets, the global market for&nbsp;adhesives going into electronic applications&nbsp;will increase at a 7% CAGR over the next five years to reach almost $8 billion, driven by the growth in consumer electronics, continuing miniaturization and the proliferation of electronics and the 5G roll-out. We believe this 2x global GDP growth is a positive for companies such as FUL, which have spent the last several years building out their electronic and high-performance engineered adhesives business.</li>
<li>Stepan Company expands portfolio with acquisition.&nbsp;SCL announced that it has entered into an&nbsp;agreement to acquire the surfactant business&nbsp;and associated assets of PerformanX Specialty Chemicals, LLC. The deal will bring approximately $20 million in annual sales and be accretive to the company’s EBITDA margins.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/914/original/image_70624173521663118561538.png?1663118564" class="editor-image img-responsive" data-smartkarma-image-id="297914"></figure>
<h2>Ag-Tech and Bio-Ag</h2>
<p>Chinese pesticide price data suggest more pain in 2023.&nbsp;As we mentioned above, the cost of inputs, such as seeds, fertilizers, and pesticides, are still weighing on the minds of farmers as they prepare for the 2022-23 planting season. Recent data from China, which show that&nbsp;pesticide export prices, while off their mid-summer highs, remain elevated versus 2021 levels and are still 30-40% above the year-ago period. As China is a major exporter of chemical pesticides, as well as the manufacturing hub for many pesticide procurers, this is not good news for the ag market heading into the purchasing period in the Northern Hemisphere. Furthermore, with elevated natural gas and energy costs and possible energy rationing over the winter months, conditions may be in place for price increases of inputs to resume over the next three to six months, suggesting there may be material downside to the USDA’s recent bullish outlook for farmers’ income come 2023.</p>
<p>Efforts to mitigate fertilizer price spike.&nbsp;Fertilizers, particularly nitrogen containing products such as urea and ammonia, have seen a nearly unprecedented increase in price over the past 12-18 months. With natural gas prices and availability becoming an issue in Europe, as well as in China, potentially curtailing production, fertilizer prices may continue to stay at elevated levels, if not head higher again. Furthermore, with fossil fuel sources under pressure from numerous government goals, rules, and regulations, elevated chemical fertilizer prices may become a feature of the ag market. To reduce the impact of higher chemical nitrogen costs, efforts are underway to commercialize and expand the use of bio-based nitrogen fixing products.&nbsp;In LATAM, a region that relies almost exclusively on imported fertilizers, the effort is led by microbial N-fixing solutions, using both symbiotic (microbes that interact with plant roots) and non-symbiotic organisms. It is estimated that in Argentina alone, this $100 million annual market may grow at a mid-teen CAGR. In the US, privately held&nbsp;Pivot Bio announced&nbsp;the development and introduction of on-seed microbial nitrogen for crops including corn, grain sorghum, and spring wheat. Adapting the technology of N-fixing to seed treatment may be a way to expand the use of microbial fertilizers to farmers that may otherwise not consider the option.</p>
<h2>Automotive &amp; Transportation</h2>
<p>We’re not out of the woods yet.&nbsp;Even as the new passenger vehicle market is beginning to recover from its lows, with the first positive Y/Y monthly comps since 1H21, concerns remain. Old problems, like parts and chips availability, continue to plague the industry, demonstrated by&nbsp;Honda’s recent announcement&nbsp;that it will slash output by about 40% this month at its assembly plant in Saitama prefecture, north of Tokyo, citing ongoing supply chain and logistical problems. Chip availability remains an issue, with another 76K vehicles cut from production forecast last week, mainly in North America and Europe. Is it any wonder that&nbsp;car dealers’ sentiment&nbsp;declined, according to Cox Automotive? Given the above and combined with growing economic concerns around the globe, made worse by food and energy insecurities in many parts of the world, auto production recovery to pre-pandemic levels may be delayed until 2024, suggesting continuing issues for companies in our index, such as PPG and AXTA, when it comes to volume growth and the ability to restore margins following the raw material run-up over the course of the past 18 months. We therefore advise caution and patience when investing in these stocks.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;RBC raised its price target (PT) to $371 from $357 and reiterated its Outperform rating; Citigroup also raised its PT to $345 from $294 and reiterated its Buy recommendation.</p>
<p>ECL –&nbsp;NorthCoast Research upgraded the stock to Buy from Neutral.</p>
<p>HXL –&nbsp;Morgan Stanley upgraded the stock to Equal Weight from Underweight and raised its PT to $68 from $59.</p>
<p>PPG –&nbsp;Redburn upgraded the stock to Buy from Neutral.</p>
<p>SHW –&nbsp;Evercore ISI raised its PT to $285 from $270 and reiterated its Outperform rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)</p>
<p>Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)</p>
<p>Initiation of Coverage – Westwater Resources (NYSE: WWR)</p>
<h3>DISCLOSURES</h3>
<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 BioEconomy and Chemicals &amp; Materials Technology 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, the broader market recovered from the previous week’s swoon, with the S&amp;P 500 posting a 2.5% return, while the broader Russell 2000 Index gained 3.3%. Our WTR-CMI index of 30 chemicals and materials technology companies outperformed both market indexes by delivering a 4.2% improvement for the week. The prior week’s culprits, lithium stocks, were last week’s winners, with ALB, LAC, LTHM, and PLL all delivering double-digit gains following the sell-off. IOSP, SCL, and PKE were the only stocks finishing the week in the red.
US farmers breathe a little easier.&nbsp;Following the USDA farm income projections mentioned last week, Purdue University/CME Group’s&nbsp;Ag Economy Barometer, a survey-driven measure of farmer sentiment, recovered from multi-year lows last month to reach a reading of 117 (versus 103 in the prior month). While concerns over input costs were still weighing on respondents’ minds, the summer rally in corn and soybean prices and expectations that cost increases will moderate next year were the biggest drivers of the change in sentiment.
Auto sales’ tepid recovery proceeding.&nbsp;New car registrations in&nbsp;Germany&nbsp;increased 3% Y/Y in August, breaking a long string of Y/Y monthly declines, as BEV sales increased 11% Y/Y.&nbsp;UK August sales&nbsp;also edged up 1.2%, driven by 35% growth in EVs. Meanwhile,&nbsp;Mexico’s auto production&nbsp;surged 31% Y/Y, driven largely by exports.
Electronic adhesives market growth expected.&nbsp;According to a recent report from ResearchandMarkets, the global market for&nbsp;adhesives going into electronic applications&nbsp;will increase at a 7% CAGR over the next five years to reach almost $8 billion, driven by the growth in consumer electronics, continuing miniaturization and the proliferation of electronics and the 5G roll-out. We believe this 2x global GDP growth is a positive for companies such as FUL, which have spent the last several years building out their electronic and high-performance engineered adhesives business.
Stepan Company expands portfolio with acquisition.&nbsp;SCL announced that it has entered into an&nbsp;agreement to acquire the surfactant business&nbsp;and associated assets of PerformanX Specialty Chemicals, LLC. The deal will bring approximately $20 million in annual sales and be accretive to the company’s EBITDA margins.

WTR-CMI WEEKLY PERFORMANCE

Ag-Tech and Bio-Ag
Chinese pesticide price data suggest more pain in 2023.&nbsp;As we mentioned above, the cost of inputs, such as seeds, fertilizers, and pesticides, are still weighing on the minds of farmers as they prepare for the 2022-23 planting season. Recent data from China, which show that&nbsp;pesticide export prices, while off their mid-summer highs, remain elevated versus 2021 levels and are still 30-40% above the year-ago period. As China is a major exporter of chemical pesticides, as well as the manufacturing hub for many pesticide procurers, this is not good news for the ag market heading into the purchasing period in the Northern Hemisphere. Furthermore, with elevated natural gas and energy costs and possible energy rationing over the winter months, conditions may be in place for price increases of inputs to resume over the next three to six months, suggesting there may be material downside to the USDA’s recent bullish outlook for farmers’ income come 2023.
Efforts to mitigate fertilizer price spike.&nbsp;Fertilizers, particularly nitrogen containing products such as urea and ammonia, have seen a nearly unprecedented increase in price over the past 12-18 months. With natural gas prices and availability becoming an issue in Europe, as well as in China, potentially curtailing production, fertilizer prices may continue to stay at elevated levels, if not head higher again. Furthermore, with fossil fuel sources under pressure from numerous government goals, rules, and regulations, elevated chemical fertilizer prices may become a feature of the ag market. To reduce the impact of higher chemical nitrogen costs, efforts are underway to commercialize and expand the use of bio-based nitrogen fixing products.&nbsp;In LATAM, a region that relies almost exclusively on imported fertilizers, the effort is led by microbial N-fixing solutions, using both symbiotic (microbes that interact with plant roots) and non-symbiotic organisms. It is estimated that in Argentina alone, this $100 million annual market may grow at a mid-teen CAGR. In the US, privately held&nbsp;Pivot Bio announced&nbsp;the development and introduction of on-seed microbial nitrogen for crops including corn, grain sorghum, and spring wheat. Adapting the technology of N-fixing to seed treatment may be a way to expand the use of microbial fertilizers to farmers that may otherwise not consider the option.
Automotive &amp; Transportation
We’re not out of the woods yet.&nbsp;Even as the new passenger vehicle market is beginning to recover from its lows, with the first positive Y/Y monthly comps since 1H21, concerns remain. Old problems, like parts and chips availability, continue to plague the industry, demonstrated by&nbsp;Honda’s recent announcement&nbsp;that it will slash output by about 40% this month at its assembly plant in Saitama prefecture, north of Tokyo, citing ongoing supply chain and logistical problems. Chip availability remains an issue, with another 76K vehicles cut from production forecast last week, mainly in North America and Europe. Is it any wonder that&nbsp;car dealers’ sentiment&nbsp;declined, according to Cox Automotive? Given the above and combined with growing economic concerns around the globe, made worse by food and energy insecurities in many parts of the world, auto production recovery to pre-pandemic levels may be delayed until 2024, suggesting continuing issues for companies in our index, such as PPG and AXTA, when it comes to volume growth and the ability to restore margins following the raw material run-up over the course of the past 18 months. We therefore advise caution and patience when investing in these stocks.
Rating and Price Target Changes
ALB –&nbsp;RBC raised its price target (PT) to $371 from $357 and reiterated its Outperform rating; Citigroup also raised its PT to $345 from $294 and reiterated its Buy recommendation.
ECL –&nbsp;NorthCoast Research upgraded the stock to Buy from Neutral.
HXL –&nbsp;Morgan Stanley upgraded the stock to Equal Weight from Underweight and raised its PT to $68 from $59.
PPG –&nbsp;Redburn upgraded the stock to Buy from Neutral.
SHW –&nbsp;Evercore ISI raised its PT to $285 from $270 and reiterated its Outperform rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)
Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)
Initiation of Coverage – Westwater Resources (NYSE: WWR)
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 BioEconomy and Chemicals &amp; Materials Technology 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 September 11, 2022

<h3>KEY HIGHLIGHTS</h3>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;In another down week for the market, the S&amp;P 500 retreated 3.3%, while the Russell 2000 lost 4.7% of its value. Our WTR-CMI index of 30 chemicals and materials technology stocks underperformed the broader market, declining 5.5% for the week. All the stocks in our index finished the week in the red, with large cap coating names—AXTA, SHW, and PPG—posting the lowest declines, along with CTVA, which may have benefited from its&nbsp;announcement of a joint development of a new soybean seed with BASF. Prior week’s leader ALB was the worst performer last week, losing 9.8% of its value, as investors may have been disappointed with the&nbsp;company’s decision to keep the Catalysts business.</li>
<li>Damn the torpedoes, part 2.&nbsp;Going full-speed ahead with the development of its Ghana and Quebec mine reserves, while awaiting permitting for its NC mine,&nbsp;PLL announced plans to construct&nbsp;the country’s largest lithium hydroxide production plant in Tennessee, with production targeted for 2025.</li>
<li>US farmers appear to survive 2022 rollercoaster.&nbsp;Despite record high fertilizer, seed, and pesticide costs, not to mention supply disruptions, weather, and fuel costs,&nbsp;the USDA forecasts that US farmers will enjoy record cash incomes&nbsp;in 2022, although net farm income is expected to decline 3.3% from 2021, despite high crop prices due to aforementioned cost headwinds. With input costs continuing to go up (diesel moving north of $5/gal average again) and a slightly dented pocketbook heading into the 2022-23 season, US farmers’ ability to withstand another year of similar shocks remains under question.</li>
<li>Auto sales finally begin to recover.&nbsp;New car registrations in&nbsp;France&nbsp;and&nbsp;the US&nbsp;rose 4% Y/Y in August, albeit coming against increasingly easy year-ago comps. Still, the news is encouraging for Tier 1 auto suppliers such as PPG and AXTA in our index.</li>
<li>Builder confidence sinks.&nbsp;August was the eighth straight month of US&nbsp;builders’ confidence declining, with the August reading of 49 falling below the neutral outlook level for the first time since May 2020. We see this as a broad negative for our sector, especially for SHW, RPM, NGVT, and FULL, for whom the building &amp; construction industry represents a major end- market.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/883/original/image_18510131561662594923949.png?1662594926" class="editor-image img-responsive" data-smartkarma-image-id="296883"></figure>
<h2>Ag-Tech and Bio-Ag</h2>
<p>LATAM markets take center stage.&nbsp;With everything but the shouting over in the North American ag market for the 2021-22 season, attention is shifting to LATAM’s 2022-23 ag market forecasts. According to the Brazilian National Supply Company (CONAB), both&nbsp;soybean and corn planted acres are expected to grow in Brazil&nbsp;in 2022-23 compared with 2021-22, with more than 100 million acres of soybean being planted in the country for the first time. Still, while acres and yields are expected to grow, farms’ operating margins are forecast to decline versus this year, due primarily to higher input costs that are more than offsetting strong commodity prices and favorable currency exchange rates.</p>
<p>Higher planted acres expected in the region as well as higher use of fertilizers and pesticides are expected to benefit ag input companies. As recent research indicated,&nbsp;large multinationals are outperforming their local peers&nbsp;in this regard when it comes to LATAM markets in general, and Brazil, the region’s largest, in particular. We see this as a positive for companies like CTVA and FMC, given their strong positions in the region. Coming off a solid North American and European season, it appears ag majors are well positioned to continue their positive growth trajectory as sales shift to LATAM and we see current stock prices for both FMS and CTV as attractive entry points for investors looking to benefit from strong demand and pricing dynamics in the ag-input industry.</p>
<p>Ag majors aren’t the only ones likely to benefit from solid market conditions in LATAM. According to the Brazilian Ministry of Agriculture, Livestock and Supply (MAPA),&nbsp;there were 92 biological or low-impact pesticides approved in 2021, down slightly from the 95 approved in 2020. However, continuing expansion of bio-based pesticides, whose review and approvals are given priority by the agency, is a positive for both farmers, who will have more alternatives and solutions should synthetic chemical inputs’ cost and availability remain an issue in 2022-23, and for emerging bio-ag players, such as BIOX and BHIL, among others, who are rapidly developing bio-based alternatives to traditional synthetic pesticides.</p>
<h2>Battery Materials &amp; Energy Transformation</h2>
<p>Government regulations working at cross purposes to government intentions when it comes to electrification.&nbsp;Even as realization spreads that virtually everywhere one looks, there is a pending shortage of battery-critical materials essential for the electrification revolution to realize its full potential and growing concerns of overreliance on China for such materials already, ramping up local supply of these materials remains problematic. One consistent obstacle is government regulations around mining—the key element in domesticating the battery supply chain and reducing reliance on China and other less-than-friendly regimes. Sweden, home to many materials that could be mined to supply the burgeoning EV battery demand in EU,&nbsp;has been called out recently&nbsp;for its slow regulatory process when it comes to approving new mines in the country. In the US, there is an&nbsp;industry push to shorten and streamline&nbsp;the US mine permit review process. As companies who are looking to develop domestic supply of everything from lithium, to graphite, to rare earths and more prosaic metals such as nickel and copper, continue to bleed red ink due to permitting delays of their major projects, government regulations continue to erect barriers and raise the cost of developing such projects, which appear contrary to many governments’ stated goals and deadlines for sufficiently reducing, if not outright eliminating, dependence on fossil fuels as the basis for the economy. As the saying goes, something’s gotta give.</p>
<p>More investments and intentions announced.&nbsp;Toyota, long viewed as a laggard in EV transition race, announced it will invest close to&nbsp;$5.6 billion into making more EV batteries in the US and Japan, with the goal of raising its production capacity by 40 GWh. The company announced that $2.5 billion of that will go toward its investments into the&nbsp;North Carolina battery plant&nbsp;that will supply batteries for both hybrid as well as fully electric vehicles. Initial production is expected in 2025.</p>
<p>Meanwhile, American Manganese Inc. (OTC: AMYZF) announced that its RecycLiCo Battery Materials arm, in partnership with Kemetco Research Inc., has successfully run a bench test whereby&nbsp;the patented process recovered more than 99% of the lithium&nbsp;contained in lithium-iron-phosphate (LFP) battery cathode materials, extending the process ability, previously demonstrated for nickel-rich, manganese-rich and cobalt-rich cathode chemistries. As we highlighted in our previous issue, work continues on other, non-battery-based energy alternatives, such as hydrogen fuel cells. Recently, German&nbsp;Bosch announced plans to invest $200 million&nbsp;in its US capacity to produce said fuel cells at its South Carolina plant.</p>
<h2>Automotive &amp; Transportation</h2>
<p>We’re not out of the woods yet.&nbsp;Although new car sales comps are beginning to turn positive, as we mentioned above, we note that August improvements (and we expect the remainder of the year to follow suit) came against record low production levels seen in 2H21 and the global industry remains materially below 2019 production levels. Many issues that have plagued the industry over the last three years remain. Thus,&nbsp;Volvo will temporarily close its plant in the Chinese city&nbsp;of Chengdu due to local coronavirus restrictions.&nbsp;Stellantis halted its Sevel van-making plant&nbsp;in central Italy due to a shortage in supplies of parts.&nbsp;Toyota announced that its global output sank&nbsp;for the fourth straight month in July, as a shortage of semiconductors and supply chain disruptions caused by COVID lockdowns in China hurt production. With the world possibly entering a recession, big ticket items such as new cars may continue to see an uneven recovery in demand, even off the 2021-22 lows. While Y/Y growth in new vehicle registrations is encouraging, ongoing issues with semiconductor and other parts supplies, logistical snags, and on-again-off-again production in China as rolling COVID lockdowns continue, the industry still seems some way off from regaining its footing.</p>
<h2>Chemicals and Materials Technology in the News</h2>
<p>Architectural coatings market growth intact.&nbsp;A report by&nbsp;Research and Markets forecasts that global demand for architectural coatings&nbsp;will continue to grow at above GDP rates, driven by residential construction and remodeling, as well as commercial and infrastructure projects. The global market for architectural coatings estimated at $64.2 billion in 2022 is projected to grow at a 4.9% CAGR through 2026, reaching $79.5 billion by 2026. While this is a positive for PPG, Masco (NYSE: MAS), which supplies Behr and Kilz brand paints to Home Depot (NYSE: HD), and Berkshire Hathaway’s Benjamin Moore paint, it is particularly impactful for SHW, which dominates the paint market in the US and is one of the leading global suppliers of architectural coatings. Furthermore, with the Do It For Me&nbsp;(DIFM) trend growing once more in the US&nbsp;in the wake of COVID lockdowns, SHW may benefit disproportionately, given its extensive company-owned contractor paint stores across the country and in Canada.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)</p>
<p>Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)</p>
<p>Fireside Chat with Management of Loop Industries (NASDAQ: LOOP)</p>
<p>Fireside Chat with Management of Westwater Resources (NYSE: WWR)</p>
<p>Initiation of Coverage – Westwater Resources (NYSE: WWR)</p>
<h3>DISCLOSURES</h3>
<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 BioEconomy and Chemicals &amp; Materials Technology 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>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s 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, agents or affiliate 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 another down week for the market, the S&amp;P 500 retreated 3.3%, while the Russell 2000 lost 4.7% of its value. Our WTR-CMI index of 30 chemicals and materials technology stocks underperformed the broader market, declining 5.5% for the week. All the stocks in our index finished the week in the red, with large cap coating names—AXTA, SHW, and PPG—posting the lowest declines, along with CTVA, which may have benefited from its&nbsp;announcement of a joint development of a new soybean seed with BASF. Prior week’s leader ALB was the worst performer last week, losing 9.8% of its value, as investors may have been disappointed with the&nbsp;company’s decision to keep the Catalysts business.
Damn the torpedoes, part 2.&nbsp;Going full-speed ahead with the development of its Ghana and Quebec mine reserves, while awaiting permitting for its NC mine,&nbsp;PLL announced plans to construct&nbsp;the country’s largest lithium hydroxide production plant in Tennessee, with production targeted for 2025.
US farmers appear to survive 2022 rollercoaster.&nbsp;Despite record high fertilizer, seed, and pesticide costs, not to mention supply disruptions, weather, and fuel costs,&nbsp;the USDA forecasts that US farmers will enjoy record cash incomes&nbsp;in 2022, although net farm income is expected to decline 3.3% from 2021, despite high crop prices due to aforementioned cost headwinds. With input costs continuing to go up (diesel moving north of $5/gal average again) and a slightly dented pocketbook heading into the 2022-23 season, US farmers’ ability to withstand another year of similar shocks remains under question.
Auto sales finally begin to recover.&nbsp;New car registrations in&nbsp;France&nbsp;and&nbsp;the US&nbsp;rose 4% Y/Y in August, albeit coming against increasingly easy year-ago comps. Still, the news is encouraging for Tier 1 auto suppliers such as PPG and AXTA in our index.
Builder confidence sinks.&nbsp;August was the eighth straight month of US&nbsp;builders’ confidence declining, with the August reading of 49 falling below the neutral outlook level for the first time since May 2020. We see this as a broad negative for our sector, especially for SHW, RPM, NGVT, and FULL, for whom the building &amp; construction industry represents a major end- market.

WTR-CMI WEEKLY PERFORMANCE

Ag-Tech and Bio-Ag
LATAM markets take center stage.&nbsp;With everything but the shouting over in the North American ag market for the 2021-22 season, attention is shifting to LATAM’s 2022-23 ag market forecasts. According to the Brazilian National Supply Company (CONAB), both&nbsp;soybean and corn planted acres are expected to grow in Brazil&nbsp;in 2022-23 compared with 2021-22, with more than 100 million acres of soybean being planted in the country for the first time. Still, while acres and yields are expected to grow, farms’ operating margins are forecast to decline versus this year, due primarily to higher input costs that are more than offsetting strong commodity prices and favorable currency exchange rates.
Higher planted acres expected in the region as well as higher use of fertilizers and pesticides are expected to benefit ag input companies. As recent research indicated,&nbsp;large multinationals are outperforming their local peers&nbsp;in this regard when it comes to LATAM markets in general, and Brazil, the region’s largest, in particular. We see this as a positive for companies like CTVA and FMC, given their strong positions in the region. Coming off a solid North American and European season, it appears ag majors are well positioned to continue their positive growth trajectory as sales shift to LATAM and we see current stock prices for both FMS and CTV as attractive entry points for investors looking to benefit from strong demand and pricing dynamics in the ag-input industry.
Ag majors aren’t the only ones likely to benefit from solid market conditions in LATAM. According to the Brazilian Ministry of Agriculture, Livestock and Supply (MAPA),&nbsp;there were 92 biological or low-impact pesticides approved in 2021, down slightly from the 95 approved in 2020. However, continuing expansion of bio-based pesticides, whose review and approvals are given priority by the agency, is a positive for both farmers, who will have more alternatives and solutions should synthetic chemical inputs’ cost and availability remain an issue in 2022-23, and for emerging bio-ag players, such as BIOX and BHIL, among others, who are rapidly developing bio-based alternatives to traditional synthetic pesticides.
Battery Materials &amp; Energy Transformation
Government regulations working at cross purposes to government intentions when it comes to electrification.&nbsp;Even as realization spreads that virtually everywhere one looks, there is a pending shortage of battery-critical materials essential for the electrification revolution to realize its full potential and growing concerns of overreliance on China for such materials already, ramping up local supply of these materials remains problematic. One consistent obstacle is government regulations around mining—the key element in domesticating the battery supply chain and reducing reliance on China and other less-than-friendly regimes. Sweden, home to many materials that could be mined to supply the burgeoning EV battery demand in EU,&nbsp;has been called out recently&nbsp;for its slow regulatory process when it comes to approving new mines in the country. In the US, there is an&nbsp;industry push to shorten and streamline&nbsp;the US mine permit review process. As companies who are looking to develop domestic supply of everything from lithium, to graphite, to rare earths and more prosaic metals such as nickel and copper, continue to bleed red ink due to permitting delays of their major projects, government regulations continue to erect barriers and raise the cost of developing such projects, which appear contrary to many governments’ stated goals and deadlines for sufficiently reducing, if not outright eliminating, dependence on fossil fuels as the basis for the economy. As the saying goes, something’s gotta give.
More investments and intentions announced.&nbsp;Toyota, long viewed as a laggard in EV transition race, announced it will invest close to&nbsp;$5.6 billion into making more EV batteries in the US and Japan, with the goal of raising its production capacity by 40 GWh. The company announced that $2.5 billion of that will go toward its investments into the&nbsp;North Carolina battery plant&nbsp;that will supply batteries for both hybrid as well as fully electric vehicles. Initial production is expected in 2025.
Meanwhile, American Manganese Inc. (OTC: AMYZF) announced that its RecycLiCo Battery Materials arm, in partnership with Kemetco Research Inc., has successfully run a bench test whereby&nbsp;the patented process recovered more than 99% of the lithium&nbsp;contained in lithium-iron-phosphate (LFP) battery cathode materials, extending the process ability, previously demonstrated for nickel-rich, manganese-rich and cobalt-rich cathode chemistries. As we highlighted in our previous issue, work continues on other, non-battery-based energy alternatives, such as hydrogen fuel cells. Recently, German&nbsp;Bosch announced plans to invest $200 million&nbsp;in its US capacity to produce said fuel cells at its South Carolina plant.
Automotive &amp; Transportation
We’re not out of the woods yet.&nbsp;Although new car sales comps are beginning to turn positive, as we mentioned above, we note that August improvements (and we expect the remainder of the year to follow suit) came against record low production levels seen in 2H21 and the global industry remains materially below 2019 production levels. Many issues that have plagued the industry over the last three years remain. Thus,&nbsp;Volvo will temporarily close its plant in the Chinese city&nbsp;of Chengdu due to local coronavirus restrictions.&nbsp;Stellantis halted its Sevel van-making plant&nbsp;in central Italy due to a shortage in supplies of parts.&nbsp;Toyota announced that its global output sank&nbsp;for the fourth straight month in July, as a shortage of semiconductors and supply chain disruptions caused by COVID lockdowns in China hurt production. With the world possibly entering a recession, big ticket items such as new cars may continue to see an uneven recovery in demand, even off the 2021-22 lows. While Y/Y growth in new vehicle registrations is encouraging, ongoing issues with semiconductor and other parts supplies, logistical snags, and on-again-off-again production in China as rolling COVID lockdowns continue, the industry still seems some way off from regaining its footing.
Chemicals and Materials Technology in the News
Architectural coatings market growth intact.&nbsp;A report by&nbsp;Research and Markets forecasts that global demand for architectural coatings&nbsp;will continue to grow at above GDP rates, driven by residential construction and remodeling, as well as commercial and infrastructure projects. The global market for architectural coatings estimated at $64.2 billion in 2022 is projected to grow at a 4.9% CAGR through 2026, reaching $79.5 billion by 2026. While this is a positive for PPG, Masco (NYSE: MAS), which supplies Behr and Kilz brand paints to Home Depot (NYSE: HD), and Berkshire Hathaway’s Benjamin Moore paint, it is particularly impactful for SHW, which dominates the paint market in the US and is one of the leading global suppliers of architectural coatings. Furthermore, with the Do It For Me&nbsp;(DIFM) trend growing once more in the US&nbsp;in the wake of COVID lockdowns, SHW may benefit disproportionately, given its extensive company-owned contractor paint stores across the country and in Canada.
Recent WTR Publications and Upcoming Events
Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)
Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)
Fireside Chat with Management of Loop Industries (NASDAQ: LOOP)
Fireside Chat with Management of Westwater Resources (NYSE: WWR)
Initiation of Coverage – Westwater Resources (NYSE: WWR)
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 BioEconomy and Chemicals &amp; Materials Technology 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.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.  The manner of WTR’s 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, agents or affiliate 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 September 4 2022

KEY HIGHLIGHTS

WTR-CMI last week.&nbsp;The stock market continued to claw back from summer lows last week, with the S&amp;P 500 appreciating 3.3% W/W and the broader Russell 2000 posting a 4.9% gain. Unlike the previous week however, our WTR-CMI index of 30 chemicals and materials technology stocks outpaced both broader indexes with a 7.8% improvement, led by lithium stocks buoyed by continuing strong demand for EVs and&nbsp;sticky lithium prices that are expected to remain elevated. EAF, whose investors continue to digest the secondary offering, PKE, and AVD were the underperformers in our index last week.
AVNT’s transformation continues.&nbsp;The company announced an&nbsp;agreement to sell its domestic plastic Distribution business to H.I.G. Capital&nbsp;for $950 million in cash, or about 10x TTM EBITDA, a valuation reflective of the business’ strong market position in North America and industry-leading operating margins. Net proceeds of ~$750 million will be used to de-lever the balance sheet following the recent DSM acquisition.
ALB going all-in in North Carolina.&nbsp;The leading global lithium producer has&nbsp;plans for a mega-plant in North Carolina&nbsp;that would process 100,000 metric tons (mt) of lithium annually, using spodumene from the company’s Kings Mountain mine, other sources, as well as recycled material, once widely available. The project is in the pre-feasibility stage with a tentative date of 2029.
July Chinese new car sales show strong growth.&nbsp;It appears that&nbsp;July new passenger car sales in China increased 40% Y/Y&nbsp;as the country continues to recover from COVID lockdowns that crushed late spring demand. However, while&nbsp;new energy vehicle (NEV) sales were up a strong 129% Y/Y&nbsp;in the month, they were down M/M compared with a record June,&nbsp;while overall sales slipped 3% versus June. Also, YTD new passenger vehicle sales were still down 2% compared with the first seven months of 2021. Commercial vehicles were also down 22% Y/Y in July.
Seed treatment applications projected to grow.&nbsp;According to a&nbsp;new study by MarketsandMarkets, the seed treatment market is expected to grow at an 8.3% CAGR over the next five years, even faster for biobased ingredients, which is a positive for BIOX, which is building all-biobased seed treatment options.

WTR-CMI WEEKLY PERFORMANCE


Source: YCharts; August 12 close

Ag-Tech and Bio-Ag
A tough end to a tough season.&nbsp;In the 2021-22 ag season, farmers had to deal with skyrocketing prices for ag inputs, from seeds to fertilizers to pesticides, as well as surging diesel and gasoline costs, supply chain disruptions, and uncooperative weather. Despite all that, US farmers planted near-record acres and were expecting, with the USDA’s blessing, near-record yields for their row crops. However, late plantings, high heat, drought, and high winds appear to be taking the shine off bullish bushel expectations. In its August 12 report,&nbsp;the USDA&nbsp;reduced yield expectations for corn and raised them slightly for soybean, although the latter has drawn some skepticism and may or may not be confirmed with field tours. In fact, lack of rain appears to have affected crop conditions in&nbsp;Nebraska&nbsp;and&nbsp;Iowa, shaving off the more optimistic yield projections.
Despite still high commodity prices and, in our opinion, high likelihood that they will remain elevated into 2023, given global supply and food scarcity concerns, 2022 farmer income may be down more than 50% from a record 2021 due mainly to record price increases in crop inputs, fuel, and energy. A report from&nbsp;the University of Illinois forecasts&nbsp;that with input and farmland cost continuing to increase and revenues staying flattish, farm income in 2022-23 may decline as much as 80% compared with this year! That would not be good news for farmers or major suppliers in the ag industry, as it is difficult to imagine farmers maintaining their purchasing power and being able to afford the volume and price of inputs that they were able to handle this year. While this may provide opportunities for emerging biobased input companies, like BIOX and BHIL, to gain market share and expand their geographic and crop footprint, it may not be good news for ag input majors, such as CTVA, AVD, FMC, and CF, as they may experience demand destruction due to high prices, seed margin pressures from elevated energy and raw material costs, and may have to reduce their own prices to sustain demand.
Battery Materials &amp; Energy Transformation
China’s dominance remains conspicuous.&nbsp;While several companies are attempting to establish a presence in the EV battery industry, including some profiled in these updates,&nbsp;half of all batteries installed in 1H22 came from two Chinese companies—CATL and BYD—according to market research company SNE Research, underscoring China’s continued dominance and control over the EV industry supply chain, from lithium and graphite materials to cell and battery pack manufacturing. Although the country is the largest EV market, growing at the fastest pace, which helps explain the initial rush by global battery and materials players to establish operations in China, the COVID-induced supply chain disruptions, the war in Ukraine and its economic aftermath, and China’s increasingly aggressive posture toward Taiwan, APAC, and the West, have given industry players pause and led to increasing efforts to domesticate supply of critical materials and components, or at the very least diversify the supply away from China. Clearly, these efforts are still in the very early stages with few noticeable results as of yet. Nonetheless, we believe domestic suppliers, as well as those outside of China, will continue to receive more attention and capital from both existing and emerging battery manufacturers, as well as EV OEMs—Tesla’s recent contracts worth $5 billion&nbsp;with Indonesia’s nickel converters being but the latest example. We see these trends as being highly positive for companies looking to establish domestic lithium and graphite production, such as ALB, PLL, LAC, WWR, and NMG.
Yet another way to skin the EV battery cat.&nbsp;As the green energy industry continues to grow and evolve, new technologies, chemistries, and manufacturing methods are being explored and developed to help the world accelerate the transition to a non-fossil energy paradigm. Such efforts range from novel sources of lithium (like geothermal wells and the Great Salt Lake) to solid state battery technologies to novel battery cathode and anode chemistries. Yet another wrinkle being added is 3-D printing of batteries, as exemplified by&nbsp;Sakuu, a California-based developer&nbsp;of such technologies, which recently opened a new engineering center in Silicon Valley, having raised more than $60 million in funding earlier this year. Solid state batteries offer real advantages versus current EV battery technology, but efforts to successfully scale up pilot plant processes have so far fallen short of expectations. Nevertheless, the technology remains an attractive area of R&amp;D and perhaps the 3D printing approach can be the final piece of the puzzle to commercial production and industry acceptance.
Chemicals and Materials Technology in the News
Five- to 10-year growth prospects remain robust for many industry sectors.&nbsp;Used in everything from adhesives to coatings to composites, epoxy resins are an important part of the chemicals and materials industry. A recent report by Fact.MR, a market research and competitive intelligence provider, forecasts that the&nbsp;epoxy resin industry will experience a 6.9% CAGR over this decade, or more than twice the expected growth of global GDP, making the sector a clear GDP-plus grower, which should appeal to growth investors. Light-weighting in automotive and transportation applications, superior strength in wind and solar applications, and growing usage in construction applications are driving this strong growth. We see this as a positive for several companies in our index, including AVNT, FUL, HXL, and RPM, as well as commodity chemicals players such as DOW and HUN. The&nbsp;global plastics market, which is expected to reach nearly $800 billion in 2022 is projected to grow at slightly GDP-plus rate of 3.7% CAGR through 2032, driven by continuing product substitution and light-weighting trends and despite the increasing efforts to reduce or eliminate single use plastics. Within this massive markets, certain sub-sectors are expected to see even faster growth. Thus, the&nbsp;polyolefin elastomer and plastomer market&nbsp;is expected to grow at nearly double the rate of the plastics industry overall, or a 7.6% CAGR through 2031, reaching nearly $8 billion in sales by that time. And the much larger&nbsp;plastic market for automotive applications, which is valued at $31 billion annually, is expected to grow at a 5.3% CAGR and reach $45 billion by 2028. We see these trends as being highly beneficial to AVNT, a global leader in engineered plastics and composites. We also believe the growing trend toward recyclability and away from fossil-based raw materials will benefit companies such as Loop Industries, Inc. (NASDAQ: LOOP).
High prices and stalled economy are not a good recipe.&nbsp;Even as&nbsp;pricing dynamics for basic chemicals&nbsp;and raw materials are improving, as prices of commodities come off early summer highs, the global economic slowdown, and outright recession that may be overtaking developed countries in 2H22 are continuing to&nbsp;worry both company executives and investors. The chemicals and materials technology sector, situated between basic commodity chemicals producers and industry and consumer end-customers, may be better positioned to weather these headwinds versus other markets, as they are likely to continue to drive higher prices into the market in 2H22 and perhaps even 1H23, while seeing their RM costs begin to decline, at least sequentially. As these companies’ cost structure contain higher levels of variable versus fixed costs, the negative impact on margins of expected volume declines won’t be nearly as strong as the positive impact of shrinking RM-cost and selling-price spreads, helping margin recovery and driving higher valuations and stock prices in the process.
Circular economy.&nbsp;Speaking of packaging and single-use plastics, industry efforts continue to address the sustainability characteristics of packaging in general and plastic packaging in particular. Certainly a major force behind the evolution is the&nbsp;increasing government focus on the issue of sustainability and circular economy, with ever stricter regulations and out-year targets for carbon net-zero, and other societal initiatives. However, just as important is the voice of the consumer and business’ efforts to innovate to drive product differentiation in an increasingly competitive market segments. Coca-Cola’s drive to&nbsp;reinvent the water/pop plastic bottle with high recycled content, in some cases as high as 100%, is one such example. A new kid on the block—Loop Industries—whose technology allows for the production of virgin-quality PET resins from no- to low-value plastic waste specifically for beverage bottles and other packaging applications may stand to benefit from brand owners developing programs to meet regulatory goals on recycled content and circular economy. In fact, the company already has a success story with the 2022 launch of its branded Infinite LOOPTM&nbsp;PET resin bottle with Avian in South Korea and the more recent partnership with Danone.
Rating and Price Target Changes
ALB –&nbsp;Deutsche Bank raise its price target (PT) to $270 from $255 and reiterated its Buy recommendation.
CMP –&nbsp;Stifel raised its PT to $70 from $69 and reiterated its Buy rating.
CTVA –&nbsp;JP Morgan upgraded the stock to Buy from Neutral and raised its PT to $63 from $58; Roth raised its PT to $74 from $67 and reiterated its Buy rating; Citigroup raised its PT to $69 from $63 and reiterated its Buy rating; Deutsche Bank lowered its PT to $68 from $72 and reiterated its Buy rating; Mizuho Securities raised its PT to $69 from $68 and reiterated its Buy rating; RBC raised its PT to $72 from $67 and reiterated its Outperform rating; Berenberg Bank raised its PT to $66 from $58 and reiterated its Buy recommendation.
EAF –&nbsp;Citigroup lowered its PT to $7.50 from $10 and maintained its Neutral rating; Credit Suisse lowered its PT to $13 from $16 and reiterated its Outperform rating.
KWR –&nbsp;Deutsche Bank raised its PT to $210 from $175 and reiterated its Buy recommendation.
VVV –&nbsp;Citigroup lowered its PT to $35 from $37 and reiterated its Buy recommendation.
Recent WTR Publications and Upcoming Events
Upcoming Events
Fireside Chat with Management of Loop Industries, Inc. (NASDAQ: LOOP)
Recent Events and Publications
Management Series Report and 2Q22 Update for Westwater Resources, Inc. (NYSE: WWR)
Fireside Chat with Management of Westwater Resources (NYSE: WWR)
Initiation of Coverage – Westwater Resources, Inc.
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
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 BioEconomy and Chemicals &amp; Materials Technology 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.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.  The manner of WTR’s 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, agents or affiliate 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 August 14, 2022

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;Our WTR-CMI index of 30 chemicals and materials technology stocks couldn’t keep up with the broader market last week, slipping 0.4% versus the prior week, while the S&amp;P 500 posted a 0.4% appreciation and the Russell 2000 rallied 1.9% for the week. Strong 2Q22 results and a strong outlook drove KWR stock up 15.3% and contributed to MTRN’s 8.6% appreciation, with LAC’s 7.7% improvement rounding out the top performers for the week. ECVT’s larger&nbsp;secondary offering priced at $8.75&nbsp;resulted in a 12.9% pullback for the stock, while VVV declined 11% despite announcing the&nbsp;sale of its Global Products business to Aramco, as investors remained concerned about margin pressures and longer-term prospects for a company still largely focused on ICE vehicle maintenance. EAF’s (9.6%) weekly performance also came courtesy of the outlook it provided on its 2Q22 earnings call, which highlighted slowing steel production and elevated costs.
Economic anxiety growing.&nbsp;Concerns over the&nbsp;impact of reduced gas supply from Russia&nbsp;and its impact on industrial production in the country were recently voiced as a reason for the cautious outlook for the balance of 2022 and into 2023, according to Covestro Germany. In yet another sign of a growing economic slowdown, domestic&nbsp;organic produce volumes declined 2.8%&nbsp;Y/Y in 2Q22, as prices went up 6.7%, indicating that consumers are becoming more price conscious as inflationary pressures heat up. This would not be good news for consumer-centric companies such as SHW, PPG, RPM, and VVV, as customer trade-downs may add mix pressures to the volume and FX headwinds.
Chip crunch prompts greater OEM involvement.&nbsp;As the chip shortage for the automotive industry&nbsp;continues to take a bite out of global production, OEMs are being looked to as reliable funding partners for future semiconductor fabs, as&nbsp;chip manufacturers look to offload some of the funding burden&nbsp;onto the ultimate customer in order to ensure the situation does not repeat once the current crunch is over,&nbsp;sometime in 2023.
LTHM gets prepayment from GM.&nbsp;In the last issue, we highlighted GM’s supply agreement with LTHM and last week we learned that the&nbsp;auto OEM is prepaying LTHM $198 million&nbsp;to ensure a six-year contractual supply—another indication of growing material availability concerns in the EV industry.

WTR-CMI WEEKLY PERFORMANCE


Source: YCharts; August 5 close

Ag-Tech and Bio-Ag
Farmland acres grow globally but shrink in the US.&nbsp;According to a recent article,&nbsp;global farm acreage has increased&nbsp;in 2000’s after the flattish 1980-2000 period, with most of the growth coming from LATAM, India, and former CIS regions, with oilseed crops, particularly soybeans, accounting for most of the increase. Conversely,&nbsp;domestic farm acres shrank&nbsp;over the past two decades, as succession decisions and urban and suburban development are removing 2,000 acres per day from domestic farming and grazing lands. We mentioned this trend in our previous reports and see this as a driver of adoption of newer ag technologies, including precision farming, seed treatment, and bio-based pesticide and fertilizer alternatives, which are all designed to improve yields and minimize environmental impact in order to produce more without needing more farmland. Companies such as BHIL and BIOX, as well as FMC, CTVA, and AVD, stand to benefit as use of inputs/acre grows, with BIOX and FMC being particularly well positioned given their strong LATAM presence and FMC’s over-representation in soybean and rapeseed markets.
As concerns over food scarcity grow, government regulators turn a deaf ear.&nbsp;While the Ukraine/Russia agreement that allowed exports of Ukrainian grain to resume is encouraging, concerns are rising over the 2022-23 Ukrainian crop season.&nbsp;According to the USDA, Ukrainian production of sunflower seeds is expected to decline 37% versus this year, with Ukraine being the number one producer of sunflower seeds. The report also predicts a 35% Y/Y decline in wheat production in the 2022-23 season (Ukraine is the ninth-largest wheat producer in the world) and a whopping 54% drop in the country’s corn production (Ukraine is the sixth-largest corn producer in the world). And that’s if the war’s impact on Ukraine’s farming heartland doesn’t get worse! As a major exporter of grain and ag products, Ukraine’s limited ability to export foodstuff this year and uncertainty over supply next season is raising concerns among major importing regions such as India, Africa, and Asia as to their ability to provide sufficient food for their populace.
It would seem that in this environment, governments would be doing all they could to ensure the adequate supply of ag products to the global market, or at least their own. However, that may not be the case. As we highlighted in the last issue, Netherlands regulators are putting environmental regulations in place that would raise the cost (if not make it outright impossible) for smaller Dutch farmers to continue to produce, which has led to widespread farmer demonstrations across the country. Holland may not be alone in this drive to reduce farming’s impact on the environment at any cost. Its example&nbsp;may be followed by Canada and Ireland&nbsp;and there is concern that similar environmental rules, which seem to be specifically aimed at farming, may come to the US, given the green agenda of the current administration. Tone deaf does not begin to describe these initiatives and efforts, in our opinion.
Automotive &amp; Transportation
July picks up where June left off.&nbsp;The top three economies in Europe are reporting another Y/Y decline in July new car registrations.&nbsp;Germany saw a 13% drop, while&nbsp;the UK posted a slightly less onerous 9% Y/Y&nbsp;decline in new car registrations last month.&nbsp;French registrations&nbsp;also declined, but at a slightly slower 7% pace. And while the impact of chip shortages is waning on a Y/Y basis as we mentioned previously and the Y/Y declines in registrations may also show better comps in 2H22, a recovery in demand still lies beyond the line of sight, as new obstacles replace the old concerns. Gas rationing in Europe due to Russia’s influence over gas supply to the region, higher model prices as OEMs work to preserve margins in&nbsp;a rising cost environment, and slowing the economy’s impact on consumer confidence&nbsp;are likely to continue to weigh on auto production and sales well into 2023. BMW for example, while looking for a recovery in 2H22, had to reduce its full-year 2022 outlook&nbsp;given the slower 1H22 and uncertainty and volatility of economic and geopolitical factors that make more optimistic predictions difficult at this time.
We continue to see risk for companies in our index with high exposure to the automotive and transportation sectors, including PPG, AXTA, and to a lesser extent, AVNT, FUL, and HXL.
Battery Materials &amp; EV Transformation
Technology, methods, and supply chain continue to evolve.&nbsp;Global&nbsp;automotive manufacturers and their suppliers are looking to invest half a trillion dollars&nbsp;over the next several years in order to prepare the industry to transition to an EV architecture more fully. The investments range from new EV factories, battery cell and battery plants, new and expanded mining and conversion plant infrastructure for critical materials, and the growing realization of the need to reduce the industry’s dependence on China as the primary source EV-related supply. The recent&nbsp;decision by CATL to delay&nbsp;finalizing its plans for a North American battery plant underscores those concerns. It can therefore be seen as a sign of desperate times that&nbsp;Tesla felt it necessary to sign supply agreements with two Chinese cobalt processors&nbsp;in an effort to ensure it has adequate access to that important battery metal. Can one blame it given&nbsp;the outlook for cobalt?
Looking high and low for critical materials.&nbsp;Almost every long-term projection of EV growth and corresponding growth in critical metals needed for EV batteries includes a widening disparity between expected demand and available, highly probable, and even somewhat probable supply for most of these materials—lithium first and foremost. It is not surprising then that both auto OEMs and battery companies are looking to sign supply deals with existing and even speculative suppliers. Case in point is the recent announcement of a&nbsp;supply agreement between Prime Planet Energy &amp; Solutions, the battery joint venture of Toyota and Panasonic, and Ioneer Ltd.&nbsp;(OTC: GSCCF), a development-stage company whose lithium production plant isn’t expected to commence construction until 4Q22, with an uncertain timeline to commercial production. Another source of critical materials for batteries is end-of-life EV batteries themselves. In the spirit of environmental responsibility and a circular economy,&nbsp;Ascend Elements has announced plans to invest up to $1 billion&nbsp;in a factory in Kentucky for the production of battery cathode materials for EVs. The plant will use black mass from recycled batteries to directly produce cathode materials for the EV market. Production is scheduled to start at the end of 2023, with capacity to produce enough cathode materials for 250,000 EVs annually. Similarly, British battery developer&nbsp;Nexeon secured more than $200 million in funding&nbsp;to develop its battery materials manufacturing operations for the production of silicone-based anode materials for EV batteries, showing that it’s not just the cathode-side metals, such as lithium and cobalt, that are subject to supply concerns and therefore provide opportunities for funding and growth. We also note that one of the companies in our WTR-CMI index, namely&nbsp;NGVT, took part in this round of funding&nbsp;for Nexeon.
Graphite market update.&nbsp;Speaking of anode materials, an often overlooked part of an EV battery is the graphite that goes into the battery anode. As with other critical battery materials, a severe shortage of supply versus projected demand is envisioned for the graphite market. However, until now, this pending imbalance appears to be getting little attention from investors. As the realization that the EV industry is 100% dependent on China for&nbsp;battery-grade graphite spreads, we believe this lack of attention will be addressed. One company that is looking to launch domestic production of battery-grade graphite materials is Westwater Resources (NYSE: WWR). We recently hosted a fireside chat with WWR management to discuss this apparent lack of investor understanding of the supply-demand imbalance and overreliance on China (see link below). The company will update investors on its progress Thursday, August 11 at 11:00 am EDT when management will host its 2Q22 call.
Chemicals and Materials Technology in the News
NGVT.&nbsp;In addition to making an aforementioned investment in Nexeon, the company also announced the&nbsp;acquisition of privately owned Ozark Materials, LLC and Ozark Logistics, LLC (“Ozark Materials”)&nbsp;for $325 million. The acquisition is expected to close by early 4Q22. The acquired business is on pace for annual revenues of approximately $150 million, with a ~20% EBITDA margin in FY23.
MTRN.&nbsp;The company announced that it has established a new facility in Milwaukee, Wisconsin to accelerate the growth of advanced chemical solutions for the semiconductor and EV battery markets. The new 150,000-square-foot facility expands the company’s capacity to produce Atomic Layer Deposition (ALD) materials for the most sophisticated semiconductor chips and provide advanced chemicals for the development of next-generation battery technology for EVs.
Circular Economy.&nbsp;Green Dot Bioplastics, a developer and supplier of bioplastic materials for innovative, sustainable end-uses,&nbsp;announced an addition of nine new grades of bioplastics&nbsp;aimed at single-use and plastic packaging markets, as the industry looks to adjust to increasingly strict government mandates and regulations related to single-use plastics. In an effort to support similar conversions, in this case to post-consumer recycled plastics,&nbsp;AVNT announced its post-consumer recycled (PCR) Color Prediction Service&nbsp;for polyolefins and polyethylene terephthalate (PET) resins as well as its new polyolefin antioxidants, Cesa Nox A4R Additives for recycled plastics, thereby lowering adoption obstacles for consumers looking to incorporate post-consumer recycled plastic into their product designs.
EAF.&nbsp;While GrafTech’s 2Q22 results and guidance for the balance of 2022 left analysts and investors unimpressed with the company’s near-term margin and volume headwinds, investors may be missing the longer-term prospects for the company as its graphite electrodes going into electric ark furnaces (EAF) are enabling a transition from high carbon-producing coal furnaces to less environmentally impactful EAF technologies, which also use steel scrap, rather than iron ore, as a raw material.&nbsp;A recent study confirming the lower carbon-generating benefits of EAF&nbsp;versus conventional smelters underscores the environmental tailwind investors may be missing in evaluating EAF’s current volume issues in an environment of declining steel production globally.
Rating and Price Target Changes
ALB –&nbsp;UBS raised its price target (PT) to $265 from $218 but maintained its Neutral rating; Oppenheimer raised its PT to $440 from $368 and reiterated its Outperform rating.
CTVA –&nbsp;Credit Suisse raised its PT to $72 from $68 and reiterated its Outperform rating; UBS raised its PT to $66 from $64 and reiterated its Buy recommendation; CFRA lowered its PT to $61 from $65 and maintained its Hold rating.
EMN –&nbsp;CFRA reiterated its Buy rating and $125 PT; Citigroup downgraded the stock to Neutral from Buy; KeyBank raised its PT to $125 from $124 and reiterated its Overweight rating; Deutsche Bank lowered its PT to $115 from $125 and reiterated its Buy rating; Stifel Nicolaus lowered its PT to $134 from $155 and reiterated its Buy rating; Barclays lowered its PT to $110 from $120 and maintained its Equal Weight rating; Wells Fargo lowered its PT to $110 from $115 and reiterated its Overweight rating; RBC raised its PT to $97 from $94 and maintained its Sector Perform rating.
FMC –&nbsp;Credit Suisse lowered its PT to $105 from $109 and reiterated its Underperform rating; CFRA lowered its PT to $120 from $126 and maintained its Hold rating; Mizuho Securities lowered its PT to $144 from $149 and reiterated its Buy rating.
FUL –&nbsp;Berenberg Bank lowered its PT to $82 from $85 and reiterated its Buy recommendation.
HXL –&nbsp;BMO raised its PT to $66 from $57 and maintained its Market Perform rating.
LTHM –&nbsp;CFRA lowered its PT to $28 from $36 and reiterated its Buy rating; Mizuho Securities lowered its PT to $30 from $34 and maintained its Neutral rating; Deutsche Bank raised its PT to $26 from $24 and maintained its Hold rating.
VVV –&nbsp;CFRA downgraded the stock to Hold from Buy and maintained its $34 PT.
Recent WTR Publications and Upcoming Events
Fireside Chat with Management of Westwater Resources, Inc.
Initiation of Coverage – Westwater Resources, Inc.
Management Series Report – Marrone Bio Innovations Inc. CEO Kevin Helash
Management Series Report – Westwater Resources, Inc. Executive Chairman Terence Cryan and CAO Steven Cates
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Mat-Chem Notes for the Week Ended August 7, 2022

United States

The Sherwin-Williams Company manufactures, distributes, and sells paints, coatings, and related products.  The Company's products are sold to professional, industrial, commercial, and retail customers primarily in North and South America. Sherwin Williams also has additional operations in the Caribbean region, Europe and Asia.

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Sherwin Williams Co (SHW US)

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