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)

KEY HIGHLIGHTS


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

WTR-CMI WEEKLY PERFORMANCE

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

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

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

<h2>KEY HIGHLIGHTS</h2>
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<li>WTR-CMI last week.&nbsp;In what was another down week for the market, with the Russell 2000 declining 1.1% and the S&amp;P 500 dropping a whopping 3.0%, our WTR-CMI index of 30 chemicals and materials technology companies bucked the trend and posted a 1.0% appreciation. YTD, our index, while down 9.8%, is materially outperforming the broader market, as the Russell 2000 has declined 21%, while the S&amp;P 500 has lost 18.1% of its value since the beginning of 2022.</li>
<li>Winners and losers.&nbsp;Lithium stocks’ recovery led the performance last week, with PLL (up 10.9%), LAC (up 7.8%), and LTHM (up 7.4%) leading the way. Conversely, KWR, SHW, and PKE suffered the biggest declines, dropping 5.5%, 5.4%, and 5.0%, respectively, being the only stocks in our index to underperform the S&amp;P 500.</li>
<li>Addressing biologics’ growing needs.&nbsp;Taking a break from boardroom fights, AVD announced the development (with 3Bar Biologics) of&nbsp;non-reusable packaging&nbsp;for liquid biologic crop protection products, as bio-based crop inputs are incompatible with reusable packaging typically used in these applications due to the threat of contamination and the need for sterility when dealing with live organisms.</li>
<li>April was the worst month of the year…so far.&nbsp;The European new car market saw another negative Y/Y comp, with&nbsp;new car registrations declining almost 21%&nbsp;compared with April of 2021, the steepest Y/Y drop this year. Unfortunately, as the&nbsp;Bloomberg chart shows, May and June results may not be much better and hopes may begin to fade for a 2H22 recovery, given the general economic slowdown taking place globally and the still unresolved supply chain and logistics issues. In our sector, PPG, AXTA, and to a lesser extent, FUL, AVNT, KWR, and HXL have the greatest exposure to the automotive and transportation industry, suggesting volume growth will be hard to come by for these companies in 2022.</li>
<li>Plantings accelerate in US, but concerns remain.&nbsp;Better weather conditions allowed US farmers to get out into the field and attempt to catch up on getting seeds into the ground. Corn and soybean&nbsp;plantings increased significantly last week, but remain below five-year averages, with planting window rapidly closing over the&nbsp;next two to three weeks.</li>
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<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
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<p>Source: YCharts; May 20 close</p>
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<h2>Lithium &amp; EV Ecosystem</h2>
<p>Auto manufacturers continue to look for an edge in EV race.&nbsp;Two German automakers made announcements last week of partnerships with companies employing new technologies to enable a more rapid transition to<br>battery-powered vehicles.&nbsp;Mercedes Benz announced the addition of a new battery technology&nbsp;in cooperation with Sila Nanotechnologies, which utilizes higher silicon content anodes for lithium batteries. The newer anodes allow for greater energy density by 20-40% and therefore expanded battery range, addressing one of the main consumer concerns. The two companies hope to have the battery as an option for high-end and heavier SUV vehicles by the middle of this decade. Meanwhile,&nbsp;BMW joined Mangrove Lithium&nbsp;(privately held Canadian company) as the lead investor. Mangrove Lithium has developed a process to transform virgin and recycled raw lithium into battery-grade material that does not require a separate carbonate plant to convert lithium raw material into battery-grade lithium carbonate. While still in the pilot plant stage, the junior lithium converter hopes to use the recently raised capital to accelerate the construction of its first commercial production plant. No timetable was provided.</p>
<p>Expanding EV ecosystem.&nbsp;Swedish start-up&nbsp;Northvolt has started commercial deliveries of its battery cells&nbsp;to a car manufacturer in Europe. While the identity of the car manufacturer was not revealed, Northvolt’s customers (companies that signed supply agreements with the lithium cell producer) include BMW, Volkswagen, Volvo Cars, and Polestar. Here in the US,&nbsp;ACE Green Recycling&nbsp;announced plans to build and operate North America’s largest sustainable battery recycling park in Texas. The proposed plant will be able to recycle both traditional lead-acid batteries, as well as lithium batteries, using a more environmentally sustainable process that can also produce higher battery material yields.</p>
<p>As if higher metal prices and looming material shortage weren’t enough.&nbsp;The new government in Chile, the world’s second-largest producer of lithium, has pledged to establish a&nbsp;state lithium firm&nbsp;to develop the ultra-light battery metal and hopes to establish a model for the company by the end of the year, effectively setting up a government-run competitor to SQM and ALB, who are currently developing and mining lithium for the global EV market in the country. Meanwhile, current lithium operators in the country are facing a new challenge, or rather a new chapter in an old challenge – environmental activism. The issue at hand is the pink flamingo population, which a&nbsp;recent study&nbsp;suggested was declining, partly as a result of excessive water use by lithium miners operating in the country, which is putting a strain on flamingo habitats. While the merit of the study and its conclusions can be debated, environmental groups have seized on the report to limit future mining activities in the country. Unfortunately, Chile is not unique – domestically, both PLL and LAC, who are trying to commercialize both lithium mining and battery material processing facilities in North Carolina and Nevada, respectively, are facing similar obstacles in getting regulatory and environmental permits necessary to commence development and construction of these projects, as environmental groups and those representing indigenous populations are actively lobbying and in some cases suing in an attempt to hinder the development of domestic supply of the materials critical to the ongoing transformation of the automotive and transportation industries. We believe these trends will continue, highlighting the underlying issues with automotive electrification – key materials to enable the transition are mined or, in the case of graphite for battery anodes, still rely on petrochemical feedstocks, which means their environmental impact must be considered and accounted for. We believe blocking domestic development of resources critical to the industry’s needs will do little to accelerate the rate of EV adoption by consumers, while keeping domestic markets hostage to Chinese sources, or reliant on materials produced in other parts of the world that may not be as environmentally responsible as domestic manufacture would be.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Food security is a real concern.&nbsp;In the latest sign of growing global food security concerns, India, the second-largest wheat grower in the world,&nbsp;has mostly prohibited exports, saying that the nation’s food security is under threat. Hot weather in wheat-producing regions of the country has already affected expected harvest yields, causing the government to lower its production outlook for the season by 5.7% to 105 million metric tons for the crop year ending in June. Meanwhile,&nbsp;grain exports from Ukraine&nbsp;are down 64% so far in May compared with last year at this time, as a result of Russia’s invasion of the country and disruptions to shipping as well as planting. Russia’s blockade of Ukrainian Black Sea ports has stranded approximately&nbsp;20 million tons of grain in the country’s warehouses, keeping the critical supplies from the global market and countries that rely on Ukrainian wheat for their food security. Ukraine accounted for 10% of global wheat exports in 2021.</p>
<p>Late plantings raise weed concerns, which may be a positive for herbicide producers.&nbsp;One consequence of late plantings and therefore late sprouting of row crops this year is the disadvantage it puts these sprouting crops versus faster growing,&nbsp;more aggressive grasses and weeds&nbsp;that compete with sowed grain for nutrients and water. As a result, greater use of herbicides (assuming farmers can get them, given the shortages and higher prices we discussed in previous publications) may be required, which may be seen as a positive for herbicide producers, such as CTVA, BASF, Bayer, AVD, and to a lesser extent, FMC (due to that company’s higher proportion of insecticide sales). It may also benefit emerging biobased ag input companies, such as BIOX and MBII, who sell products that help crops utilize the nutrients in the soil, as well as condition the soil itself to be less hospitable to pests.</p>
<h2>Recent WTR Publications</h2>
<p>Bio-ag market update and Marrone Bio Innovations-Bioceres Merger</p>
<p>Marrone Bio Innovations 1Q22 Results</p>
<p>Fireside Chat: Kevin R. Helash, Chief Executive Officer and Director of Marrone Bio Innovations</p>
<h2>Rating and Price Target Changes</h2>
<p>EAF –&nbsp;GLJ Research lowered its price target (PT) to $4.93 from $6.72 and reiterated its Sell recommendation.</p>
<p>ECL –&nbsp;Credit Suisse initiated coverage of the stock with a Neutral rating and $180 PT.</p>
<p>KWR –&nbsp;Deutsche Bank lowered its PT to $175 from $225 and reiterated its Buy rating.</p>
<p>LTHM –&nbsp;Deutsche Bank initiated coverage of the stock with a Hold rating and $29 PT.</p>
<p>PPG –&nbsp;Berenberg Bank downgraded the stock to Hold from Buy and lowered its PT to $140 from $180.</p>
<p>SHW –&nbsp;Berenberg Bank lowered its PT to $285 from $310 and maintained its Hold recommendation.</p>
<h3>DISCLOSURES</h3>
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<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>
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KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;In what was another down week for the market, with the Russell 2000 declining 1.1% and the S&amp;P 500 dropping a whopping 3.0%, our WTR-CMI index of 30 chemicals and materials technology companies bucked the trend and posted a 1.0% appreciation. YTD, our index, while down 9.8%, is materially outperforming the broader market, as the Russell 2000 has declined 21%, while the S&amp;P 500 has lost 18.1% of its value since the beginning of 2022.
Winners and losers.&nbsp;Lithium stocks’ recovery led the performance last week, with PLL (up 10.9%), LAC (up 7.8%), and LTHM (up 7.4%) leading the way. Conversely, KWR, SHW, and PKE suffered the biggest declines, dropping 5.5%, 5.4%, and 5.0%, respectively, being the only stocks in our index to underperform the S&amp;P 500.
Addressing biologics’ growing needs.&nbsp;Taking a break from boardroom fights, AVD announced the development (with 3Bar Biologics) of&nbsp;non-reusable packaging&nbsp;for liquid biologic crop protection products, as bio-based crop inputs are incompatible with reusable packaging typically used in these applications due to the threat of contamination and the need for sterility when dealing with live organisms.
April was the worst month of the year…so far.&nbsp;The European new car market saw another negative Y/Y comp, with&nbsp;new car registrations declining almost 21%&nbsp;compared with April of 2021, the steepest Y/Y drop this year. Unfortunately, as the&nbsp;Bloomberg chart shows, May and June results may not be much better and hopes may begin to fade for a 2H22 recovery, given the general economic slowdown taking place globally and the still unresolved supply chain and logistics issues. In our sector, PPG, AXTA, and to a lesser extent, FUL, AVNT, KWR, and HXL have the greatest exposure to the automotive and transportation industry, suggesting volume growth will be hard to come by for these companies in 2022.
Plantings accelerate in US, but concerns remain.&nbsp;Better weather conditions allowed US farmers to get out into the field and attempt to catch up on getting seeds into the ground. Corn and soybean&nbsp;plantings increased significantly last week, but remain below five-year averages, with planting window rapidly closing over the&nbsp;next two to three weeks.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; May 20 close







Lithium &amp; EV Ecosystem
Auto manufacturers continue to look for an edge in EV race.&nbsp;Two German automakers made announcements last week of partnerships with companies employing new technologies to enable a more rapid transition to battery-powered vehicles.&nbsp;Mercedes Benz announced the addition of a new battery technology&nbsp;in cooperation with Sila Nanotechnologies, which utilizes higher silicon content anodes for lithium batteries. The newer anodes allow for greater energy density by 20-40% and therefore expanded battery range, addressing one of the main consumer concerns. The two companies hope to have the battery as an option for high-end and heavier SUV vehicles by the middle of this decade. Meanwhile,&nbsp;BMW joined Mangrove Lithium&nbsp;(privately held Canadian company) as the lead investor. Mangrove Lithium has developed a process to transform virgin and recycled raw lithium into battery-grade material that does not require a separate carbonate plant to convert lithium raw material into battery-grade lithium carbonate. While still in the pilot plant stage, the junior lithium converter hopes to use the recently raised capital to accelerate the construction of its first commercial production plant. No timetable was provided.
Expanding EV ecosystem.&nbsp;Swedish start-up&nbsp;Northvolt has started commercial deliveries of its battery cells&nbsp;to a car manufacturer in Europe. While the identity of the car manufacturer was not revealed, Northvolt’s customers (companies that signed supply agreements with the lithium cell producer) include BMW, Volkswagen, Volvo Cars, and Polestar. Here in the US,&nbsp;ACE Green Recycling&nbsp;announced plans to build and operate North America’s largest sustainable battery recycling park in Texas. The proposed plant will be able to recycle both traditional lead-acid batteries, as well as lithium batteries, using a more environmentally sustainable process that can also produce higher battery material yields.
As if higher metal prices and looming material shortage weren’t enough.&nbsp;The new government in Chile, the world’s second-largest producer of lithium, has pledged to establish a&nbsp;state lithium firm&nbsp;to develop the ultra-light battery metal and hopes to establish a model for the company by the end of the year, effectively setting up a government-run competitor to SQM and ALB, who are currently developing and mining lithium for the global EV market in the country. Meanwhile, current lithium operators in the country are facing a new challenge, or rather a new chapter in an old challenge – environmental activism. The issue at hand is the pink flamingo population, which a&nbsp;recent study&nbsp;suggested was declining, partly as a result of excessive water use by lithium miners operating in the country, which is putting a strain on flamingo habitats. While the merit of the study and its conclusions can be debated, environmental groups have seized on the report to limit future mining activities in the country. Unfortunately, Chile is not unique – domestically, both PLL and LAC, who are trying to commercialize both lithium mining and battery material processing facilities in North Carolina and Nevada, respectively, are facing similar obstacles in getting regulatory and environmental permits necessary to commence development and construction of these projects, as environmental groups and those representing indigenous populations are actively lobbying and in some cases suing in an attempt to hinder the development of domestic supply of the materials critical to the ongoing transformation of the automotive and transportation industries. We believe these trends will continue, highlighting the underlying issues with automotive electrification – key materials to enable the transition are mined or, in the case of graphite for battery anodes, still rely on petrochemical feedstocks, which means their environmental impact must be considered and accounted for. We believe blocking domestic development of resources critical to the industry’s needs will do little to accelerate the rate of EV adoption by consumers, while keeping domestic markets hostage to Chinese sources, or reliant on materials produced in other parts of the world that may not be as environmentally responsible as domestic manufacture would be.
Ag-Chem and Ag-Tech
Food security is a real concern.&nbsp;In the latest sign of growing global food security concerns, India, the second-largest wheat grower in the world,&nbsp;has mostly prohibited exports, saying that the nation’s food security is under threat. Hot weather in wheat-producing regions of the country has already affected expected harvest yields, causing the government to lower its production outlook for the season by 5.7% to 105 million metric tons for the crop year ending in June. Meanwhile,&nbsp;grain exports from Ukraine&nbsp;are down 64% so far in May compared with last year at this time, as a result of Russia’s invasion of the country and disruptions to shipping as well as planting. Russia’s blockade of Ukrainian Black Sea ports has stranded approximately&nbsp;20 million tons of grain in the country’s warehouses, keeping the critical supplies from the global market and countries that rely on Ukrainian wheat for their food security. Ukraine accounted for 10% of global wheat exports in 2021.
Late plantings raise weed concerns, which may be a positive for herbicide producers.&nbsp;One consequence of late plantings and therefore late sprouting of row crops this year is the disadvantage it puts these sprouting crops versus faster growing,&nbsp;more aggressive grasses and weeds&nbsp;that compete with sowed grain for nutrients and water. As a result, greater use of herbicides (assuming farmers can get them, given the shortages and higher prices we discussed in previous publications) may be required, which may be seen as a positive for herbicide producers, such as CTVA, BASF, Bayer, AVD, and to a lesser extent, FMC (due to that company’s higher proportion of insecticide sales). It may also benefit emerging biobased ag input companies, such as BIOX and MBII, who sell products that help crops utilize the nutrients in the soil, as well as condition the soil itself to be less hospitable to pests.
Recent WTR Publications
Bio-ag market update and Marrone Bio Innovations-Bioceres Merger
Marrone Bio Innovations 1Q22 Results
Fireside Chat: Kevin R. Helash, Chief Executive Officer and Director of Marrone Bio Innovations
Rating and Price Target Changes
EAF –&nbsp;GLJ Research lowered its price target (PT) to $4.93 from $6.72 and reiterated its Sell recommendation.
ECL –&nbsp;Credit Suisse initiated coverage of the stock with a Neutral rating and $180 PT.
KWR –&nbsp;Deutsche Bank lowered its PT to $175 from $225 and reiterated its Buy rating.
LTHM –&nbsp;Deutsche Bank initiated coverage of the stock with a Hold rating and $29 PT.
PPG –&nbsp;Berenberg Bank downgraded the stock to Hold from Buy and lowered its PT to $140 from $180.
SHW –&nbsp;Berenberg Bank lowered its PT to $285 from $310 and maintained its Hold recommendation.
DISCLOSURES

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








Mat-Chem Notes for the Week Ended May 22, 2022

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;The market continued to correct, with both the S&amp;P 500 and Russell 2000 declining 2.4% and 2.5%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks didn’t quite keep up the pace, losing 2.6% over the course of last week.</li>
<li>Winners and losers.&nbsp;Possibly driven by the prospects of boardroom actions, AVD led our index last week with a 4.1% gain. Overall, only eight of our 30 stocks saw their value increase last week. The declines were led by PLL, which lost 15.5%, along with other lithium stocks in our index, including ALB, LTHM, and LAC (down 5.6%, 5.9%, and 7.0%, respectively), which are beginning to trade like energy stocks in response to announced increases in Saudi Arabian oil production.</li>
<li>Patent fights and boardroom machinations (cont.).&nbsp;FMC continues its legal battles with unlicensed manufacturers of its leading insecticide active ingredient and announced that the Ningbo Intermediate People’s Court in Zhejiang Province, China,&nbsp;granted the company a pre-suit preliminary injunction&nbsp;restraining Zhejiang Yongtai Technology Co. Ltd. from infringing on the chlorantraniliprole (Rynaxypyr®) patent. Meanwhile, Cruiser Capital Advisors responded to the AVD board’s letter to the shareholders with one of its own, accompanied by a&nbsp;presentation filed with the SEC&nbsp;that advocates its position.</li>
<li>String of auto sales declines continued in April.&nbsp;If April new car registration declines in the US, UK, and France were bad, China’s COVID lockdown policies contributed to an even steeper&nbsp;48% drop in Y/Y registrations&nbsp;to the lowest April level in 10 years. The consequences of the invasion of Ukraine and the sanctions that followed were evident in&nbsp;Russia’s 79% Y/Y plunge&nbsp;in new car registrations last month. Even&nbsp;Germany&nbsp;wasn’t spared, with April registrations down 22% Y/Y.</li>
<li>Not quite ready for primetime?&nbsp;Stellantis CEO Carlos Tavares recently spoke at an industry event and&nbsp;expressed apprehension&nbsp;over the rapid growth of EV production, often driven by political considerations, without addressing the other parts of the EV infrastructure, such as charging, mining, and energy grids, which may give rise to problems of their own, suggesting more thought should be given to the execution of the EV transition.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/275/517/original/image_84217254721653010732172.png?1653010735" class="editor-image img-responsive" data-smartkarma-image-id="275517"></figure>
<p>Source: YCharts; May 13 close</p>
<h2>Automotive &amp; Transportation</h2>
<p>Bad April results may not be the last.&nbsp;As major auto producing countries finish reporting their April new car sales results, early indications are that May may not show much of an improvement, even as Y/Y comps get slightly easier. Recently,&nbsp;Toyota announced temporary idling&nbsp;of several lines across its plants in Japan, citing COVID lockdowns and supply chain disruptions. The company lowered its production target for the month by approximately 7%. While some supply chain issues are getting resolved, particularly when it comes to European manufacturers, with wire harness producer&nbsp;Leoni getting back close to pre-war levels, semiconductor chip shortages continue to buffet the industry as well, with&nbsp;another 75,300 vehicles axed&nbsp;from global production estimates by AutoForecast Solutions. Consequently, we remain concerned over the performance of PPG, AXTA, FUL, AVNT, and other companies in our sector with significant exposure to the automotive and transportation industry, as weaker end customer volumes may not be fully offset by higher prices, especially now that the US dollar has rallied to multi-year highs against foreign currencies, adding FX risk to earnings and sales forecasts.</p>
<h2>Lithium &amp; EV Ecosystem</h2>
<p>China’s NEV growth hits a snag in April.&nbsp;While April NEV sales in the country were up 50% Y/Y, they&nbsp;were down more than 38% versus March&nbsp;and were the lowest monthly sales so far this year, even when compared with February, which was affected by Chinese Lunar New Year events. The unwinding of COVID lockdowns may allow the Y/Y growth pace to pick up again in May, but we may have to wait until June for the industry to return to high double-digit or<br>triple-digit Y/Y growth of NEVs, especially as vehicle prices are going up due to rapidly rising battery metal and other raw material costs.</p>
<p>Expanding European EV ecosystem.&nbsp;Privately held Green Lithium, a lithium processing company, has published plans to build the&nbsp;UK’s first lithium refinery&nbsp;in northern England. Construction is expected to begin in2023, with production targeted to start in 2024. Full production capacity of 50,000 mt of battery-grade lithium products is expected to be reached in 2026 and is intended to supply the European EV and battery market. Meanwhile, a year after buying land in Germany for the construction of a battery grade-lithium hydroxide processing plant, AMG Lithium GmbH, a subsidiary of the Dutch Advanced Metallurgical Group (AMG),&nbsp;started construction&nbsp;of its lithium hydroxide plant in Bitterfeld-Wolfen<br>(Saxony-Anhalt), with production expected in the fall of 2023 and initial annual production capacity of 20,000 mt, enough to supply 800,000 electric cars. The plant will be capable of expanding production to 100,000 mt over time, as demand warrants.</p>
<p>Rising costs drive consternation and innovation.&nbsp;We previously highlighted Stellantis CEO Carlos Tavares’ concerns over the hurdles the EV industry must clear in the near to mid-term; a somewhat more optimistic view was provided by a&nbsp;recent report analyzing the EV market&nbsp;published by Transportation &amp; Environment, which suggests we have sufficient critical metals infrastructure to meet the expected demand from the EV market at least through the next two to four years, by which time a slew of new mining, refining, converting, and battery production capacity is expected to be brought online. A more&nbsp;granular look at the various metals&nbsp;that go into EV batteries was provided by Davis Index, which highlighted recent geopolitical issues, including the war in Ukraine, and offered a less optimistic view, more in line with that of Mr. Tavares. Regardless of forecasts and assumptions around EV growth and possible projected raw material shortfalls, one thing is certain now: metal prices have skyrocketed over the last two years, which is driving technology decisions today, and may have implications for the long term. Thus,&nbsp;BMW is working to switch to a newer and cheaper battery cell technology&nbsp;that may allow it to cut its battery costs by 30%, while improving energy density of battery packs by at least low double-digit percent versus batteries currently used by Tesla. With higher lithium prices&nbsp;reducing the premium&nbsp;of nickel-cobalt-manganese, or NCM, batteries versus lithium-iron-phosphate, or LFP batteries, auto manufacturers may begin to reconsider sacrificing the performance of NCM packs in favor of lower priced LFP technology for entry level and bargain priced EVs. Meanwhile, research continues on&nbsp;commercializing sodium-ion batteries&nbsp;as an alternative to current lithium-ion technologies, given the obvious price and availability advantages of sodium versus lithium.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Weather takes center stage as US plantings fall behind schedule.&nbsp;The latest USDA report shows that&nbsp;plantings are off to their worst start in nine years, with only 22% the crop planted, which is 28% below the five-year average for this time of year. The news isn’t much better in soybeans, with plantings at 12% being half that of the five-year average. Not surprising,&nbsp;the USDA recently lowered its yield projections for corn, although the soybean outlook still remains robust, with higher planted acres still expected. Historically, it’s been difficult, if not impossible, to catch up with plantings after such a slow start, but even&nbsp;late plantings have a chance to produce higher-than-expected yields. However, record yields still used by the USDA in its projections for corn may not be achievable, suggesting another cut in USDA expectations may be coming. Globally, despite ongoing war,&nbsp;Ukrainian farmers are doing what they can&nbsp;to get their crop into the ground to help avert food shortages at home and have an opportunity to export to countries dependent on Ukraine for crops. Meanwhile, the country awaits the opportunity to export the wheat from its last harvest, which is currently being blocked by Russian blockades of Ukrainian ports.</p>
<h2>Recent WTR Publications</h2>
<p>Bio-ag market update and Marrone Bio Innovations-Bioceres Merger</p>
<p>Marrone Bio Innovations 1Q22 Results</p>
<p>Fireside Chat with Marrone Bio Innovations CEO – Kevin Helash</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;KeyBank raised its price target (PT) to $125 from $198 and reiterated its Underweight recommendation; JP Morgan raised its PT to $235 from $200 and maintained its Neutral rating; Morgan Stanley raised its PT to $135 from $80 and reiterated its Underweight rating; RBC raised its PT to $300 from $276 and reiterated its Outperform rating; Wells Fargo upgraded the stock to Overweight from Equal Weight and raised its PT to $285 from $215.</p>
<p>CTVA –&nbsp;Deutsche Bank raised its PT to $64 from $56 and reiterated its Buy recommendation.</p>
<p>EAF –&nbsp;RBC lowered its PT to $10 from $12 but reiterated its Buy recommendation.</p>
<p>NGVT –&nbsp;Wells Fargo raised its PT to $74 from $70 and maintained its Equal Weight recommendation.</p>
<p>VVV –&nbsp;CFRA lowered its PT to $34 from $40 and reiterated its Buy rating; Citigroup also lowered its PT to $35 from $40 and reiterated its Buy recommendation; JP Morgan upgraded the stock to Overweight from Neutral and established a $36 PT.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;The market continued to correct, with both the S&amp;P 500 and Russell 2000 declining 2.4% and 2.5%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks didn’t quite keep up the pace, losing 2.6% over the course of last week.
Winners and losers.&nbsp;Possibly driven by the prospects of boardroom actions, AVD led our index last week with a 4.1% gain. Overall, only eight of our 30 stocks saw their value increase last week. The declines were led by PLL, which lost 15.5%, along with other lithium stocks in our index, including ALB, LTHM, and LAC (down 5.6%, 5.9%, and 7.0%, respectively), which are beginning to trade like energy stocks in response to announced increases in Saudi Arabian oil production.
Patent fights and boardroom machinations (cont.).&nbsp;FMC continues its legal battles with unlicensed manufacturers of its leading insecticide active ingredient and announced that the Ningbo Intermediate People’s Court in Zhejiang Province, China,&nbsp;granted the company a pre-suit preliminary injunction&nbsp;restraining Zhejiang Yongtai Technology Co. Ltd. from infringing on the chlorantraniliprole (Rynaxypyr®) patent. Meanwhile, Cruiser Capital Advisors responded to the AVD board’s letter to the shareholders with one of its own, accompanied by a&nbsp;presentation filed with the SEC&nbsp;that advocates its position.
String of auto sales declines continued in April.&nbsp;If April new car registration declines in the US, UK, and France were bad, China’s COVID lockdown policies contributed to an even steeper&nbsp;48% drop in Y/Y registrations&nbsp;to the lowest April level in 10 years. The consequences of the invasion of Ukraine and the sanctions that followed were evident in&nbsp;Russia’s 79% Y/Y plunge&nbsp;in new car registrations last month. Even&nbsp;Germany&nbsp;wasn’t spared, with April registrations down 22% Y/Y.
Not quite ready for primetime?&nbsp;Stellantis CEO Carlos Tavares recently spoke at an industry event and&nbsp;expressed apprehension&nbsp;over the rapid growth of EV production, often driven by political considerations, without addressing the other parts of the EV infrastructure, such as charging, mining, and energy grids, which may give rise to problems of their own, suggesting more thought should be given to the execution of the EV transition.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; May 13 close
Automotive &amp; Transportation
Bad April results may not be the last.&nbsp;As major auto producing countries finish reporting their April new car sales results, early indications are that May may not show much of an improvement, even as Y/Y comps get slightly easier. Recently,&nbsp;Toyota announced temporary idling&nbsp;of several lines across its plants in Japan, citing COVID lockdowns and supply chain disruptions. The company lowered its production target for the month by approximately 7%. While some supply chain issues are getting resolved, particularly when it comes to European manufacturers, with wire harness producer&nbsp;Leoni getting back close to pre-war levels, semiconductor chip shortages continue to buffet the industry as well, with&nbsp;another 75,300 vehicles axed&nbsp;from global production estimates by AutoForecast Solutions. Consequently, we remain concerned over the performance of PPG, AXTA, FUL, AVNT, and other companies in our sector with significant exposure to the automotive and transportation industry, as weaker end customer volumes may not be fully offset by higher prices, especially now that the US dollar has rallied to multi-year highs against foreign currencies, adding FX risk to earnings and sales forecasts.
Lithium &amp; EV Ecosystem
China’s NEV growth hits a snag in April.&nbsp;While April NEV sales in the country were up 50% Y/Y, they&nbsp;were down more than 38% versus March&nbsp;and were the lowest monthly sales so far this year, even when compared with February, which was affected by Chinese Lunar New Year events. The unwinding of COVID lockdowns may allow the Y/Y growth pace to pick up again in May, but we may have to wait until June for the industry to return to high double-digit or triple-digit Y/Y growth of NEVs, especially as vehicle prices are going up due to rapidly rising battery metal and other raw material costs.
Expanding European EV ecosystem.&nbsp;Privately held Green Lithium, a lithium processing company, has published plans to build the&nbsp;UK’s first lithium refinery&nbsp;in northern England. Construction is expected to begin in2023, with production targeted to start in 2024. Full production capacity of 50,000 mt of battery-grade lithium products is expected to be reached in 2026 and is intended to supply the European EV and battery market. Meanwhile, a year after buying land in Germany for the construction of a battery grade-lithium hydroxide processing plant, AMG Lithium GmbH, a subsidiary of the Dutch Advanced Metallurgical Group (AMG),&nbsp;started construction&nbsp;of its lithium hydroxide plant in Bitterfeld-Wolfen (Saxony-Anhalt), with production expected in the fall of 2023 and initial annual production capacity of 20,000 mt, enough to supply 800,000 electric cars. The plant will be capable of expanding production to 100,000 mt over time, as demand warrants.
Rising costs drive consternation and innovation.&nbsp;We previously highlighted Stellantis CEO Carlos Tavares’ concerns over the hurdles the EV industry must clear in the near to mid-term; a somewhat more optimistic view was provided by a&nbsp;recent report analyzing the EV market&nbsp;published by Transportation &amp; Environment, which suggests we have sufficient critical metals infrastructure to meet the expected demand from the EV market at least through the next two to four years, by which time a slew of new mining, refining, converting, and battery production capacity is expected to be brought online. A more&nbsp;granular look at the various metals&nbsp;that go into EV batteries was provided by Davis Index, which highlighted recent geopolitical issues, including the war in Ukraine, and offered a less optimistic view, more in line with that of Mr. Tavares. Regardless of forecasts and assumptions around EV growth and possible projected raw material shortfalls, one thing is certain now: metal prices have skyrocketed over the last two years, which is driving technology decisions today, and may have implications for the long term. Thus,&nbsp;BMW is working to switch to a newer and cheaper battery cell technology&nbsp;that may allow it to cut its battery costs by 30%, while improving energy density of battery packs by at least low double-digit percent versus batteries currently used by Tesla. With higher lithium prices&nbsp;reducing the premium&nbsp;of nickel-cobalt-manganese, or NCM, batteries versus lithium-iron-phosphate, or LFP batteries, auto manufacturers may begin to reconsider sacrificing the performance of NCM packs in favor of lower priced LFP technology for entry level and bargain priced EVs. Meanwhile, research continues on&nbsp;commercializing sodium-ion batteries&nbsp;as an alternative to current lithium-ion technologies, given the obvious price and availability advantages of sodium versus lithium.
Ag-Chem and Ag-Tech
Weather takes center stage as US plantings fall behind schedule.&nbsp;The latest USDA report shows that&nbsp;plantings are off to their worst start in nine years, with only 22% the crop planted, which is 28% below the five-year average for this time of year. The news isn’t much better in soybeans, with plantings at 12% being half that of the five-year average. Not surprising,&nbsp;the USDA recently lowered its yield projections for corn, although the soybean outlook still remains robust, with higher planted acres still expected. Historically, it’s been difficult, if not impossible, to catch up with plantings after such a slow start, but even&nbsp;late plantings have a chance to produce higher-than-expected yields. However, record yields still used by the USDA in its projections for corn may not be achievable, suggesting another cut in USDA expectations may be coming. Globally, despite ongoing war,&nbsp;Ukrainian farmers are doing what they can&nbsp;to get their crop into the ground to help avert food shortages at home and have an opportunity to export to countries dependent on Ukraine for crops. Meanwhile, the country awaits the opportunity to export the wheat from its last harvest, which is currently being blocked by Russian blockades of Ukrainian ports.
Recent WTR Publications
Bio-ag market update and Marrone Bio Innovations-Bioceres Merger
Marrone Bio Innovations 1Q22 Results
Fireside Chat with Marrone Bio Innovations CEO – Kevin Helash
Rating and Price Target Changes
ALB –&nbsp;KeyBank raised its price target (PT) to $125 from $198 and reiterated its Underweight recommendation; JP Morgan raised its PT to $235 from $200 and maintained its Neutral rating; Morgan Stanley raised its PT to $135 from $80 and reiterated its Underweight rating; RBC raised its PT to $300 from $276 and reiterated its Outperform rating; Wells Fargo upgraded the stock to Overweight from Equal Weight and raised its PT to $285 from $215.
CTVA –&nbsp;Deutsche Bank raised its PT to $64 from $56 and reiterated its Buy recommendation.
EAF –&nbsp;RBC lowered its PT to $10 from $12 but reiterated its Buy recommendation.
NGVT –&nbsp;Wells Fargo raised its PT to $74 from $70 and maintained its Equal Weight recommendation.
VVV –&nbsp;CFRA lowered its PT to $34 from $40 and reiterated its Buy rating; Citigroup also lowered its PT to $35 from $40 and reiterated its Buy recommendation; JP Morgan upgraded the stock to Overweight from Neutral and established a $36 PT.
DISCLOSURES

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

Mat-Chem Notes for the Week Ended May 15, 2022

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

KEY HIGHLIGHTS

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

WTR-CMI WEEKLY PERFORMANCE

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

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

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

<h2>KEY HIGHLIGHTS</h2>
<ul>
<li>WTR-CMI last week.&nbsp;In what was a down week for the market overall, our WTR-CMI index of 30 chemicals and materials technology stocks declined 1.8%, which still beat both the S&amp;P 500’s (2.8%) and Russell 2000’s (3.2%) returns for the week.</li>
<li>Winners and losers. Stronger than expected 1Q22 results drove AVNT (up 10.8%), and PPG (up 3.6%) last week, with AVNT also benefiting from the&nbsp;announced acquisition&nbsp;of DSM’s Protective Materials business, which would expand the company’s position in the advanced composites industry. At the other end of the spectrum, the ever-volatile lithium names came under pressure, possibly on news that Chinese lithium carbonate production exceeded expectations, with LTHM losing 10.7%, LAC pulling back 9.3%, and PLL and ALB seeing their stock prices decline 5.3% and 4.9% respectively.</li>
<li>Construction market losing steam in US.&nbsp;Construction and Transportation markets represent 40-50% of a typical chemicals and materials company’s sales, so the performance of these industries is a key barometer of performance for the companies in their respective supply chains. With the global automotive industry struggling with semiconductor shortages, COVID lockdowns, and logistical issues, the strength of the construction market helped shore up volumes for many companies in our sector in 2021. However, recent&nbsp;weakness in this market, driven by cost inflation and now, higher mortgage rates, may spell trouble for companies with exposure to the sector, including SHW, PPG, FUL and RPM. Furthermore, with&nbsp;homebuilders’ sentiment declining, construction market woes may be just beginning.</li>
<li>Organic production drives bio-based ag-chem growth.&nbsp;Organic fresh produce sales grew 4% Y/Y&nbsp;in 1Q22, and while growth was driven by higher prices, as volumes declined 1%, they still outperformed conventional produce sales, which saw volume drop of 2.7% Y/Y. Continued adoption of organic farming is one of many reasons bio-ag companies like MBII and BIOX are seeing strong growth, while&nbsp;established ag-chem companies jockey for position&nbsp;in this evolving industry. With fertilizer prices and availability becoming in issue (see below),&nbsp;biostimulants market segment&nbsp;may see even stronger adoption rates.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/270/791/original/image_73769124821651103162837.png?1651103165" class="editor-image img-responsive" data-smartkarma-image-id="270791"></figure>
<p>Source: YCharts, April 22 close</p>
<h2>Automotive &amp; Transportation</h2>
<p>Bad start to the year in Europe. 1Q22&nbsp;ACEA statistics&nbsp;on new auto registrations in Europe were released, showing a 20.5% Y/Y drop in March (ninth consecutive month of Y/Y declines), which brought 1Q22 registrations down 12.3% Y/Y. With 1Q22 containing only one month (March) of tough Y/Y comps and 2Q22 coming against the last two strong months of 2021, April and May, this quarter’s performance may not show much if any improvement compared to 1Q22 results. Companies with significant exposure to the European automotive market, such as AXTA and BASF (and to a lesser degree, PPG) may therefore continue to struggle with volumes, even as they raise prices in order to catch up with inflationary raw material costs. Results therefore appear more likely to disappoint, at least until we get into easier Y/Y comps in 2H22.</p>
<p>COVID lockdown impact yet to be worked out, while European war adds further concerns. While the Chinese government appears to be relaxing the lockdowns in Shanghai, the&nbsp;restart of production in the region&nbsp;is going far from smoothly. In the meantime, the lockdowns and shuttered production impacted the already tight semiconductor market, with&nbsp;Chinese chip output down 4.2%&nbsp;Y/Y, the first time Y/Y production slipped since 1Q19. With chip shortages continuing to be an issue holding back auto production globally,&nbsp;Honda joined the list of companies cutting back on auto builds&nbsp;at its factories in Japan, citing COVID lockdowns and chip shortages as the reason. And as if that wasn’t enough of a headwind for the industry,&nbsp;Continental, one of the major global tire producers, recently lowered its earnings outlook&nbsp;for the year, citing higher material costs due to the war in Ukraine, as well as related supply chain disruptions.</p>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>Supply chain tie-ups continue. Companies throughout the EV supply chain look to both secure critical metals and materials for batteries and electric motors powering the EV transition, and to reduce if not eliminate the near total dependence on China for these strategic materials. China, for example, supplies near 100% of rare earths, used in magnets driving electric motors. One global electric motor producer, Schaeffler,&nbsp;recently announced a deal&nbsp;to source rare earths for its magnets from Norway, reducing its dependence on China, at least after 2024. Graphite, another critical material for EV batteries, is also expected to see strong growth going forward, with auto companies seeking to secure their supply of the material with off-take agreements with producers. Recently, a US unit of Australian company Syrah Resources Ltd.&nbsp;announced the receipt of $107M in a conditional loan&nbsp;from the Biden Administration to expand its facility in Louisiana and provide a domestic source of graphite for Tesla’s operations.</p>
<p>Efforts to domesticate EV supply chain. Again, both in an effort to shorten and simplify the supply chain, but also to reduce reliance on China, manufacturers and governments are working to develop local ecosystems for EV production. Thus,&nbsp;South Korean battery companies are looking to develop and expand nickel production in Indonesia, signing an agreement with Indonesian state-owned companies for a project worth around $9 billion over time. Closer to home, the founder of Britishvolt and Italvolt has announced the creation of another subsidiary, this time in the US, named Statevolt, for the purpose of&nbsp;building a lithium battery factory in U.S., most likely in Southern California’s Imperial Valley, which will offer an annual capacity of 54 GWh when fully expanded.</p>
<p>Impact of chip shortages spreading to EVs. While the semiconductor shortage has plagued the auto industry for well over a year, the EV industry seemed largely immune. That may be changing, as EV production halts have begun to occur more often, usually blamed on chip shortages, but now also on supply disruptions related to the war in Ukraine.&nbsp;Renault had to pause production&nbsp;of its all-electric Mégane E-Tech Electric brand in France for over 10 days recently. With chip shortages expected to last into 2024, their impact on EV production may expand which, combined with higher material and battery costs (and resulting higher vehicle costs), may temper the pace of growth of EVs globally.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Real world implications from the war in Ukraine. As expected, Russia’s invasion of Ukraine is having a catastrophic impact on the country’s ag sector. Government officials already warned that this year’s plantings may be down as much as 50%, perhaps more, as the result of the conflict. The latest&nbsp;planting updates&nbsp;from the region do not provide cause for optimism. And despite the heroism of the farmers that are getting out into the fields despite shelling, land mines, and&nbsp;shortages of everything from fuel to fertilizers, this year’s production may barely suffice for internal use, with longer term impact likely to be felt for years to come. Aside from the planting and production shortfall in Ukraine, the impact of sanctions and counter sanctions continue to be evaluated from the global perspective. And while American farmers may be&nbsp;less impacted by potential shortages of fertilizers, given that our needs are met largely by domestic or Canadian production, in Brazil, which imports 75-95% of its fertilizer needs, much of it from Russia and Belarus, price and availability may become a real issue for the region’s ag industry.</p>
<p>Availability of ag inputs. Given the importance of Brazil in the global market as a producer and exporter of row crops, acreage or yield declines due to unavailability of crop inputs can have devastating effects on global food security. On a positive note, a&nbsp;<a href="https://www.thedailyscoop.com/news/retail-industry/russian-fertilizer-shipments-continue-brazil?mkt_tok=ODQzLVlHQi03OTMAAAGD5dKOWK90TEnesgpbtZe3iLXpaEggk9J1LM6TmfkjaeW3Qy8y6HyZwt-WyOqH6hPxO3iOo8z3xhMlCub_jFOlpylGdDRUpD3Ac_euHYreRSD1-qcTAQ" target="_blank" rel="noopener">recent report by </a>Reuters&nbsp;mentioned that least 24 vessels carrying almost 678,000 MT of Russian fertilizers will reach Brazil in the following weeks. However, with 11 of the 24 vessels leaving port after the February 24 start of hostilities, the flow of fertilizer from Russia into the country may slow, even as demand ramps up, leaving plenty of uncertainty in the market as to the ultimate production quantities that would be available for export. Speaking of Brazil, the&nbsp;country’s wheat industry saw a strong uptick in herbicide use in 2021, driven in part by growth in planted acres, but also by growing adoption of pre-harvest desiccation. Wheat being an important end-market for BIOX’s sales and a growth opportunity for MBII as it partners with BIOX to expedite its penetration of the LATAM market, we see this is a positive for the combined company, as well as for ag-chem majors like CTVA, BASF and Bayer.</p>
<p>As if the war and cost inflation wasn’t enough. While one would expect the conflict in Europe to disrupt production and shipping of fertilizers, Union Pacific’s limitations on fertilizer shipments in domestic markets is adding insult to injury.&nbsp;CF Industries’ notice of UP reducing shipments&nbsp;of its nitrogen and hydrogen products by 20% may impact the company’s ability to meet new or incremental demand, adding to availability concerns many farmers already face, not to mention likely contributing to higher fertilizer prices if alternative shipping arrangements are required. The one remaining silver lining is the&nbsp;continuing upward trend in grain prices, which suggest US farmers may still deliver strong results, even with higher costs of everything from fertilizers to crop protection chemicals, to fuel, to labor, to land.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB&nbsp;– RBC raised its price target (PT) to $276 from $275 and reiterated its Outperform rating.</p>
<p>ASH&nbsp;– Wells Fargo raised its PT to $113 from $105 while maintaining its Equal Weight recommendation; Mizuho also raised its PT to $136 from $129, reiterating its Buy rating.</p>
<p>AVNT&nbsp;– Wells Fargo raised its PT to $65 from $60 and reiterated its Overweight rating; Oppenheimer also raised its PT to $69 from $68 and reiterated its Outperform rating.</p>
<p>AXTA&nbsp;– Deutsche Bank downgraded the stock to Hold from Buy and lowered PT to $27 from $34; Wells Fargo reduced its PT to $27 from $32 and maintained its Equal Weight rating.</p>
<p>CMP&nbsp;– BMO raised its PT to $63 from $60 and maintained its Market Perform rating.</p>
<p>CTVA&nbsp;– RBC raised its PT to $67 from $57 and reiterated its Outperform rating.</p>
<p>EAF&nbsp;– RBC lowered its PT to $112 from $113 but reiterated its Outperform rating.</p>
<p>EMN&nbsp;– BofA downgraded the stock to Neutral from Buy and lowered its PT to $124 from $150; Wolfe Research downgraded the stock to Peer Perform from Outperform and lowered its PT to $114 from $130.</p>
<p>FMC&nbsp;– RBC raised its PT to $152 from $135 and reiterated its Outperform rating.</p>
<p>PPG&nbsp;– Wells Fargo lowered its PT to $140 from $170 and maintained its Equal Weight rating.</p>
<p>SHW&nbsp;– Wells Fargo lowered its PT to $275 from $315 and maintained its Equal Weight rating.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

WTR-CMI last week.&nbsp;In what was a down week for the market overall, our WTR-CMI index of 30 chemicals and materials technology stocks declined 1.8%, which still beat both the S&amp;P 500’s (2.8%) and Russell 2000’s (3.2%) returns for the week.
Winners and losers. Stronger than expected 1Q22 results drove AVNT (up 10.8%), and PPG (up 3.6%) last week, with AVNT also benefiting from the&nbsp;announced acquisition&nbsp;of DSM’s Protective Materials business, which would expand the company’s position in the advanced composites industry. At the other end of the spectrum, the ever-volatile lithium names came under pressure, possibly on news that Chinese lithium carbonate production exceeded expectations, with LTHM losing 10.7%, LAC pulling back 9.3%, and PLL and ALB seeing their stock prices decline 5.3% and 4.9% respectively.
Construction market losing steam in US.&nbsp;Construction and Transportation markets represent 40-50% of a typical chemicals and materials company’s sales, so the performance of these industries is a key barometer of performance for the companies in their respective supply chains. With the global automotive industry struggling with semiconductor shortages, COVID lockdowns, and logistical issues, the strength of the construction market helped shore up volumes for many companies in our sector in 2021. However, recent&nbsp;weakness in this market, driven by cost inflation and now, higher mortgage rates, may spell trouble for companies with exposure to the sector, including SHW, PPG, FUL and RPM. Furthermore, with&nbsp;homebuilders’ sentiment declining, construction market woes may be just beginning.
Organic production drives bio-based ag-chem growth.&nbsp;Organic fresh produce sales grew 4% Y/Y&nbsp;in 1Q22, and while growth was driven by higher prices, as volumes declined 1%, they still outperformed conventional produce sales, which saw volume drop of 2.7% Y/Y. Continued adoption of organic farming is one of many reasons bio-ag companies like MBII and BIOX are seeing strong growth, while&nbsp;established ag-chem companies jockey for position&nbsp;in this evolving industry. With fertilizer prices and availability becoming in issue (see below),&nbsp;biostimulants market segment&nbsp;may see even stronger adoption rates.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts, April 22 close
Automotive &amp; Transportation
Bad start to the year in Europe. 1Q22&nbsp;ACEA statistics&nbsp;on new auto registrations in Europe were released, showing a 20.5% Y/Y drop in March (ninth consecutive month of Y/Y declines), which brought 1Q22 registrations down 12.3% Y/Y. With 1Q22 containing only one month (March) of tough Y/Y comps and 2Q22 coming against the last two strong months of 2021, April and May, this quarter’s performance may not show much if any improvement compared to 1Q22 results. Companies with significant exposure to the European automotive market, such as AXTA and BASF (and to a lesser degree, PPG) may therefore continue to struggle with volumes, even as they raise prices in order to catch up with inflationary raw material costs. Results therefore appear more likely to disappoint, at least until we get into easier Y/Y comps in 2H22.
COVID lockdown impact yet to be worked out, while European war adds further concerns. While the Chinese government appears to be relaxing the lockdowns in Shanghai, the&nbsp;restart of production in the region&nbsp;is going far from smoothly. In the meantime, the lockdowns and shuttered production impacted the already tight semiconductor market, with&nbsp;Chinese chip output down 4.2%&nbsp;Y/Y, the first time Y/Y production slipped since 1Q19. With chip shortages continuing to be an issue holding back auto production globally,&nbsp;Honda joined the list of companies cutting back on auto builds&nbsp;at its factories in Japan, citing COVID lockdowns and chip shortages as the reason. And as if that wasn’t enough of a headwind for the industry,&nbsp;Continental, one of the major global tire producers, recently lowered its earnings outlook&nbsp;for the year, citing higher material costs due to the war in Ukraine, as well as related supply chain disruptions.
Lithium &amp; EV Ecosystem Developments
Supply chain tie-ups continue. Companies throughout the EV supply chain look to both secure critical metals and materials for batteries and electric motors powering the EV transition, and to reduce if not eliminate the near total dependence on China for these strategic materials. China, for example, supplies near 100% of rare earths, used in magnets driving electric motors. One global electric motor producer, Schaeffler,&nbsp;recently announced a deal&nbsp;to source rare earths for its magnets from Norway, reducing its dependence on China, at least after 2024. Graphite, another critical material for EV batteries, is also expected to see strong growth going forward, with auto companies seeking to secure their supply of the material with off-take agreements with producers. Recently, a US unit of Australian company Syrah Resources Ltd.&nbsp;announced the receipt of $107M in a conditional loan&nbsp;from the Biden Administration to expand its facility in Louisiana and provide a domestic source of graphite for Tesla’s operations.
Efforts to domesticate EV supply chain. Again, both in an effort to shorten and simplify the supply chain, but also to reduce reliance on China, manufacturers and governments are working to develop local ecosystems for EV production. Thus,&nbsp;South Korean battery companies are looking to develop and expand nickel production in Indonesia, signing an agreement with Indonesian state-owned companies for a project worth around $9 billion over time. Closer to home, the founder of Britishvolt and Italvolt has announced the creation of another subsidiary, this time in the US, named Statevolt, for the purpose of&nbsp;building a lithium battery factory in U.S., most likely in Southern California’s Imperial Valley, which will offer an annual capacity of 54 GWh when fully expanded.
Impact of chip shortages spreading to EVs. While the semiconductor shortage has plagued the auto industry for well over a year, the EV industry seemed largely immune. That may be changing, as EV production halts have begun to occur more often, usually blamed on chip shortages, but now also on supply disruptions related to the war in Ukraine.&nbsp;Renault had to pause production&nbsp;of its all-electric Mégane E-Tech Electric brand in France for over 10 days recently. With chip shortages expected to last into 2024, their impact on EV production may expand which, combined with higher material and battery costs (and resulting higher vehicle costs), may temper the pace of growth of EVs globally.
Ag-Chem and Ag-Tech
Real world implications from the war in Ukraine. As expected, Russia’s invasion of Ukraine is having a catastrophic impact on the country’s ag sector. Government officials already warned that this year’s plantings may be down as much as 50%, perhaps more, as the result of the conflict. The latest&nbsp;planting updates&nbsp;from the region do not provide cause for optimism. And despite the heroism of the farmers that are getting out into the fields despite shelling, land mines, and&nbsp;shortages of everything from fuel to fertilizers, this year’s production may barely suffice for internal use, with longer term impact likely to be felt for years to come. Aside from the planting and production shortfall in Ukraine, the impact of sanctions and counter sanctions continue to be evaluated from the global perspective. And while American farmers may be&nbsp;less impacted by potential shortages of fertilizers, given that our needs are met largely by domestic or Canadian production, in Brazil, which imports 75-95% of its fertilizer needs, much of it from Russia and Belarus, price and availability may become a real issue for the region’s ag industry.
Availability of ag inputs. Given the importance of Brazil in the global market as a producer and exporter of row crops, acreage or yield declines due to unavailability of crop inputs can have devastating effects on global food security. On a positive note, a&nbsp;recent report by Reuters&nbsp;mentioned that least 24 vessels carrying almost 678,000 MT of Russian fertilizers will reach Brazil in the following weeks. However, with 11 of the 24 vessels leaving port after the February 24 start of hostilities, the flow of fertilizer from Russia into the country may slow, even as demand ramps up, leaving plenty of uncertainty in the market as to the ultimate production quantities that would be available for export. Speaking of Brazil, the&nbsp;country’s wheat industry saw a strong uptick in herbicide use in 2021, driven in part by growth in planted acres, but also by growing adoption of pre-harvest desiccation. Wheat being an important end-market for BIOX’s sales and a growth opportunity for MBII as it partners with BIOX to expedite its penetration of the LATAM market, we see this is a positive for the combined company, as well as for ag-chem majors like CTVA, BASF and Bayer.
As if the war and cost inflation wasn’t enough. While one would expect the conflict in Europe to disrupt production and shipping of fertilizers, Union Pacific’s limitations on fertilizer shipments in domestic markets is adding insult to injury.&nbsp;CF Industries’ notice of UP reducing shipments&nbsp;of its nitrogen and hydrogen products by 20% may impact the company’s ability to meet new or incremental demand, adding to availability concerns many farmers already face, not to mention likely contributing to higher fertilizer prices if alternative shipping arrangements are required. The one remaining silver lining is the&nbsp;continuing upward trend in grain prices, which suggest US farmers may still deliver strong results, even with higher costs of everything from fertilizers to crop protection chemicals, to fuel, to labor, to land.
Rating and Price Target Changes
ALB&nbsp;– RBC raised its price target (PT) to $276 from $275 and reiterated its Outperform rating.
ASH&nbsp;– Wells Fargo raised its PT to $113 from $105 while maintaining its Equal Weight recommendation; Mizuho also raised its PT to $136 from $129, reiterating its Buy rating.
AVNT&nbsp;– Wells Fargo raised its PT to $65 from $60 and reiterated its Overweight rating; Oppenheimer also raised its PT to $69 from $68 and reiterated its Outperform rating.
AXTA&nbsp;– Deutsche Bank downgraded the stock to Hold from Buy and lowered PT to $27 from $34; Wells Fargo reduced its PT to $27 from $32 and maintained its Equal Weight rating.
CMP&nbsp;– BMO raised its PT to $63 from $60 and maintained its Market Perform rating.
CTVA&nbsp;– RBC raised its PT to $67 from $57 and reiterated its Outperform rating.
EAF&nbsp;– RBC lowered its PT to $112 from $113 but reiterated its Outperform rating.
EMN&nbsp;– BofA downgraded the stock to Neutral from Buy and lowered its PT to $124 from $150; Wolfe Research downgraded the stock to Peer Perform from Outperform and lowered its PT to $114 from $130.
FMC&nbsp;– RBC raised its PT to $152 from $135 and reiterated its Outperform rating.
PPG&nbsp;– Wells Fargo lowered its PT to $140 from $170 and maintained its Equal Weight rating.
SHW&nbsp;– Wells Fargo lowered its PT to $275 from $315 and maintained its Equal Weight rating.
DISCLOSURES

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

Mat-Chem Notes for the Week Ended April 24, 2022

United States

Corteva, Inc. provides agricultural products. The Company offers seeds and crop protection products, as well as software solutions and digital services. Corteva serves customers worldwide.

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Corteva (CTVA US)

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