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

WTR-CMI WEEKLY PERFORMANCE


Source: YCharts; August 5 close

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

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

Mat-Chem Notes for the Week Ended August 7, 2022

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;In what was a week of recovery for the market, the S&amp;P 500 and Russell 2000 advanced 2.5% and 3.6%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks outperformed the broader indexes by delivering a 6.1% bounce last week. The WTR-CMI’s performance was led by EAF’s 14.4% rebound from previous weeks’ losses and regained investor enthusiasm for lithium following Elon Musk’s remarks, which saw LTHM, PLL, LAC, and ALB deliver double-digit gains for the week. PKE and AVD were the only stocks in our index to finish the week in the red.</li>
<li>NEVs are not immune from market forces.&nbsp;An&nbsp;ACEA summary of the EU’s 2Q22 auto sales by fuel type&nbsp;showed that while the share of new energy vehicles (NEVs) of new car sales has increased Y/Y, it was more a function of declining sales volumes of conventional fueled vehicles as growth, as Y/Y sales of BEVs increased a relatively modest 11%,. Furthermore, hybrid vehicle (HEV) and plug-in hybrid vehicle (PHEV) sales declined. This suggests that a deepening and spreading economic recession may slow the pace of NEV sales versus expectations and, by extent, affect growth forecasts for key material.</li>
<li>ASH provides positive outlook.&nbsp;Citing lower exposure to pet-chem-driven RM inflation and stable end-markets,&nbsp;ASH pre-announced&nbsp;stronger F3Q22 (Jun-Q) results and raised guidance for its Sep-Q by 3% for revenue and 4% for EBITDA, helping the stock keep up with the WTR-CMI index last week. Similar RM and end-market exposure may benefit ECL, SXT, and NGVT.</li>
<li>Keeping an eye on the future.&nbsp;Even as recession concerns grow, EV manufacturers are looking to ensure sufficient supply of critical materials for lithium batteries, casting their nets wide. Thus,&nbsp;CMP announced a signing&nbsp;of a non-binding memorandum of understanding with Ford to potentially supply the company or its battery partners with battery-grade lithium from CMP’s yet-to-be designed lithium extraction and conversion facility.</li>
<li>A new trend continues to emerge in ag.&nbsp;Indoor farming, or&nbsp;controlled environment agriculture (CEA)&nbsp;continues to evolve in order to overcome the expected land shortage and address consumer demands. We believe innovations around this sector will disproportionately benefit bio-ag companies such as BIOX and BHIL, as their products also address similar concerns.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/288/568/original/image_102276742221658965404091.png?1658965406" class="editor-image img-responsive" data-smartkarma-image-id="288568"></figure>
<h2>Automotive &amp; Transportation Market</h2>
<p>Chipping away at semiconductor shortages.&nbsp;Volvo, in announcing stronger 2Q22 results, also warned that&nbsp;its total car production in 2022 may be flat to down versus last year, largely due to continuing supply issues, particularly related to semiconductor availability. It therefore appears that near-term chip availability may remain an issue holding back new car production through the balance of 2022 and affecting major auto suppliers in our WTR-CMI index, such as PPG and AXTA. As we noted last week, car companies and the semiconductor industry are not taking this shortage lying down. Last week,&nbsp;VW announced a partnership with STMicroelectronics&nbsp;to co-develop semiconductors for a cross-brand single software platform. The new semiconductors are expected to be built by TSMC. Meanwhile, American semiconductor company SkyWater Technology Inc. (NASDAQ: SKYT) announced&nbsp;plans for building a chip R&amp;D and production center&nbsp;in Indiana, with groundbreaking expected sometime in 2023. Again, these steps, while essential in shortening and strengthening the automotive supply chain for the long term, are unlikely to have a material impact on chip availability in the short term and we remain cautious on the automotive sector and those companies in our industry who rely on that market for substantial portions of their sales.</p>
<h2>EVs &amp; Battery Ecosystem</h2>
<p>Maximizing climate and economic benefits.&nbsp;A European environmental group’s study concluded that&nbsp;solid state batteries for EVs will significantly reduce the carbon footprint&nbsp;of such battery production, including lower use of metals coming from such places as the DRC. The group is therefore encouraging the EU parliament and member nations to increase their focus on promoting innovations in solid state battery technology and incorporating carbon goals for EV battery production into the region’s regulations. Meanwhile, Swedish battery company&nbsp;Northvolt is looking at technology that would utilize carbon from wood, which is plentiful in Sweden, rather than natural or pet-chem based synthetic graphite for the anode material of an EV battery, in an attempt to make the EU battery market less dependent on non-EU sources of critical battery materials. Domesticating critical supply and driving economic expansion appear to be the motivations behind&nbsp;Morocco’s efforts to attract an EV battery factory to the country&nbsp;and to integrate the country’s emerging cobalt industry more fully into the automotive battery sector. As North African countries look to compete more effectively with China and India, we may see similar strategies being followed by other nations in the region, looking to spur their economies and better the lives of their citizenry.</p>
<p>Another reason for concern.&nbsp;S&amp;P predicts global copper demand could nearly double during the next decade, from 25M mt annually now to about 50M mt in 2035 and there is a growing concern that mined copper is falling well short of this projected growth in demand. What’s more, there&nbsp;may not be sufficient copper available to meet the world’s net-zero 2050 goals, even factoring in “strong price signals and incentivizing policy initiatives, aggressive capacity utilization rates and all-time high recycling rates”. We believe that, at the very least, such physical limitations (and copper is far from the most concerning supply-demand discrepancy stories) will come into play over the next decade, potentially upsetting many of the current optimistic projections. In such an environment, we would look to market segments, such as graphite anode materials, that face nearer-term supply-demand imbalances that would still exist even under significantly reduced EV growth forecasts. We believe Westwater Resources (NYSE: WWR) offers a compelling investment opportunity in this regard.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>US crop conditions—so far so good.&nbsp;As of last week,&nbsp;corn and soybean crop conditions held steady, with 64% of corn crop listed as in good-to-excellent condition versus 65% last year, while in soybeans, good-to-excellent conditions were characterized for 61% of the crop versus 60% last year. One area of concern remains—late corn plantings resulted in only 37% of the crop silking, compared with the 48% five-year average at this time. But even assuming USDA yield and acreage projections hold, getting the harvested grain to where it needs to go via rail in the US may present its own set of problems. And while Ukraine and Russia appear to have reached an agreement on exporting Ukrainian grain through Russia-blockaded Black Sea ports, domestically,&nbsp;rail companies and unions are embroiled in labor negotiations&nbsp;that may lead to even more logistical disruptions this fall, even as grain is needing to move to processing facilities or exporting hubs.</p>
<p>Fertilizer availability (and price) remain a concern heading into 2023.&nbsp;Supply chain and logistical disruptions in the agricultural sector caused by Russia’s war in Ukraine, among other factors, are giving rise to growing concerns for the 2022-23 ag season. While fertilizer prices&nbsp;have come off their mid-season highs in North America, due to both lower off-season demand and declining energy costs, concerns remain over price and availability remain. Thus, Norwegian fertilizer company Yara, while reporting modestly stronger than expected 2Q22,&nbsp;cautioned that high natural gas prices and concerns over its availability&nbsp;given the heavy European reliance on Russian sources may result in lower production of nitrogen fertilizers in 2023, which we feel may lead to a repeat of 2021-22 price inflation in urea and ammonia, at least in the EU region. Europeans’ inability to produce sufficient fertilizer products at an acceptable cost may provide opportunities for American-based companies, such as CF Industries (NYSE: CF), to increase their market share and maintain elevated prices that should contribute to stronger margins.</p>
<p>Can grain prices support higher input cost expectations?&nbsp;With fertilizer and other crop input costs still well above 2020 levels, even after coming off mid-season peak, farmer income and farmers’ ability to withstand similar price spikes next season will depend to a large degree on commodity crop prices when this year’s harvest is monetized. As the largest importer of ag products, China’s economic health is becoming a growing concern in this regard. With the&nbsp;country’s economy slowing to 0.4% GDP growth in 2Q22&nbsp;from 4.8% growth seen in 1Q22, the Chinese government has significantly reduced its purchases of ag commodities, especially from the US, despite lower soybean production in LATAM. With Chinese imports perhaps slowing even more in conjunction with slowing economic growth, a main source of demand for ag commodities may wane over the next six to nine months, which may in turn lead to lower commodity grain prices, even as domestic farmers look to sell their supplies. Lower grain prices mean lower farmer cash income, which suggests lower ability to pay for still high input costs come 2023. US farmers may have dodged the profit contraction bullet in 2022, but it is not clear if they would be able to do it again in 2023.</p>
<p>Lower planted acreage, reduced utilization of fertilizer and ag-chem inputs per acre (as we already saw this year), and changing crop acreage decisions have the potential to negatively affect ag-chem companies such as FMC, AVD, and CTVA and we are becoming more concerned with investors’ outlook on these names souring in the months ahead. On the other hand, farmers’ strong incentive to look for alternative ways of growing and protecting their crops as well as receiving premium prices for their products may lead to faster expansion of organic farming in row crops and to accelerating adoption of bio-based fertilizers, soil conditioning products and bio-based pesticides, which we see as a positive for BIOX and BHIL.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;KeyBank upgraded the stock to Sector Weight from Underweight.</p>
<p>ASH –&nbsp;Wells Fargo lowered its price target (PT) to $107 from $113 and maintained its Equal Weight rating; Deutsche Bank lowered its PT to $120 from $122 and reiterated its Buy rating; Mizuho Securities raised its PT to $139 from $138, while also reiterating its Buy rating.</p>
<p>AVNT –&nbsp;Oppenheimer lowered its PT to $58 from $69 and reiterated its Outperform rating.</p>
<p>AXTA –&nbsp;KeyBank upgraded the stock to Overweight from Sector Weight and established a PT of $30.</p>
<p>ECVT –&nbsp;KeyBank lowered its PT to $13 from $16 and reiterated its Overweight rating.</p>
<p>EMN –&nbsp;KeyBank lowered its PT to $124 from $142 and reiterated its Overweight rating.</p>
<p>FMC –&nbsp;KeyBank raised its rating on the stock to Overweight from Sector Weight and established a $122 PT.</p>
<p>PPG –&nbsp;Wells Fargo lowered its PT to $126 from $140 and maintained its Equal Weight rating; CFRA downgraded the stock to Hold from Buy and lowered its PT to $135 from $165; Credit Suisse lowered its PT to $110 from $115 and reiterated its Underperform rating; UBS also lowered its PT to $160 from $161 but reiterated its Buy recommendation.</p>
<p>SHW –&nbsp;Wells Fargo lowered its PT to $270 from $285 and maintained its Equal Weight rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Marrone Bio Innovations CEO Kevin Helash</p>
<p>Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates</p>
<p>Initiation of Coverage – Westwater Resources, Inc.</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 week of recovery for the market, the S&amp;P 500 and Russell 2000 advanced 2.5% and 3.6%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks outperformed the broader indexes by delivering a 6.1% bounce last week. The WTR-CMI’s performance was led by EAF’s 14.4% rebound from previous weeks’ losses and regained investor enthusiasm for lithium following Elon Musk’s remarks, which saw LTHM, PLL, LAC, and ALB deliver double-digit gains for the week. PKE and AVD were the only stocks in our index to finish the week in the red.
NEVs are not immune from market forces.&nbsp;An&nbsp;ACEA summary of the EU’s 2Q22 auto sales by fuel type&nbsp;showed that while the share of new energy vehicles (NEVs) of new car sales has increased Y/Y, it was more a function of declining sales volumes of conventional fueled vehicles as growth, as Y/Y sales of BEVs increased a relatively modest 11%,. Furthermore, hybrid vehicle (HEV) and plug-in hybrid vehicle (PHEV) sales declined. This suggests that a deepening and spreading economic recession may slow the pace of NEV sales versus expectations and, by extent, affect growth forecasts for key material.
ASH provides positive outlook.&nbsp;Citing lower exposure to pet-chem-driven RM inflation and stable end-markets,&nbsp;ASH pre-announced&nbsp;stronger F3Q22 (Jun-Q) results and raised guidance for its Sep-Q by 3% for revenue and 4% for EBITDA, helping the stock keep up with the WTR-CMI index last week. Similar RM and end-market exposure may benefit ECL, SXT, and NGVT.
Keeping an eye on the future.&nbsp;Even as recession concerns grow, EV manufacturers are looking to ensure sufficient supply of critical materials for lithium batteries, casting their nets wide. Thus,&nbsp;CMP announced a signing&nbsp;of a non-binding memorandum of understanding with Ford to potentially supply the company or its battery partners with battery-grade lithium from CMP’s yet-to-be designed lithium extraction and conversion facility.
A new trend continues to emerge in ag.&nbsp;Indoor farming, or&nbsp;controlled environment agriculture (CEA)&nbsp;continues to evolve in order to overcome the expected land shortage and address consumer demands. We believe innovations around this sector will disproportionately benefit bio-ag companies such as BIOX and BHIL, as their products also address similar concerns.

WTR-CMI WEEKLY PERFORMANCE

Automotive &amp; Transportation Market
Chipping away at semiconductor shortages.&nbsp;Volvo, in announcing stronger 2Q22 results, also warned that&nbsp;its total car production in 2022 may be flat to down versus last year, largely due to continuing supply issues, particularly related to semiconductor availability. It therefore appears that near-term chip availability may remain an issue holding back new car production through the balance of 2022 and affecting major auto suppliers in our WTR-CMI index, such as PPG and AXTA. As we noted last week, car companies and the semiconductor industry are not taking this shortage lying down. Last week,&nbsp;VW announced a partnership with STMicroelectronics&nbsp;to co-develop semiconductors for a cross-brand single software platform. The new semiconductors are expected to be built by TSMC. Meanwhile, American semiconductor company SkyWater Technology Inc. (NASDAQ: SKYT) announced&nbsp;plans for building a chip R&amp;D and production center&nbsp;in Indiana, with groundbreaking expected sometime in 2023. Again, these steps, while essential in shortening and strengthening the automotive supply chain for the long term, are unlikely to have a material impact on chip availability in the short term and we remain cautious on the automotive sector and those companies in our industry who rely on that market for substantial portions of their sales.
EVs &amp; Battery Ecosystem
Maximizing climate and economic benefits.&nbsp;A European environmental group’s study concluded that&nbsp;solid state batteries for EVs will significantly reduce the carbon footprint&nbsp;of such battery production, including lower use of metals coming from such places as the DRC. The group is therefore encouraging the EU parliament and member nations to increase their focus on promoting innovations in solid state battery technology and incorporating carbon goals for EV battery production into the region’s regulations. Meanwhile, Swedish battery company&nbsp;Northvolt is looking at technology that would utilize carbon from wood, which is plentiful in Sweden, rather than natural or pet-chem based synthetic graphite for the anode material of an EV battery, in an attempt to make the EU battery market less dependent on non-EU sources of critical battery materials. Domesticating critical supply and driving economic expansion appear to be the motivations behind&nbsp;Morocco’s efforts to attract an EV battery factory to the country&nbsp;and to integrate the country’s emerging cobalt industry more fully into the automotive battery sector. As North African countries look to compete more effectively with China and India, we may see similar strategies being followed by other nations in the region, looking to spur their economies and better the lives of their citizenry.
Another reason for concern.&nbsp;S&amp;P predicts global copper demand could nearly double during the next decade, from 25M mt annually now to about 50M mt in 2035 and there is a growing concern that mined copper is falling well short of this projected growth in demand. What’s more, there&nbsp;may not be sufficient copper available to meet the world’s net-zero 2050 goals, even factoring in “strong price signals and incentivizing policy initiatives, aggressive capacity utilization rates and all-time high recycling rates”. We believe that, at the very least, such physical limitations (and copper is far from the most concerning supply-demand discrepancy stories) will come into play over the next decade, potentially upsetting many of the current optimistic projections. In such an environment, we would look to market segments, such as graphite anode materials, that face nearer-term supply-demand imbalances that would still exist even under significantly reduced EV growth forecasts. We believe Westwater Resources (NYSE: WWR) offers a compelling investment opportunity in this regard.
Ag-Chem and Ag-Tech
US crop conditions—so far so good.&nbsp;As of last week,&nbsp;corn and soybean crop conditions held steady, with 64% of corn crop listed as in good-to-excellent condition versus 65% last year, while in soybeans, good-to-excellent conditions were characterized for 61% of the crop versus 60% last year. One area of concern remains—late corn plantings resulted in only 37% of the crop silking, compared with the 48% five-year average at this time. But even assuming USDA yield and acreage projections hold, getting the harvested grain to where it needs to go via rail in the US may present its own set of problems. And while Ukraine and Russia appear to have reached an agreement on exporting Ukrainian grain through Russia-blockaded Black Sea ports, domestically,&nbsp;rail companies and unions are embroiled in labor negotiations&nbsp;that may lead to even more logistical disruptions this fall, even as grain is needing to move to processing facilities or exporting hubs.
Fertilizer availability (and price) remain a concern heading into 2023.&nbsp;Supply chain and logistical disruptions in the agricultural sector caused by Russia’s war in Ukraine, among other factors, are giving rise to growing concerns for the 2022-23 ag season. While fertilizer prices&nbsp;have come off their mid-season highs in North America, due to both lower off-season demand and declining energy costs, concerns remain over price and availability remain. Thus, Norwegian fertilizer company Yara, while reporting modestly stronger than expected 2Q22,&nbsp;cautioned that high natural gas prices and concerns over its availability&nbsp;given the heavy European reliance on Russian sources may result in lower production of nitrogen fertilizers in 2023, which we feel may lead to a repeat of 2021-22 price inflation in urea and ammonia, at least in the EU region. Europeans’ inability to produce sufficient fertilizer products at an acceptable cost may provide opportunities for American-based companies, such as CF Industries (NYSE: CF), to increase their market share and maintain elevated prices that should contribute to stronger margins.
Can grain prices support higher input cost expectations?&nbsp;With fertilizer and other crop input costs still well above 2020 levels, even after coming off mid-season peak, farmer income and farmers’ ability to withstand similar price spikes next season will depend to a large degree on commodity crop prices when this year’s harvest is monetized. As the largest importer of ag products, China’s economic health is becoming a growing concern in this regard. With the&nbsp;country’s economy slowing to 0.4% GDP growth in 2Q22&nbsp;from 4.8% growth seen in 1Q22, the Chinese government has significantly reduced its purchases of ag commodities, especially from the US, despite lower soybean production in LATAM. With Chinese imports perhaps slowing even more in conjunction with slowing economic growth, a main source of demand for ag commodities may wane over the next six to nine months, which may in turn lead to lower commodity grain prices, even as domestic farmers look to sell their supplies. Lower grain prices mean lower farmer cash income, which suggests lower ability to pay for still high input costs come 2023. US farmers may have dodged the profit contraction bullet in 2022, but it is not clear if they would be able to do it again in 2023.
Lower planted acreage, reduced utilization of fertilizer and ag-chem inputs per acre (as we already saw this year), and changing crop acreage decisions have the potential to negatively affect ag-chem companies such as FMC, AVD, and CTVA and we are becoming more concerned with investors’ outlook on these names souring in the months ahead. On the other hand, farmers’ strong incentive to look for alternative ways of growing and protecting their crops as well as receiving premium prices for their products may lead to faster expansion of organic farming in row crops and to accelerating adoption of bio-based fertilizers, soil conditioning products and bio-based pesticides, which we see as a positive for BIOX and BHIL.
Rating and Price Target Changes
ALB –&nbsp;KeyBank upgraded the stock to Sector Weight from Underweight.
ASH –&nbsp;Wells Fargo lowered its price target (PT) to $107 from $113 and maintained its Equal Weight rating; Deutsche Bank lowered its PT to $120 from $122 and reiterated its Buy rating; Mizuho Securities raised its PT to $139 from $138, while also reiterating its Buy rating.
AVNT –&nbsp;Oppenheimer lowered its PT to $58 from $69 and reiterated its Outperform rating.
AXTA –&nbsp;KeyBank upgraded the stock to Overweight from Sector Weight and established a PT of $30.
ECVT –&nbsp;KeyBank lowered its PT to $13 from $16 and reiterated its Overweight rating.
EMN –&nbsp;KeyBank lowered its PT to $124 from $142 and reiterated its Overweight rating.
FMC –&nbsp;KeyBank raised its rating on the stock to Overweight from Sector Weight and established a $122 PT.
PPG –&nbsp;Wells Fargo lowered its PT to $126 from $140 and maintained its Equal Weight rating; CFRA downgraded the stock to Hold from Buy and lowered its PT to $135 from $165; Credit Suisse lowered its PT to $110 from $115 and reiterated its Underperform rating; UBS also lowered its PT to $160 from $161 but reiterated its Buy recommendation.
SHW –&nbsp;Wells Fargo lowered its PT to $270 from $285 and maintained its Equal Weight rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates
Initiation of Coverage – Westwater Resources, Inc.
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 July 24, 2022

<h3>KEY HIGHLIGHTS</h3>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;While both broad market indexes declined last week, with the S&amp;P 500 and the Russell 2000 down 0.9% and 1.4%, respectively, our WTR-CMI index of 30 chemicals and materials technology stocks underperformed on a relative basis, declining 1.5%. BofA’s downgrade didn’t prevent SHW from appreciating 3.1%, followed by RPM’s 3.0% and AVNT’s 2.8% improvement, as consumer spending remained strong. Volatile lithium stocks contributed to our index’s decline, with PLL’s 11% drop continuing the erosion of that stock on lack of rezoning and permitting progress at its North Carolina plant/mine. LTHM saw its stock drop 9% and EAF delivered a 7.7% decline, likely on reports of&nbsp;weaker Y/Y steel production volumes.</li>
<li>Ag economy is doing its part for the environment.&nbsp;A new&nbsp;report by the USDA indicates&nbsp;the US farm economy reduced its carbon footprint from 699M mt of CO2&nbsp;in 2019 to 670M mt in 2020. With growing use of blue and green ammonia lowering the fertilizer industry’s contribution to CO2&nbsp;generation and with greater use of bio-based pesticides, the carbon footprint of the industry should continue to trend down, helping the US meet the administration’s carbon emissions 2030 goal.</li>
<li>Automotive market may be bottoming.&nbsp;June new car registrations&nbsp;fell 14% in the EU, but increased&nbsp;24% Y/Y in China, after that country’s easing of COVID lockdowns and an infusion of consumer incentives. However, industry participants don’t see the market recovering until 2024, as indicated by the Chinese market’s downward revision for 2022 growth from 5.4% to 3%, although there is growing optimism that 2H22 will be better than the previous six months. With PPG and AXTA well off their end of 2021 highs, prospects of stabilization in auto production may be seen as good news.</li>
<li>EV market struggles with battery materials.&nbsp;As the EV revolution continues, with&nbsp;China’s NEV market up 123% YTD, securing sufficient battery materials to ensure continued growth of the EV industry is still a major concern. Current geopolitics are only adding fuel to the fire, with reduced supply of nickel and other critical metals from Russia. While graphite did not make the&nbsp;list of concerns, it is this material, largely underappreciated by the investors, that may provide the best investment vehicle and we encourage investors to explore WWR, as well as its NA graphite development peers.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/287/434/original/image_14966178821658361148932.png?1658361153" class="editor-image img-responsive" data-smartkarma-image-id="287434"></figure>
<h2>Automotive &amp; Transportation Market</h2>
<p>Chipping away at semiconductor shortages.&nbsp;Last week,&nbsp;AFS estimated that more than 167,000 vehicles&nbsp;were scratched from production globally due to semiconductor shortages, mostly in Asian plants outside of China. This comes on top of the 220,000 vehicles lost due to chip shortfalls the previous week, mostly from European production. As the hopes for a quick resolution to the chip shortage crisis fade, industry participants are learning the lessons from this debacle and investing in dedicated automotive semiconductor capacity, including&nbsp;Bosch’s latest announcement of a $3 billion investment&nbsp;in chip production, including in Germany, to expand supply and shorten the supply chain in an effort to prevent similar shortages from affecting the industry in the future. Unfortunately, while these investments are scheduled to take place through 2026, near-term chip availability may remain an issue in holding back new car production and affecting major auto suppliers in our WTR-CMI index, such as PPG and AXTA.</p>
<h2>EVs &amp; Battery Ecosystem</h2>
<p>New battery plant and battery materials supply.&nbsp;Panasonic edged a step closer&nbsp;to setting up a new battery cell factory in Kansas to supply Tesla and others, expanding EV production in the US. Looking to expand the source of critical materials for battery manufacturing in North America,&nbsp;VW entered into a wide-ranging collaboration with recycling start-up Redwood Materials, whereby Redwood would work directly with VW dealers in North America to collect and recycle end-of-life EV batteries in order to extract critical metals such as copper, cobalt, lithium, and nickel for use in building new batteries built by domestic battery manufacturers. Meanwhile,&nbsp;Belgian Umicore (OTC: UMICY) is looking to build its first factory&nbsp;in North America (having picked Canada) for the production of battery-grade cathode materials, with construction scheduled to begin in 2023 and production to come online by the end of 2025, with capacity to provide for about 1 million EVs annually.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Soybean expectations lowered.&nbsp;The USDA’s&nbsp;World Agricultural Supply and Demand Estimates (WASDE) for July 2022&nbsp;showed no change in corn estimates, but included a reduction in soybean planted acres and therefore exports. With weather being the key focus for corn and soybean crop over the next two to four weeks, yield estimates, which were left largely unchanged, may have to be reduced, signaling that higher crop prices may remain, which may help farmers offset higher input costs and lower bushels to still generate acceptable, albeit likely lower than last year’s cash income by the end of this ag season.&nbsp;The USDA report also included raised expectations for LATAM production and higher wheat plantings and production in the US, as we mentioned last week. Most intriguing, the report includes estimates of significantly lower cotton planting and production in the US this year, driven by drought conditions across the southern plains.</p>
<p>Governments continue to tighten the regulatory noose.&nbsp;While the world is in the midst of dealing with what could turn out to be one of the worst food security issues in a generation or more, due to the conflict in Ukraine,&nbsp;the Dutch government voted last month on proposals to slash emissions of damaging pollutants, a plan that will likely force farmers in the country to cut their livestock herds or stop work altogether. The government says emissions of nitrogen oxide and ammonia, which livestock produce, must be drastically reduced to meet its and the EU’s climate goals.&nbsp;Dutch farmers have been demonstrating in cities and towns across the country&nbsp;to protest the government decision that, in farmers’ views, callously sacrifices the country’s farm industry on the altar of climate change. While one may debate the merits of government policies in normal times, enforcing these new laws during times of real geopolitical and economic crises appears questionable. On a related note, Brazil continues to actively work to lower or eliminate the use dangerous chemicals-based ag input products in the country. The government’s latest move is to suspend the import, production, distribution, and commercialization of the active ingredient&nbsp;Carbendazim and its technical products. Carbendazim is a leading broad spectrum fungicide used by itself or in combination with other active ingredients. Among the companies in our WTR-CMCCI index, FMC appears most at risk, should the government decide to permanently ban or restrict the use of the fungicide in the country. On the other hand, bio-based fungicides, such as those being manufactured by Marrone Bio, which is soon to merge with Bioceres (NASDAQ: BIOX), may get a boost from these actions, as they provide a viable alternative to chem-based fungicides.</p>
<h2>Chemicals and Materials News</h2>
<p>Looking to benefit from growth in e-commerce.&nbsp;FUL recently announced it has&nbsp;entered a strategic partnership&nbsp;in North America with Enimac, an international tape application equipment manufacturer that serves more than 100 customers in more than 30 countries. The two companies will collaborate on the development of pressure-sensitive adhesives and tape dispensing equipment to help FUL gain additional share in the packaging market, whose growth is increasingly driven by e-commerce applications. While this may not be a game changer for FUL, the partnership should allow the company to accelerate its growth in an important packaging market, potentially helping to offset an expected slowdown in construction and assembly adhesives areas.</p>
<p>Commodity prices ease, but downstream derivatives still headed higher.&nbsp;Both polyethylene (PE) and polypropylene (PP)&nbsp;resin prices declined $0.02/lb. and $0.03/lb., respectively, last week. With slowing economic conditions and easing crude oil and gas prices, commodity resin prices may continue their decline off recent highs in the weeks and months ahead. This would be a positive for AVNT, which purchases significant quantities of commodity resins before converting them to specialty and engineered plastic compounds and we may see the company’s margins begin to improve sequentially in 2H22, although Y/Y comps are likely to remain challenging into 2023. However, prices of pet-chem derivatives, such as coatings, adhesives and composites resins, are still going up, as companies attempt to restore their margins following the sharp run-up in raw material costs, including basic polymers and resins over the past 12 months. Thus,&nbsp;Wacker is increasing prices&nbsp;for dispersions, resins, and dispersible polymer powders sourced from its production sites in Europe by up to 10%. Nevertheless, intermediate suppliers such as Wacker may have the toughest time restoring their margins, given that their raw materials are commodities highly correlated with oil and gas prices, while their products are sold in a highly competitive market that limits the ability to raise prices fast enough to offset raw material inflation. In our WTR-CMI index, EMN, KOP, and KWR may be most exposed to this margin compression trend, and we remain cautious of these companies’ abilities to deliver 2022 results that would positively surprise versus current expectations.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;UBS lowered its price target (PT) to $218 from $260 and maintained its Neutral rating.</p>
<p>AXTA –&nbsp;UBS lowered its PT to $30 from $33 and reiterated its Buy rating; Mizuho Securities lowered its PT to $31 from $34 and reiterated its Buy rating.</p>
<p>CTVA –&nbsp;UBS lowered its PT to $64 from $68 and reiterated its Buy rating; Credit Suisse initiated coverage with an Outperform rating and $68 PT.</p>
<p>EAF –&nbsp;RBC downgraded the stock to Sector Perform from Outperform and lowered its PT to $7 from $10.</p>
<p>ECL&nbsp;– BofA downgraded the stock to Neutral from Buy and lowered its PT to $183 from $193; Wells Fargo initiated on the stock with Overweight and $187 PT; RBC lowered its PT to $190 from $225 and maintained its Sector Perform rating.</p>
<p>EMN –&nbsp;RBC lowered its PT to $94 from $109 and maintained its Sector Perform rating; UBS lowered its PT from $142 to $121 but reiterated its Buy rating; BofA lowered its PT to $115 from $123 and maintained its Neutral rating.</p>
<p>FMC –&nbsp;UBS lowered its PT to $140 from $149 and reiterated its Buy rating.</p>
<p>RPM –&nbsp;BofA lowered its PT to $78 from $90 and reiterated its Underperform rating; UBS lowered its PT from $106 to $96 and reiterated its Buy rating.</p>
<p>PPG –&nbsp;UBS lowered its PT to $161 from $177 and reiterated its Buy rating; BofA lowered its PT to $161 from $172 and reiterated its Buy rating; Mizuho Securities lowered its PT to $162 from $169 and reiterated its Buy rating.</p>
<p>SHW –&nbsp;Northcoast Research reinstated coverage with a Buy rating and $300 PT; BofA downgraded the stock to Neutral from Buy and lowered its PT to $292 from $313; Mizuho Securities lowered its PT to $294 from $310 and reiterated its Buy rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Marrone Bio Innovations CEO Kevin Helash</p>
<p>Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates</p>
<p>Initiation of Coverage – Westwater Resources, Inc.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the 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;While both broad market indexes declined last week, with the S&amp;P 500 and the Russell 2000 down 0.9% and 1.4%, respectively, our WTR-CMI index of 30 chemicals and materials technology stocks underperformed on a relative basis, declining 1.5%. BofA’s downgrade didn’t prevent SHW from appreciating 3.1%, followed by RPM’s 3.0% and AVNT’s 2.8% improvement, as consumer spending remained strong. Volatile lithium stocks contributed to our index’s decline, with PLL’s 11% drop continuing the erosion of that stock on lack of rezoning and permitting progress at its North Carolina plant/mine. LTHM saw its stock drop 9% and EAF delivered a 7.7% decline, likely on reports of&nbsp;weaker Y/Y steel production volumes.
Ag economy is doing its part for the environment.&nbsp;A new&nbsp;report by the USDA indicates&nbsp;the US farm economy reduced its carbon footprint from 699M mt of CO2&nbsp;in 2019 to 670M mt in 2020. With growing use of blue and green ammonia lowering the fertilizer industry’s contribution to CO2&nbsp;generation and with greater use of bio-based pesticides, the carbon footprint of the industry should continue to trend down, helping the US meet the administration’s carbon emissions 2030 goal.
Automotive market may be bottoming.&nbsp;June new car registrations&nbsp;fell 14% in the EU, but increased&nbsp;24% Y/Y in China, after that country’s easing of COVID lockdowns and an infusion of consumer incentives. However, industry participants don’t see the market recovering until 2024, as indicated by the Chinese market’s downward revision for 2022 growth from 5.4% to 3%, although there is growing optimism that 2H22 will be better than the previous six months. With PPG and AXTA well off their end of 2021 highs, prospects of stabilization in auto production may be seen as good news.
EV market struggles with battery materials.&nbsp;As the EV revolution continues, with&nbsp;China’s NEV market up 123% YTD, securing sufficient battery materials to ensure continued growth of the EV industry is still a major concern. Current geopolitics are only adding fuel to the fire, with reduced supply of nickel and other critical metals from Russia. While graphite did not make the&nbsp;list of concerns, it is this material, largely underappreciated by the investors, that may provide the best investment vehicle and we encourage investors to explore WWR, as well as its NA graphite development peers.

WTR-CMI WEEKLY PERFORMANCE

Automotive &amp; Transportation Market
Chipping away at semiconductor shortages.&nbsp;Last week,&nbsp;AFS estimated that more than 167,000 vehicles&nbsp;were scratched from production globally due to semiconductor shortages, mostly in Asian plants outside of China. This comes on top of the 220,000 vehicles lost due to chip shortfalls the previous week, mostly from European production. As the hopes for a quick resolution to the chip shortage crisis fade, industry participants are learning the lessons from this debacle and investing in dedicated automotive semiconductor capacity, including&nbsp;Bosch’s latest announcement of a $3 billion investment&nbsp;in chip production, including in Germany, to expand supply and shorten the supply chain in an effort to prevent similar shortages from affecting the industry in the future. Unfortunately, while these investments are scheduled to take place through 2026, near-term chip availability may remain an issue in holding back new car production and affecting major auto suppliers in our WTR-CMI index, such as PPG and AXTA.
EVs &amp; Battery Ecosystem
New battery plant and battery materials supply.&nbsp;Panasonic edged a step closer&nbsp;to setting up a new battery cell factory in Kansas to supply Tesla and others, expanding EV production in the US. Looking to expand the source of critical materials for battery manufacturing in North America,&nbsp;VW entered into a wide-ranging collaboration with recycling start-up Redwood Materials, whereby Redwood would work directly with VW dealers in North America to collect and recycle end-of-life EV batteries in order to extract critical metals such as copper, cobalt, lithium, and nickel for use in building new batteries built by domestic battery manufacturers. Meanwhile,&nbsp;Belgian Umicore (OTC: UMICY) is looking to build its first factory&nbsp;in North America (having picked Canada) for the production of battery-grade cathode materials, with construction scheduled to begin in 2023 and production to come online by the end of 2025, with capacity to provide for about 1 million EVs annually.
Ag-Chem and Ag-Tech
Soybean expectations lowered.&nbsp;The USDA’s&nbsp;World Agricultural Supply and Demand Estimates (WASDE) for July 2022&nbsp;showed no change in corn estimates, but included a reduction in soybean planted acres and therefore exports. With weather being the key focus for corn and soybean crop over the next two to four weeks, yield estimates, which were left largely unchanged, may have to be reduced, signaling that higher crop prices may remain, which may help farmers offset higher input costs and lower bushels to still generate acceptable, albeit likely lower than last year’s cash income by the end of this ag season.&nbsp;The USDA report also included raised expectations for LATAM production and higher wheat plantings and production in the US, as we mentioned last week. Most intriguing, the report includes estimates of significantly lower cotton planting and production in the US this year, driven by drought conditions across the southern plains.
Governments continue to tighten the regulatory noose.&nbsp;While the world is in the midst of dealing with what could turn out to be one of the worst food security issues in a generation or more, due to the conflict in Ukraine,&nbsp;the Dutch government voted last month on proposals to slash emissions of damaging pollutants, a plan that will likely force farmers in the country to cut their livestock herds or stop work altogether. The government says emissions of nitrogen oxide and ammonia, which livestock produce, must be drastically reduced to meet its and the EU’s climate goals.&nbsp;Dutch farmers have been demonstrating in cities and towns across the country&nbsp;to protest the government decision that, in farmers’ views, callously sacrifices the country’s farm industry on the altar of climate change. While one may debate the merits of government policies in normal times, enforcing these new laws during times of real geopolitical and economic crises appears questionable. On a related note, Brazil continues to actively work to lower or eliminate the use dangerous chemicals-based ag input products in the country. The government’s latest move is to suspend the import, production, distribution, and commercialization of the active ingredient&nbsp;Carbendazim and its technical products. Carbendazim is a leading broad spectrum fungicide used by itself or in combination with other active ingredients. Among the companies in our WTR-CMCCI index, FMC appears most at risk, should the government decide to permanently ban or restrict the use of the fungicide in the country. On the other hand, bio-based fungicides, such as those being manufactured by Marrone Bio, which is soon to merge with Bioceres (NASDAQ: BIOX), may get a boost from these actions, as they provide a viable alternative to chem-based fungicides.
Chemicals and Materials News
Looking to benefit from growth in e-commerce.&nbsp;FUL recently announced it has&nbsp;entered a strategic partnership&nbsp;in North America with Enimac, an international tape application equipment manufacturer that serves more than 100 customers in more than 30 countries. The two companies will collaborate on the development of pressure-sensitive adhesives and tape dispensing equipment to help FUL gain additional share in the packaging market, whose growth is increasingly driven by e-commerce applications. While this may not be a game changer for FUL, the partnership should allow the company to accelerate its growth in an important packaging market, potentially helping to offset an expected slowdown in construction and assembly adhesives areas.
Commodity prices ease, but downstream derivatives still headed higher.&nbsp;Both polyethylene (PE) and polypropylene (PP)&nbsp;resin prices declined $0.02/lb. and $0.03/lb., respectively, last week. With slowing economic conditions and easing crude oil and gas prices, commodity resin prices may continue their decline off recent highs in the weeks and months ahead. This would be a positive for AVNT, which purchases significant quantities of commodity resins before converting them to specialty and engineered plastic compounds and we may see the company’s margins begin to improve sequentially in 2H22, although Y/Y comps are likely to remain challenging into 2023. However, prices of pet-chem derivatives, such as coatings, adhesives and composites resins, are still going up, as companies attempt to restore their margins following the sharp run-up in raw material costs, including basic polymers and resins over the past 12 months. Thus,&nbsp;Wacker is increasing prices&nbsp;for dispersions, resins, and dispersible polymer powders sourced from its production sites in Europe by up to 10%. Nevertheless, intermediate suppliers such as Wacker may have the toughest time restoring their margins, given that their raw materials are commodities highly correlated with oil and gas prices, while their products are sold in a highly competitive market that limits the ability to raise prices fast enough to offset raw material inflation. In our WTR-CMI index, EMN, KOP, and KWR may be most exposed to this margin compression trend, and we remain cautious of these companies’ abilities to deliver 2022 results that would positively surprise versus current expectations.
Rating and Price Target Changes
ALB –&nbsp;UBS lowered its price target (PT) to $218 from $260 and maintained its Neutral rating.
AXTA –&nbsp;UBS lowered its PT to $30 from $33 and reiterated its Buy rating; Mizuho Securities lowered its PT to $31 from $34 and reiterated its Buy rating.
CTVA –&nbsp;UBS lowered its PT to $64 from $68 and reiterated its Buy rating; Credit Suisse initiated coverage with an Outperform rating and $68 PT.
EAF –&nbsp;RBC downgraded the stock to Sector Perform from Outperform and lowered its PT to $7 from $10.
ECL&nbsp;– BofA downgraded the stock to Neutral from Buy and lowered its PT to $183 from $193; Wells Fargo initiated on the stock with Overweight and $187 PT; RBC lowered its PT to $190 from $225 and maintained its Sector Perform rating.
EMN –&nbsp;RBC lowered its PT to $94 from $109 and maintained its Sector Perform rating; UBS lowered its PT from $142 to $121 but reiterated its Buy rating; BofA lowered its PT to $115 from $123 and maintained its Neutral rating.
FMC –&nbsp;UBS lowered its PT to $140 from $149 and reiterated its Buy rating.
RPM –&nbsp;BofA lowered its PT to $78 from $90 and reiterated its Underperform rating; UBS lowered its PT from $106 to $96 and reiterated its Buy rating.
PPG –&nbsp;UBS lowered its PT to $161 from $177 and reiterated its Buy rating; BofA lowered its PT to $161 from $172 and reiterated its Buy rating; Mizuho Securities lowered its PT to $162 from $169 and reiterated its Buy rating.
SHW –&nbsp;Northcoast Research reinstated coverage with a Buy rating and $300 PT; BofA downgraded the stock to Neutral from Buy and lowered its PT to $292 from $313; Mizuho Securities lowered its PT to $294 from $310 and reiterated its Buy rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates
Initiation of Coverage – Westwater Resources, Inc.
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 July 17, 2022

<h2>KEY HIGHLIGHTS</h2>
<ul style="list-style-type: none;">
<li>&nbsp;</li>
</ul>
<ul>
<li>WTR-CMI last week.&nbsp;After a dead cat bounce the previous week, last week saw the market resume its sell-off, with the S&amp;P 500 and Russell 2000 each losing 2.2% of their value for the week. Our WTR-CMI index of 30 chemicals and materials technology companies delivered a slightly weaker result (2.5%), dragged down by the volatile lithium sector, as PLL, ALB, LTHM, and LAC all lost 8% to 14% of their value for the week. A stronger aerospace outlook contributed to PKE’s 3.2% appreciation and improved investor sentiment following a proxy fight likely drove AVD’s 2.8% appreciation.</li>
<li>Ag-chem players step on bio-based pedal.&nbsp;FMC announced the creation of a new identity for its plant health business, called&nbsp;Biologicals by FMC&nbsp;and announced the&nbsp;acquisition of BioPhero ApS, a Danish pheromone research and production company, to further boost its biologicals portfolio of products for $200 million, with the deal expected to close by the end of 3Q22. Meanwhile,&nbsp;CTVA, BASF, and MS Technologies signed an agreement&nbsp;to bring an industry-first soybean trait stack to market in the US and Canada. As part of the agreement, CTVA and MS Technologies have licensed the Enlist E3 soybean trait to BASF for development with the NRS trait in BASF germplasm.</li>
<li>NA lithium production plans expand.&nbsp;Lithium producer Sayona Mining and its partner PLL approved the restart of their spodumene plant in Canada at a cost of C$98 million ($76.19 million). Operations at the&nbsp;North American Lithium (NAL) project&nbsp;located near Val-d’Or, Quebec are expected to commence in 1H23. Meanwhile,&nbsp;ALB announced its intentions to build a processing plant&nbsp;with 100,000 mt of annual capacity in the US, possibly using its mothballed mine in North Carolina as a source of spodumene for the plant to process, possibly as early as 2027.</li>
<li>Specialty segments looking to grow.&nbsp;The global&nbsp;protective coatings market&nbsp;is projected to grow at 3.4% CAGR to $16.7 billion by 2030 from $12.2 billion in 2021. While not spectacular, this steady growth should be a positive for SHW, PPG, AXTA, and especially RPM and may help mitigate the continuing doldrums in auto/transportation coatings and&nbsp;softening construction markets. Also, demand for&nbsp;plastics in medical applications&nbsp;is expected to grow at a 7.8% CAGR through 2032, which is a positive for AVNT.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/285/191/original/image_71701074321657248484378.png?1657248487" class="editor-image img-responsive" data-smartkarma-image-id="285191"></figure>
<p>Source: YCharts; July 1 close</p>
<h2>Automotive &amp; Transportation Market</h2>
<p>Automotive doldrums continue.&nbsp;As June new passenger car registration data dribble in,&nbsp;France is already looking at a 14% Y/Y decline&nbsp;in registrations for the month, pointing to continuing struggles for the sector. Meanwhile,&nbsp;Toyota cut its July production plans&nbsp;by 50,000 units globally on COVID-19 lockdowns and semiconductor shortages, while Stellantis announced temporary production halts&nbsp;in Italy&nbsp;and&nbsp;France&nbsp;due in large part to ongoing semiconductor shortages. Not surprising then that&nbsp;AlixPartners expects&nbsp;the chip shortage and other supply chain issues to affect the industry through 2024 and is looking for 2022 new vehicle production to decline from 2021 levels globally. Cox Automotive also recently&nbsp;lowered is outlook for the US market&nbsp;to 14.4 million units, down from 15.3 million. Given this backdrop, we continue to remain cautious on PPG and AXTA, two of the top three coatings suppliers to the automotive industry, as well as AVNT and FUL—a significant amount of whose sales also go into the automotive and transportation markets.</p>
<h2>EVs &amp; Battery Ecosystem</h2>
<p>Car companies see battery supply to be the bottleneck in EU’s plans to move off ICEs.&nbsp;The region’s goal of phasing out internal combustion engines (ICEs) by 2040 may be difficult to obtain, not due to lack of automotive production capacity, but by limited battery production capacity for electric vehicles (EVs). Both&nbsp;VW&nbsp;and&nbsp;Stellantis&nbsp;managements voiced their concerns over the speed with which battery manufacturing is expanding compared with the forecasted needs of the automotive sector. The rising prices of EVs, driven by double- and triple-digit increases in the cost of critical materials, such as lithium for the EV batteries, pose yet another concern for the market as it pivots away from ICEs.</p>
<p>Efforts to head off material shortages continue.&nbsp;To secure the needed critical battery materials, automotive companies continue to partner with raw material suppliers in an effort to mitigate the expected market tightness that is expected to worsen in the next three to five years. Recently,&nbsp;Stellantis announced an investment in Vulcan Energy Resources&nbsp;(OTC: VULNF), a German-Australian lithium producer. The €50 million investment represents an 8% stake in the company, making Stellantis its second-largest shareholder. Vulcan and Stellantis have also extended their binding off-take agreement for lithium hydroxide by five to 10 years. Similarly, South Korean battery maker&nbsp;LG Energy Solutions announced&nbsp;a non-binding deal for battery-grade lithium supply with Compass Minerals (NYSE: CMP), under which LG would receive as much as 40% of lithium carbonate and lithium hydroxide that CMP produces for seven years, starting in 2025. Meanwhile, Brazilian lithium development company&nbsp;Sigma Lithium (NASDAQ: SGML) announced positive results&nbsp;of its drilling program and the company remains on track to begin producing early next year at an annual rate of 37,000 mt of lithium carbonate equivalent (LCE), as it wraps up engineering for a second phase that would take output to about 72,000 mt in 2024. Given the implied environmental benefit of moving from ICEs to battery-powered vehicles, efforts to achieve circular economy status when it comes to the end of live EV batteries is gaining steam, as&nbsp;Toyota recently announced&nbsp;collaboration with battery recycling company&nbsp;Redwood Materials&nbsp;as it works to provide a more sustainable battery supply chain for its EV push.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Pressure mounts as weather impact and input shortages intensify.&nbsp;Supply issues and higher costs are top of mind for US farmers,&nbsp;according to a recent survey. Agrichemical companies blame the COVID-19 pandemic, transportation delays, a lack of workers, and extreme weather for shortages of key inputs such as herbicides and insecticides. Fertilizer and some seeds are also in short supply globally. It is unclear if the situation will improve for the 2022-23 planting season. Meantime,&nbsp;weather continues to be the wild card&nbsp;in predicting ultimate yields for major crops in the US,&nbsp;with small reductions in soybean and corn conditions&nbsp;already being noted.</p>
<p>Wheat supply concerns add to global food security issues.&nbsp;Lack of rain in&nbsp;winter wheat growing regions of US&nbsp;and high humidity in other parts of the country are fueling concerns over global food security issues, even as the war in Ukraine continues to affect the supply outlook from that region. Ukrainian farmers, often unable to find fuel for their combines and tractors needed to bring in the harvest, thanks to Russia’s air and rocket campaign aimed at refineries, seaports, and many other parts of the country’s infrastructure, have resorted to&nbsp;destroying their harvesting equipment&nbsp;to prevent Russian forces from confiscating the wheat currently ripening in Ukrainian fields. With the hostilities likely to continue and its aftereffects likely to be felt long after armed conflict bogs down, the 2023 outlook is not much better.</p>
<p>Government regulators aren’t making life easier either.&nbsp;The European Commission wants to&nbsp;cut the use of chemical pesticides in half by 2030, as part of its latest plan on sustainability and biodiversity. While the plans will need approval from the European Parliament and European Council before they can become law, at least some countries’ governments are expressing concerns that such a plan being implemented at a time when food scarcity is already a real danger may be tone-deaf at best. However, moves in this direction are likely to continue, in our opinion, which should be a positive for companies such as BIOX, which specializes in bio-based alternatives to chemical pesticides, as well as established ag-chem players like FMC and CTVA. In a more targeted move, The Brazilian National Health Surveillance Agency (Anvisa)&nbsp;suspended the import, production, distribution, and commercialization of the fungicide carbendazim—one of the most used fungicides in Brazil in crops such as soybeans, corn, oranges, and apples. Europe and the US have already banned the product on suspicion of causing cancer and fetal malformation. However, its ban in Brazil, LATAM’s largest ag producing region that’s still reliant on older, but cheaper ag-chem products for its crop production, may lead to temporary declines in yields and acres in the country, until alternative products are imported in sufficient quantities and at a sufficiently low price to allow Brazilian farmers to make a profit growing their crops.</p>
<p>…Or are they?&nbsp;Brazilian government’s Ministry of Agriculture, Livestock, and Supply recently&nbsp;defined the criteria for prioritizing the registration of agrochemicals and related issues. It is hoped that the more transparent and streamlined process will allow newer novel products and technologies that address the country’s most pressing pest needs will be allowed to proceed through the government’s registration process in a more rational and predictive fashion possibly shortening the time and expense of new product registrations, provided they address what the Ministry sees as the farm industry’s greatest needs at the moment. Meantime, while regulatory requirements are a contributing factor to farmers’ increasing adoption of sustainable practices,&nbsp;consumers are seen as the No.1 driver of this transition, which is a positive for bio-ag innovators, such as BIOX and other companies looking to change the way farmers produce and harvest their crops, so as to minimize the impact on the environment.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;Credit Suisse initiated coverage of the stock with Underperform rating and $185 price target (PT); Vertical Research lowered its PT to $268 from $286 and maintained its Hold rating.</p>
<p>AVNT –&nbsp;Jefferies lowered its PT to $51 from $67 and reiterated its Buy rating.</p>
<p>AXTA&nbsp;–&nbsp;Vertical Research lowered its PT to $28 from $32 and maintained its Hold rating.</p>
<p>CTVA&nbsp;–&nbsp;Bank of America raised its PT to $57 from $51 and reiterated its Outperform rating; Vertical Research lowered its PT to $55 from $59 and maintained its Hold rating.</p>
<p>EAF&nbsp;–&nbsp;BMO lowered its PT to $9 from $10 and maintained its Market Perform rating.</p>
<p>ECL&nbsp;–&nbsp;Morgan Stanley lowered its PT to $181 from $210 and maintained its Equal Weight rating; Vertical Research lowered its PT to $169 from $185 and maintained its Hold rating; Mizuho Securities lowered its PT to $183 from $198 and maintained its Neutral rating.</p>
<p>EMN&nbsp;–&nbsp;Wells Fargo lowered its PT to $115 from $125 and reiterated its Outperform rating; Vertical Research lowered its PT to $117 from $136 and reiterated its Buy rating; Berenberg Bank also lowered its PT to $130 from $150 while reiterating its Buy rating.</p>
<p>FMC&nbsp;–&nbsp;Bank of America upgraded the stock to Buy from Underperform; Vertical Research lowered its PT to $116 from $126 and maintained its Hold rating.</p>
<p>FUL&nbsp;–&nbsp;JP Morgan downgraded the stock to Underperform from Neutral and set a $52 PT; Deutsche Bank also lowered its PT to $72 from $85 but reiterated its Buy recommendation.</p>
<p>LTHM&nbsp;–&nbsp;Vertical Research lowered its PT to $31 from $33 and reiterated its Buy recommendation.</p>
<p>PPG –&nbsp;Vertical Research upgraded the stock to Buy from Hold, despite lowering its PT to $139 from $154.</p>
<p>RPM&nbsp;–&nbsp;Credit Suisse initiated coverage with an Outperform rating and $95 PT; Vertical Research lowered its PT to $83 from $99 and maintained its Hold rating.</p>
<p>SHW&nbsp;–&nbsp;Evercore ISI lowered its PT to $280 from $305 and reiterated its Outperform rating; Vertical Research lowered its PT to $254 from $284 and maintained its Hold rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Marrone Bio Innovations CEO Kevin Helash</p>
<p>Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates</p>
<p>Initiation of Coverage – Westwater Resources, Inc.</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

&nbsp;


WTR-CMI last week.&nbsp;After a dead cat bounce the previous week, last week saw the market resume its sell-off, with the S&amp;P 500 and Russell 2000 each losing 2.2% of their value for the week. Our WTR-CMI index of 30 chemicals and materials technology companies delivered a slightly weaker result (2.5%), dragged down by the volatile lithium sector, as PLL, ALB, LTHM, and LAC all lost 8% to 14% of their value for the week. A stronger aerospace outlook contributed to PKE’s 3.2% appreciation and improved investor sentiment following a proxy fight likely drove AVD’s 2.8% appreciation.
Ag-chem players step on bio-based pedal.&nbsp;FMC announced the creation of a new identity for its plant health business, called&nbsp;Biologicals by FMC&nbsp;and announced the&nbsp;acquisition of BioPhero ApS, a Danish pheromone research and production company, to further boost its biologicals portfolio of products for $200 million, with the deal expected to close by the end of 3Q22. Meanwhile,&nbsp;CTVA, BASF, and MS Technologies signed an agreement&nbsp;to bring an industry-first soybean trait stack to market in the US and Canada. As part of the agreement, CTVA and MS Technologies have licensed the Enlist E3 soybean trait to BASF for development with the NRS trait in BASF germplasm.
NA lithium production plans expand.&nbsp;Lithium producer Sayona Mining and its partner PLL approved the restart of their spodumene plant in Canada at a cost of C$98 million ($76.19 million). Operations at the&nbsp;North American Lithium (NAL) project&nbsp;located near Val-d’Or, Quebec are expected to commence in 1H23. Meanwhile,&nbsp;ALB announced its intentions to build a processing plant&nbsp;with 100,000 mt of annual capacity in the US, possibly using its mothballed mine in North Carolina as a source of spodumene for the plant to process, possibly as early as 2027.
Specialty segments looking to grow.&nbsp;The global&nbsp;protective coatings market&nbsp;is projected to grow at 3.4% CAGR to $16.7 billion by 2030 from $12.2 billion in 2021. While not spectacular, this steady growth should be a positive for SHW, PPG, AXTA, and especially RPM and may help mitigate the continuing doldrums in auto/transportation coatings and&nbsp;softening construction markets. Also, demand for&nbsp;plastics in medical applications&nbsp;is expected to grow at a 7.8% CAGR through 2032, which is a positive for AVNT.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; July 1 close
Automotive &amp; Transportation Market
Automotive doldrums continue.&nbsp;As June new passenger car registration data dribble in,&nbsp;France is already looking at a 14% Y/Y decline&nbsp;in registrations for the month, pointing to continuing struggles for the sector. Meanwhile,&nbsp;Toyota cut its July production plans&nbsp;by 50,000 units globally on COVID-19 lockdowns and semiconductor shortages, while Stellantis announced temporary production halts&nbsp;in Italy&nbsp;and&nbsp;France&nbsp;due in large part to ongoing semiconductor shortages. Not surprising then that&nbsp;AlixPartners expects&nbsp;the chip shortage and other supply chain issues to affect the industry through 2024 and is looking for 2022 new vehicle production to decline from 2021 levels globally. Cox Automotive also recently&nbsp;lowered is outlook for the US market&nbsp;to 14.4 million units, down from 15.3 million. Given this backdrop, we continue to remain cautious on PPG and AXTA, two of the top three coatings suppliers to the automotive industry, as well as AVNT and FUL—a significant amount of whose sales also go into the automotive and transportation markets.
EVs &amp; Battery Ecosystem
Car companies see battery supply to be the bottleneck in EU’s plans to move off ICEs.&nbsp;The region’s goal of phasing out internal combustion engines (ICEs) by 2040 may be difficult to obtain, not due to lack of automotive production capacity, but by limited battery production capacity for electric vehicles (EVs). Both&nbsp;VW&nbsp;and&nbsp;Stellantis&nbsp;managements voiced their concerns over the speed with which battery manufacturing is expanding compared with the forecasted needs of the automotive sector. The rising prices of EVs, driven by double- and triple-digit increases in the cost of critical materials, such as lithium for the EV batteries, pose yet another concern for the market as it pivots away from ICEs.
Efforts to head off material shortages continue.&nbsp;To secure the needed critical battery materials, automotive companies continue to partner with raw material suppliers in an effort to mitigate the expected market tightness that is expected to worsen in the next three to five years. Recently,&nbsp;Stellantis announced an investment in Vulcan Energy Resources&nbsp;(OTC: VULNF), a German-Australian lithium producer. The €50 million investment represents an 8% stake in the company, making Stellantis its second-largest shareholder. Vulcan and Stellantis have also extended their binding off-take agreement for lithium hydroxide by five to 10 years. Similarly, South Korean battery maker&nbsp;LG Energy Solutions announced&nbsp;a non-binding deal for battery-grade lithium supply with Compass Minerals (NYSE: CMP), under which LG would receive as much as 40% of lithium carbonate and lithium hydroxide that CMP produces for seven years, starting in 2025. Meanwhile, Brazilian lithium development company&nbsp;Sigma Lithium (NASDAQ: SGML) announced positive results&nbsp;of its drilling program and the company remains on track to begin producing early next year at an annual rate of 37,000 mt of lithium carbonate equivalent (LCE), as it wraps up engineering for a second phase that would take output to about 72,000 mt in 2024. Given the implied environmental benefit of moving from ICEs to battery-powered vehicles, efforts to achieve circular economy status when it comes to the end of live EV batteries is gaining steam, as&nbsp;Toyota recently announced&nbsp;collaboration with battery recycling company&nbsp;Redwood Materials&nbsp;as it works to provide a more sustainable battery supply chain for its EV push.
Ag-Chem and Ag-Tech
Pressure mounts as weather impact and input shortages intensify.&nbsp;Supply issues and higher costs are top of mind for US farmers,&nbsp;according to a recent survey. Agrichemical companies blame the COVID-19 pandemic, transportation delays, a lack of workers, and extreme weather for shortages of key inputs such as herbicides and insecticides. Fertilizer and some seeds are also in short supply globally. It is unclear if the situation will improve for the 2022-23 planting season. Meantime,&nbsp;weather continues to be the wild card&nbsp;in predicting ultimate yields for major crops in the US,&nbsp;with small reductions in soybean and corn conditions&nbsp;already being noted.
Wheat supply concerns add to global food security issues.&nbsp;Lack of rain in&nbsp;winter wheat growing regions of US&nbsp;and high humidity in other parts of the country are fueling concerns over global food security issues, even as the war in Ukraine continues to affect the supply outlook from that region. Ukrainian farmers, often unable to find fuel for their combines and tractors needed to bring in the harvest, thanks to Russia’s air and rocket campaign aimed at refineries, seaports, and many other parts of the country’s infrastructure, have resorted to&nbsp;destroying their harvesting equipment&nbsp;to prevent Russian forces from confiscating the wheat currently ripening in Ukrainian fields. With the hostilities likely to continue and its aftereffects likely to be felt long after armed conflict bogs down, the 2023 outlook is not much better.
Government regulators aren’t making life easier either.&nbsp;The European Commission wants to&nbsp;cut the use of chemical pesticides in half by 2030, as part of its latest plan on sustainability and biodiversity. While the plans will need approval from the European Parliament and European Council before they can become law, at least some countries’ governments are expressing concerns that such a plan being implemented at a time when food scarcity is already a real danger may be tone-deaf at best. However, moves in this direction are likely to continue, in our opinion, which should be a positive for companies such as BIOX, which specializes in bio-based alternatives to chemical pesticides, as well as established ag-chem players like FMC and CTVA. In a more targeted move, The Brazilian National Health Surveillance Agency (Anvisa)&nbsp;suspended the import, production, distribution, and commercialization of the fungicide carbendazim—one of the most used fungicides in Brazil in crops such as soybeans, corn, oranges, and apples. Europe and the US have already banned the product on suspicion of causing cancer and fetal malformation. However, its ban in Brazil, LATAM’s largest ag producing region that’s still reliant on older, but cheaper ag-chem products for its crop production, may lead to temporary declines in yields and acres in the country, until alternative products are imported in sufficient quantities and at a sufficiently low price to allow Brazilian farmers to make a profit growing their crops.
…Or are they?&nbsp;Brazilian government’s Ministry of Agriculture, Livestock, and Supply recently&nbsp;defined the criteria for prioritizing the registration of agrochemicals and related issues. It is hoped that the more transparent and streamlined process will allow newer novel products and technologies that address the country’s most pressing pest needs will be allowed to proceed through the government’s registration process in a more rational and predictive fashion possibly shortening the time and expense of new product registrations, provided they address what the Ministry sees as the farm industry’s greatest needs at the moment. Meantime, while regulatory requirements are a contributing factor to farmers’ increasing adoption of sustainable practices,&nbsp;consumers are seen as the No.1 driver of this transition, which is a positive for bio-ag innovators, such as BIOX and other companies looking to change the way farmers produce and harvest their crops, so as to minimize the impact on the environment.
Rating and Price Target Changes
ALB –&nbsp;Credit Suisse initiated coverage of the stock with Underperform rating and $185 price target (PT); Vertical Research lowered its PT to $268 from $286 and maintained its Hold rating.
AVNT –&nbsp;Jefferies lowered its PT to $51 from $67 and reiterated its Buy rating.
AXTA&nbsp;–&nbsp;Vertical Research lowered its PT to $28 from $32 and maintained its Hold rating.
CTVA&nbsp;–&nbsp;Bank of America raised its PT to $57 from $51 and reiterated its Outperform rating; Vertical Research lowered its PT to $55 from $59 and maintained its Hold rating.
EAF&nbsp;–&nbsp;BMO lowered its PT to $9 from $10 and maintained its Market Perform rating.
ECL&nbsp;–&nbsp;Morgan Stanley lowered its PT to $181 from $210 and maintained its Equal Weight rating; Vertical Research lowered its PT to $169 from $185 and maintained its Hold rating; Mizuho Securities lowered its PT to $183 from $198 and maintained its Neutral rating.
EMN&nbsp;–&nbsp;Wells Fargo lowered its PT to $115 from $125 and reiterated its Outperform rating; Vertical Research lowered its PT to $117 from $136 and reiterated its Buy rating; Berenberg Bank also lowered its PT to $130 from $150 while reiterating its Buy rating.
FMC&nbsp;–&nbsp;Bank of America upgraded the stock to Buy from Underperform; Vertical Research lowered its PT to $116 from $126 and maintained its Hold rating.
FUL&nbsp;–&nbsp;JP Morgan downgraded the stock to Underperform from Neutral and set a $52 PT; Deutsche Bank also lowered its PT to $72 from $85 but reiterated its Buy recommendation.
LTHM&nbsp;–&nbsp;Vertical Research lowered its PT to $31 from $33 and reiterated its Buy recommendation.
PPG –&nbsp;Vertical Research upgraded the stock to Buy from Hold, despite lowering its PT to $139 from $154.
RPM&nbsp;–&nbsp;Credit Suisse initiated coverage with an Outperform rating and $95 PT; Vertical Research lowered its PT to $83 from $99 and maintained its Hold rating.
SHW&nbsp;–&nbsp;Evercore ISI lowered its PT to $280 from $305 and reiterated its Outperform rating; Vertical Research lowered its PT to $254 from $284 and maintained its Hold rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates
Initiation of Coverage – Westwater Resources, Inc.
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 July 3, 2022

KEY HIGHLIGHTS


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

WTR-CMI WEEKLY PERFORMANCE

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

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

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

United States

Eastman Chemical Company is an international chemical company which produces chemicals, fibers, and plastics.  The Company's operations include coatings, adhesives, specialty polymers, and Inks, fibers, performance chemicals and intermediates, performance polymers, and specialty plastics.

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Eastman Chemical Co (EMN US)

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