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

<h2>KEY HIGHLIGHTS</h2>
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<li>WTR-CMI last week.&nbsp;In what was another down week for the market, with the Russell 2000 declining 1.1% and the S&amp;P 500 dropping a whopping 3.0%, our WTR-CMI index of 30 chemicals and materials technology companies bucked the trend and posted a 1.0% appreciation. YTD, our index, while down 9.8%, is materially outperforming the broader market, as the Russell 2000 has declined 21%, while the S&amp;P 500 has lost 18.1% of its value since the beginning of 2022.</li>
<li>Winners and losers.&nbsp;Lithium stocks’ recovery led the performance last week, with PLL (up 10.9%), LAC (up 7.8%), and LTHM (up 7.4%) leading the way. Conversely, KWR, SHW, and PKE suffered the biggest declines, dropping 5.5%, 5.4%, and 5.0%, respectively, being the only stocks in our index to underperform the S&amp;P 500.</li>
<li>Addressing biologics’ growing needs.&nbsp;Taking a break from boardroom fights, AVD announced the development (with 3Bar Biologics) of&nbsp;non-reusable packaging&nbsp;for liquid biologic crop protection products, as bio-based crop inputs are incompatible with reusable packaging typically used in these applications due to the threat of contamination and the need for sterility when dealing with live organisms.</li>
<li>April was the worst month of the year…so far.&nbsp;The European new car market saw another negative Y/Y comp, with&nbsp;new car registrations declining almost 21%&nbsp;compared with April of 2021, the steepest Y/Y drop this year. Unfortunately, as the&nbsp;Bloomberg chart shows, May and June results may not be much better and hopes may begin to fade for a 2H22 recovery, given the general economic slowdown taking place globally and the still unresolved supply chain and logistics issues. In our sector, PPG, AXTA, and to a lesser extent, FUL, AVNT, KWR, and HXL have the greatest exposure to the automotive and transportation industry, suggesting volume growth will be hard to come by for these companies in 2022.</li>
<li>Plantings accelerate in US, but concerns remain.&nbsp;Better weather conditions allowed US farmers to get out into the field and attempt to catch up on getting seeds into the ground. Corn and soybean&nbsp;plantings increased significantly last week, but remain below five-year averages, with planting window rapidly closing over the&nbsp;next two to three weeks.</li>
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<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
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<p>Source: YCharts; May 20 close</p>
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<h2>Lithium &amp; EV Ecosystem</h2>
<p>Auto manufacturers continue to look for an edge in EV race.&nbsp;Two German automakers made announcements last week of partnerships with companies employing new technologies to enable a more rapid transition to<br>battery-powered vehicles.&nbsp;Mercedes Benz announced the addition of a new battery technology&nbsp;in cooperation with Sila Nanotechnologies, which utilizes higher silicon content anodes for lithium batteries. The newer anodes allow for greater energy density by 20-40% and therefore expanded battery range, addressing one of the main consumer concerns. The two companies hope to have the battery as an option for high-end and heavier SUV vehicles by the middle of this decade. Meanwhile,&nbsp;BMW joined Mangrove Lithium&nbsp;(privately held Canadian company) as the lead investor. Mangrove Lithium has developed a process to transform virgin and recycled raw lithium into battery-grade material that does not require a separate carbonate plant to convert lithium raw material into battery-grade lithium carbonate. While still in the pilot plant stage, the junior lithium converter hopes to use the recently raised capital to accelerate the construction of its first commercial production plant. No timetable was provided.</p>
<p>Expanding EV ecosystem.&nbsp;Swedish start-up&nbsp;Northvolt has started commercial deliveries of its battery cells&nbsp;to a car manufacturer in Europe. While the identity of the car manufacturer was not revealed, Northvolt’s customers (companies that signed supply agreements with the lithium cell producer) include BMW, Volkswagen, Volvo Cars, and Polestar. Here in the US,&nbsp;ACE Green Recycling&nbsp;announced plans to build and operate North America’s largest sustainable battery recycling park in Texas. The proposed plant will be able to recycle both traditional lead-acid batteries, as well as lithium batteries, using a more environmentally sustainable process that can also produce higher battery material yields.</p>
<p>As if higher metal prices and looming material shortage weren’t enough.&nbsp;The new government in Chile, the world’s second-largest producer of lithium, has pledged to establish a&nbsp;state lithium firm&nbsp;to develop the ultra-light battery metal and hopes to establish a model for the company by the end of the year, effectively setting up a government-run competitor to SQM and ALB, who are currently developing and mining lithium for the global EV market in the country. Meanwhile, current lithium operators in the country are facing a new challenge, or rather a new chapter in an old challenge – environmental activism. The issue at hand is the pink flamingo population, which a&nbsp;recent study&nbsp;suggested was declining, partly as a result of excessive water use by lithium miners operating in the country, which is putting a strain on flamingo habitats. While the merit of the study and its conclusions can be debated, environmental groups have seized on the report to limit future mining activities in the country. Unfortunately, Chile is not unique – domestically, both PLL and LAC, who are trying to commercialize both lithium mining and battery material processing facilities in North Carolina and Nevada, respectively, are facing similar obstacles in getting regulatory and environmental permits necessary to commence development and construction of these projects, as environmental groups and those representing indigenous populations are actively lobbying and in some cases suing in an attempt to hinder the development of domestic supply of the materials critical to the ongoing transformation of the automotive and transportation industries. We believe these trends will continue, highlighting the underlying issues with automotive electrification – key materials to enable the transition are mined or, in the case of graphite for battery anodes, still rely on petrochemical feedstocks, which means their environmental impact must be considered and accounted for. We believe blocking domestic development of resources critical to the industry’s needs will do little to accelerate the rate of EV adoption by consumers, while keeping domestic markets hostage to Chinese sources, or reliant on materials produced in other parts of the world that may not be as environmentally responsible as domestic manufacture would be.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Food security is a real concern.&nbsp;In the latest sign of growing global food security concerns, India, the second-largest wheat grower in the world,&nbsp;has mostly prohibited exports, saying that the nation’s food security is under threat. Hot weather in wheat-producing regions of the country has already affected expected harvest yields, causing the government to lower its production outlook for the season by 5.7% to 105 million metric tons for the crop year ending in June. Meanwhile,&nbsp;grain exports from Ukraine&nbsp;are down 64% so far in May compared with last year at this time, as a result of Russia’s invasion of the country and disruptions to shipping as well as planting. Russia’s blockade of Ukrainian Black Sea ports has stranded approximately&nbsp;20 million tons of grain in the country’s warehouses, keeping the critical supplies from the global market and countries that rely on Ukrainian wheat for their food security. Ukraine accounted for 10% of global wheat exports in 2021.</p>
<p>Late plantings raise weed concerns, which may be a positive for herbicide producers.&nbsp;One consequence of late plantings and therefore late sprouting of row crops this year is the disadvantage it puts these sprouting crops versus faster growing,&nbsp;more aggressive grasses and weeds&nbsp;that compete with sowed grain for nutrients and water. As a result, greater use of herbicides (assuming farmers can get them, given the shortages and higher prices we discussed in previous publications) may be required, which may be seen as a positive for herbicide producers, such as CTVA, BASF, Bayer, AVD, and to a lesser extent, FMC (due to that company’s higher proportion of insecticide sales). It may also benefit emerging biobased ag input companies, such as BIOX and MBII, who sell products that help crops utilize the nutrients in the soil, as well as condition the soil itself to be less hospitable to pests.</p>
<h2>Recent WTR Publications</h2>
<p>Bio-ag market update and Marrone Bio Innovations-Bioceres Merger</p>
<p>Marrone Bio Innovations 1Q22 Results</p>
<p>Fireside Chat: Kevin R. Helash, Chief Executive Officer and Director of Marrone Bio Innovations</p>
<h2>Rating and Price Target Changes</h2>
<p>EAF –&nbsp;GLJ Research lowered its price target (PT) to $4.93 from $6.72 and reiterated its Sell recommendation.</p>
<p>ECL –&nbsp;Credit Suisse initiated coverage of the stock with a Neutral rating and $180 PT.</p>
<p>KWR –&nbsp;Deutsche Bank lowered its PT to $175 from $225 and reiterated its Buy rating.</p>
<p>LTHM –&nbsp;Deutsche Bank initiated coverage of the stock with a Hold rating and $29 PT.</p>
<p>PPG –&nbsp;Berenberg Bank downgraded the stock to Hold from Buy and lowered its PT to $140 from $180.</p>
<p>SHW –&nbsp;Berenberg Bank lowered its PT to $285 from $310 and maintained its Hold recommendation.</p>
<h3>DISCLOSURES</h3>
<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>
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KEY HIGHLIGHTS


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

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; May 20 close







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

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








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

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;While the broader Russell 2000 index barely held its own (0.2%), the large-cap S&amp;P 500 index fell more (2.4%). Conversely, our WTR-CMI index of chemicals and materials technology companies delivered a 0.9% gain for the week. While the index’s YoY performance is still down 4.9%, it is well ahead of the (7.8%) returns for the S&amp;P 500 and (10.7%) for the Russell 2000.</li>
<li>Winners and losers. WTR-CMI’s performance last week was led by AVD’s 10.3% jump, as the company benefited from positive demand and pricing dynamics in the ag market. KOP’s 9.3% appreciation broke a month-long trend of declining stock price. ASH’s&nbsp;positive preannouncement&nbsp;of F2Q22 (Mar-22) likely drove the stock’s 7.7% rally last week. At the other end, volatile LAC posted the steepest decline in our index with an 11.5% drop, followed by KWR’s (6.4%) and PPG’s (4.4%) performance. Margin concerns were the likely culprit of declines in PPG.</li>
<li>Late winter demand drives stronger salt volumes.&nbsp;Although the road-salt season got off to a slow start, more inclement weather events in Mar-Q appear to have driven positive volume growth for road salt at CMP,&nbsp;which updated its outlook for the quarter. The company also announced that it received the&nbsp;maximum earn-out payment&nbsp;of $18.5M for the business it sold last year.</li>
<li>Chip shortage continues to impact auto production. European plants appear to be particularly hit hard, with&nbsp;AutoForecast Solutions increasing its forecast&nbsp;for missed auto production by nearly 100K last week, mostly out of Europe. After losing 10.5M units last year, the industry may be on pace for another 2-plus million units under-produced this year, a number we believe may continue to get revised higher.</li>
<li>Commodity resin prices may be stabilizing. With exports still hampered by logistical bottlenecks, and with warehouses bulging with products as a result,&nbsp;PE and PP producers may be curtailing production&nbsp;even as they worked to secure $0.04-$0.10/lb price increases for March. With oil prices retreating from their March highs, resin prices may stabilize at current levels, allowing customers such as AVNT to catch up with price increases of their own, and restore margins as 2022 progresses.</li>
</ul>
<p>WTR-CMI WEEKLY PERFORMANCE</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/269/583/original/image_71971076121650473739809.png?1650473742" class="editor-image img-responsive" data-smartkarma-image-id="269583"></figure>
<p>Source: YCharts * April 15 close</p>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>Auto companies continue to sign supply deals directly with metal producers. Recently GM, which is in the process of ramping up EV production,&nbsp;<a href="https://carsinsiders.com/2022/04/12/gm-ramping-up-for-ev-production-reaches-cobalt-supply-deal-with-miner-glencore/" target="_blank" rel="noopener">signed a supply deal with Australian miner </a>Glencore&nbsp;(OTC: GLNCY) to ensure its supply of cobalt—a material critical to EV battery production. Looking to do the same (secure critical metal supply), Ford announced the&nbsp;signing of a supply deal with Lake Resources&nbsp;(OTC: LLKKF), under which it will purchase 25K metric tonne of LCE (lithium carbonate equivalents) annually from Lake’s Argentinean mine.</p>
<p>More battery plant intentions announced. Joint-venture partners&nbsp;Stellantis and LG Energy Solutions announced&nbsp;a commitment to spend $4.1 billion to build Canada’s first large-scale EV battery plant in Windsor, Ontario. The plant is expected to begin operations in 2024 and will have an annual capacity of 45 GWh. Meanwhile, Japan-based EV battery maker Envision AESC Group&nbsp;announced plans to spend $2B&nbsp;to build a battery plant in Kentucky (its second plant in U.S.). The plant is expected to have an annual production capacity of 30 GWh, potentially rising to 40 GWh over time.</p>
<p>Flies in the ointment. While the EV market remains one of the few bright spots in the automotive industry, with&nbsp;China reporting a 150% YoY increase in new energy vehicles&nbsp;(NEV) sales in 1Q22, despite a 12% YoY drop in total new car sales in March and flattish 1Q22 overall, several challenges continue to impact the industry. We have often spoken about metal availability as a mid-term concern, although a&nbsp;report by McKinsey &amp; Co., suggests there will be enough lithium to meet EV demand through 2030, but we have also mentioned other factors that may impact near-term pace of EV consumer adoption. One such factor continues to be charging infrastructure. Public charging points&nbsp;continue to grow at a slower rate than EVs&nbsp;across the world, with China being the worst. That’s not surprising, given the high number of EVs being sold in the country and the government’s relatively less attention and abilities being focused on supporting the infrastructure. We continue to believe that at some point this imbalance will need to be addressed, if the NEV revolution is to fully take off. Another, long-acknowledged challenge to faster EV transition is the relatively higher cost of EVs vs. ICE vehicles. Higher EV production volumes and higher battery production volumes were expected to drive higher efficiencies and lower battery costs (the major factor in the cost difference of ICE vs. EV). However, supply concerns, logistics challenges and energy inflation are driving a sharp increase in battery prices instead. In fact,&nbsp;Korean battery manufacturers are expected to raise prices 40%&nbsp;over the next 2-3 years to offset higher metal and graphite costs and we’re fairly confident S. Korean players will not be the only ones raising prices. If that wasn’t enough, the continuing COVID-19-related lockdowns, particularly in China, are impacting near-term production of EVs, with Chinese EV manufacturer&nbsp;Neo announcing a production stop&nbsp;for lack of supplies, due to disruptions from Covid-19-driven lockdowns. What’s even more concerning is that the company is unsure when production would resume.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Welcome regulatory changes coming. A bill&nbsp;pending in the Brazilian Senate&nbsp;will modernize and update regulations around research, experimentation, labeling, registration, and classification, through storage and transport, to commercialization, control, inspection, and disposal of packaging for pesticides used in the country’s agricultural sector. Proponents believe the Bill, if passed and enacted, will allow newer, more efficacious, and less-expensive products into the country’s ag sector, streamlining the approval process from as long as 8 years to 1-2 years, typical for other jurisdictions. Closer home, the&nbsp;EPA released a workplan&nbsp;to protect endangered species from pesticides, while ensuring the products are available for farmers to use. According to the EPA, the current pesticide approval system has major drawbacks that make the process of complying with Endangered Species Act (ESA) ‘unsustainable and legally tenuous’. It currently has a backlog of nearly 20 years in pending litigation or court-enforceable deadlines covering over 1,000 pesticide products related to the ESA. We believe both these developments are a positive for the ag-chem industry and its participants, whether Tier-I players such as CTVA and FMC, or emerging bio-based crop protection companies, such as MBII, as it may lower registration and litigation costs for the former and speed up the uptake of bio-based alternatives to synthetic chemical pesticides for the latter.</p>
<p>War in Ukraine a cause for growing concern. We have previously highlighted Ukraine’s major role as a producer and exporter of ag products, particularly wheat, seed oil, and corn. With the planting season underway in the Northern Hemisphere,&nbsp;concerns are growing over the country’s ability to meet even its internal needs, let alone support its export customers. Even getting crop inputs, such as pesticides and fertilizers, into the country is getting increasingly problematic, while planting, let alone harvesting abilities, remain under question.</p>
<p>Use less, save more. The sky-high costs of fertilizers are driving increasing resources into developing products and processes to reduce the volume of these inputs needed to generate acceptable yields. From using manure (discussed in last week’s Mat-Chem Notes) as a substitute to developing bio-based solutions to fix nitrogen in the soil, or prevent its loss in the plant,&nbsp;significant research and commercialization efforts are underway. Making greater use of&nbsp;seed treatment&nbsp;as a way to improve yields may also be gaining traction, even among farmers that did not fully take advantage of the technology in the past. High chemical fertilizer prices are also providing an opening for&nbsp;bio-based fertilizers&nbsp;and soil treatment products to gain traction in the market. Again, we se this as a strong positive driver for MBII, as well as Argentinean-based Bioceres (NASDAQ: BIOX).</p>
<h2>Rating and Price Target Changes</h2>
<p>ASH&nbsp;– Deutsche Bank raised its price target (PT) to $120 from $115 and reiterated its Buy rating.</p>
<p>CTVA – Loop Capital upgraded the stock to Buy from Hold with $69 PT; Vertical Research downgraded the stock to Hold from Buy, while keeping its $58 PT.</p>
<p>EMN&nbsp;– RBC reduced its PT to $116 from $125, maintaining its Sector Perform rating.</p>
<p>FMC&nbsp;– CFRA downgraded the stock to Sell from Hold and maintained its $126 PT; likewise, Loop Capital downgraded the stock to Hold from Buy with PT of $140.</p>
<p>FUL&nbsp;– Following the company’s Investor Day, Baird upgraded the stock to Outperform from Neutral, keeping its $85 PT unchanged.</p>
<p>RPM&nbsp;– BMO lowered its PT to $111 from $115 and reiterated its Outperform rating.</p>
<p>SHW – Mizuho lowered its PT to $310 from $350, reiterating its Buy recommendation.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;While the broader Russell 2000 index barely held its own (0.2%), the large-cap S&amp;P 500 index fell more (2.4%). Conversely, our WTR-CMI index of chemicals and materials technology companies delivered a 0.9% gain for the week. While the index’s YoY performance is still down 4.9%, it is well ahead of the (7.8%) returns for the S&amp;P 500 and (10.7%) for the Russell 2000.
Winners and losers. WTR-CMI’s performance last week was led by AVD’s 10.3% jump, as the company benefited from positive demand and pricing dynamics in the ag market. KOP’s 9.3% appreciation broke a month-long trend of declining stock price. ASH’s&nbsp;positive preannouncement&nbsp;of F2Q22 (Mar-22) likely drove the stock’s 7.7% rally last week. At the other end, volatile LAC posted the steepest decline in our index with an 11.5% drop, followed by KWR’s (6.4%) and PPG’s (4.4%) performance. Margin concerns were the likely culprit of declines in PPG.
Late winter demand drives stronger salt volumes.&nbsp;Although the road-salt season got off to a slow start, more inclement weather events in Mar-Q appear to have driven positive volume growth for road salt at CMP,&nbsp;which updated its outlook for the quarter. The company also announced that it received the&nbsp;maximum earn-out payment&nbsp;of $18.5M for the business it sold last year.
Chip shortage continues to impact auto production. European plants appear to be particularly hit hard, with&nbsp;AutoForecast Solutions increasing its forecast&nbsp;for missed auto production by nearly 100K last week, mostly out of Europe. After losing 10.5M units last year, the industry may be on pace for another 2-plus million units under-produced this year, a number we believe may continue to get revised higher.
Commodity resin prices may be stabilizing. With exports still hampered by logistical bottlenecks, and with warehouses bulging with products as a result,&nbsp;PE and PP producers may be curtailing production&nbsp;even as they worked to secure $0.04-$0.10/lb price increases for March. With oil prices retreating from their March highs, resin prices may stabilize at current levels, allowing customers such as AVNT to catch up with price increases of their own, and restore margins as 2022 progresses.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts * April 15 close
Lithium &amp; EV Ecosystem Developments
Auto companies continue to sign supply deals directly with metal producers. Recently GM, which is in the process of ramping up EV production,&nbsp;signed a supply deal with Australian miner Glencore&nbsp;(OTC: GLNCY) to ensure its supply of cobalt—a material critical to EV battery production. Looking to do the same (secure critical metal supply), Ford announced the&nbsp;signing of a supply deal with Lake Resources&nbsp;(OTC: LLKKF), under which it will purchase 25K metric tonne of LCE (lithium carbonate equivalents) annually from Lake’s Argentinean mine.
More battery plant intentions announced. Joint-venture partners&nbsp;Stellantis and LG Energy Solutions announced&nbsp;a commitment to spend $4.1 billion to build Canada’s first large-scale EV battery plant in Windsor, Ontario. The plant is expected to begin operations in 2024 and will have an annual capacity of 45 GWh. Meanwhile, Japan-based EV battery maker Envision AESC Group&nbsp;announced plans to spend $2B&nbsp;to build a battery plant in Kentucky (its second plant in U.S.). The plant is expected to have an annual production capacity of 30 GWh, potentially rising to 40 GWh over time.
Flies in the ointment. While the EV market remains one of the few bright spots in the automotive industry, with&nbsp;China reporting a 150% YoY increase in new energy vehicles&nbsp;(NEV) sales in 1Q22, despite a 12% YoY drop in total new car sales in March and flattish 1Q22 overall, several challenges continue to impact the industry. We have often spoken about metal availability as a mid-term concern, although a&nbsp;report by McKinsey &amp; Co., suggests there will be enough lithium to meet EV demand through 2030, but we have also mentioned other factors that may impact near-term pace of EV consumer adoption. One such factor continues to be charging infrastructure. Public charging points&nbsp;continue to grow at a slower rate than EVs&nbsp;across the world, with China being the worst. That’s not surprising, given the high number of EVs being sold in the country and the government’s relatively less attention and abilities being focused on supporting the infrastructure. We continue to believe that at some point this imbalance will need to be addressed, if the NEV revolution is to fully take off. Another, long-acknowledged challenge to faster EV transition is the relatively higher cost of EVs vs. ICE vehicles. Higher EV production volumes and higher battery production volumes were expected to drive higher efficiencies and lower battery costs (the major factor in the cost difference of ICE vs. EV). However, supply concerns, logistics challenges and energy inflation are driving a sharp increase in battery prices instead. In fact,&nbsp;Korean battery manufacturers are expected to raise prices 40%&nbsp;over the next 2-3 years to offset higher metal and graphite costs and we’re fairly confident S. Korean players will not be the only ones raising prices. If that wasn’t enough, the continuing COVID-19-related lockdowns, particularly in China, are impacting near-term production of EVs, with Chinese EV manufacturer&nbsp;Neo announcing a production stop&nbsp;for lack of supplies, due to disruptions from Covid-19-driven lockdowns. What’s even more concerning is that the company is unsure when production would resume.
Ag-Chem and Ag-Tech
Welcome regulatory changes coming. A bill&nbsp;pending in the Brazilian Senate&nbsp;will modernize and update regulations around research, experimentation, labeling, registration, and classification, through storage and transport, to commercialization, control, inspection, and disposal of packaging for pesticides used in the country’s agricultural sector. Proponents believe the Bill, if passed and enacted, will allow newer, more efficacious, and less-expensive products into the country’s ag sector, streamlining the approval process from as long as 8 years to 1-2 years, typical for other jurisdictions. Closer home, the&nbsp;EPA released a workplan&nbsp;to protect endangered species from pesticides, while ensuring the products are available for farmers to use. According to the EPA, the current pesticide approval system has major drawbacks that make the process of complying with Endangered Species Act (ESA) ‘unsustainable and legally tenuous’. It currently has a backlog of nearly 20 years in pending litigation or court-enforceable deadlines covering over 1,000 pesticide products related to the ESA. We believe both these developments are a positive for the ag-chem industry and its participants, whether Tier-I players such as CTVA and FMC, or emerging bio-based crop protection companies, such as MBII, as it may lower registration and litigation costs for the former and speed up the uptake of bio-based alternatives to synthetic chemical pesticides for the latter.
War in Ukraine a cause for growing concern. We have previously highlighted Ukraine’s major role as a producer and exporter of ag products, particularly wheat, seed oil, and corn. With the planting season underway in the Northern Hemisphere,&nbsp;concerns are growing over the country’s ability to meet even its internal needs, let alone support its export customers. Even getting crop inputs, such as pesticides and fertilizers, into the country is getting increasingly problematic, while planting, let alone harvesting abilities, remain under question.
Use less, save more. The sky-high costs of fertilizers are driving increasing resources into developing products and processes to reduce the volume of these inputs needed to generate acceptable yields. From using manure (discussed in last week’s Mat-Chem Notes) as a substitute to developing bio-based solutions to fix nitrogen in the soil, or prevent its loss in the plant,&nbsp;significant research and commercialization efforts are underway. Making greater use of&nbsp;seed treatment&nbsp;as a way to improve yields may also be gaining traction, even among farmers that did not fully take advantage of the technology in the past. High chemical fertilizer prices are also providing an opening for&nbsp;bio-based fertilizers&nbsp;and soil treatment products to gain traction in the market. Again, we se this as a strong positive driver for MBII, as well as Argentinean-based Bioceres (NASDAQ: BIOX).
Rating and Price Target Changes
ASH&nbsp;– Deutsche Bank raised its price target (PT) to $120 from $115 and reiterated its Buy rating.
CTVA – Loop Capital upgraded the stock to Buy from Hold with $69 PT; Vertical Research downgraded the stock to Hold from Buy, while keeping its $58 PT.
EMN&nbsp;– RBC reduced its PT to $116 from $125, maintaining its Sector Perform rating.
FMC&nbsp;– CFRA downgraded the stock to Sell from Hold and maintained its $126 PT; likewise, Loop Capital downgraded the stock to Hold from Buy with PT of $140.
FUL&nbsp;– Following the company’s Investor Day, Baird upgraded the stock to Outperform from Neutral, keeping its $85 PT unchanged.
RPM&nbsp;– BMO lowered its PT to $111 from $115 and reiterated its Outperform rating.
SHW – Mizuho lowered its PT to $310 from $350, reiterating its Buy recommendation.
DISCLOSURES

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Mat-Chem Notes for the Week Ended April 17, 2022

Macro Strategist, Saxo Capital Markets

Kay Van-Petersen

Macro Strategist

Saxo Capital Markets

<ul><li>It's time to break out the analysis on gold and silver miners</li><li>Some goldminers are trading well below P/B, with potential price moves of +4x just to get back to median P/B levels</li><li>Fed week: watch for dovishness; US GDP watch for a miss. Both of these plus coming up to month end could add to near-term equity bullish sentiment</li><li>Central bank meetings include Japan, New Zealand, South Africa, Russia and Nigeria</li></ul>

It's time to break out the analysis on gold and silver minersSome goldminers are trading well below P/B, with potential price moves of +4x just to get back to median P/B levelsFed week: watch for dovishness; US GDP watch for a miss. Both of these plus coming up to month end could add to near-term equity bullish sentimentCentral bank meetings include Japan, New Zealand, South Africa, Russia and Nigeria

The Macro Take: Get the Picks Out for Gold and Silver Miners

United States

H.B. Fuller Company manufactures and markets adhesives, sealants, coatings, paints, and other specialty chemical products worldwide.  The Company's products are sold in countries that include North America, Europe, Latin America, the Asia Pacific region, India, the Middle East and Africa.

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H.B. Fuller Co. (FUL US)

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The Macro Take: Get the Picks Out for Gold and Silver Miners

It's time to break out the analysis on gold and silver miners Some goldminers are trading well below P/B, with potential price moves of +4x just...

Kay Van-Petersen

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52-week Range

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