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)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<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>
</ul>
<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>
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<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

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

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

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)

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

KEY HIGHLIGHTS WTR-CMI last week. In what was another down week for the market, with the Russell 2000 declining 1.1% and the S&P 500 dropping...

Water Tower Research

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

KEY HIGHLIGHTS WTR-CMI last week. While the broader Russell 2000 index barely held its own (0.2%), the large-cap S&P 500 index fell more...

Water Tower Research

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