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>
<ul>
<li>WTR-CMI last week.&nbsp;Last week, the market continued to digest the impact of the war in Europe, global inflation, and continuing supply disruptions due to COVID-19-related lockdowns in parts of China. Nevertheless, the S&amp;P 500 eked out a bare 0.1% gain, and the broader Russell 2000 0.6%. Our WTR-CMI index of 30 chemicals and materials technology stocks outperformed both the indexes by appreciating 1%.</li>
<li>Winners and losers. Once again—and this time propelled by the&nbsp;Biden Administration’s invocation&nbsp;of the War Powers Act to drive faster domestication of the critical EV battery materials industry—lithium stocks led the gains. While LAC surged 13.0% and LTHM 7.1%, KWR and EAF fell (4.2%) and (4.0%), respectively, likely due to their exposure to the steel industry, which saw a volume contraction in 2021 and may continue to underperform in 2022.</li>
<li>More good news for PLL. After recently completing a successful secondary stock offering raising over $100M, PLL got more good news last week as Atlantic Lithium (OTC: ALLIF), in which PLL has an earn-in right, announced a significant 42% upgrade in the&nbsp;mineral resource estimate&nbsp;for its Ewoyaa lithium deposit in Ghana. While still in the early stages, this is a positive development. PLL is currently seeking to complete a permitting process in North Carolina, diversifying its sourcing by taking a lithium mine online in Quebec, and continuing to develop properties in Ghana.</li>
<li>Inflation pressure unremitting. While oil prices have retreated from their war-panic highs, downstream commodities, particularly&nbsp;commodity resins&nbsp;such as polyethylene and polypropylene, remain at elevated levels, with more (albeit modest) price increases expected in the months ahead. With fuel prices at all-time highs in the U.S., food inflation is expected to get worse in 2022, as the U.S. Department of Agriculture&nbsp;(USDA) recently upped&nbsp;its food inflation expectations for the year from 2.5-3.5% to 4.5-5.5%.</li>
<li>Anticorrosion coatings market growth. Demand from end-users in construction, automotive, transportation, consumer durables, and industrial machinery is expected to drive the growth of&nbsp;anti-corrosion coatings&nbsp;by 4% CAGR through 2024.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<p>Source: Y-Charts; prices as of April 1 close</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/267/393/original/image_49469512221649294020557.png?1649294023" class="editor-image img-responsive" data-smartkarma-image-id="267393"></figure>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>PLL may get a neighbor… eventually. As PLL works to complete the permitting process for its proposed lithium mine and conversion plant in North Carolina, ALB, one of the largest lithium carbonate producers,&nbsp;is said to be considering&nbsp;reopening its idle Kings Mountain lithium mine in the state, having announced environmental and economic reviews of the plan. At the earliest, these may be competed in late 2023, or more likely in 2024, at which time ALB will decide whether to pursue state and local permits needed to reopen the mine. The Biden Administration’s focus on promoting and enabling faster and greater development of strategically important domestic resources for lithium and other critical EV battery components may accelerate that timetable, or possibly lower/remove, some of the regulatory barriers and red tape needed to domesticate lithium production.</p>
<p>Diversifying out of China. Non-Chinese automotive companies, battery manufacturers, and lithium and graphite providers have been looking to diversify geographically and lower their reliance on China for materials critical to the continuing transition away from fossil fuels. Interestingly, Chinese battery manufacturers are also taking cue. For example, battery maker&nbsp;EVE Energy is looking to build a factory in Hungary&nbsp;to position itself as a local supplier to the growing EV automotive market in Europe.</p>
<p>Beyond lithium. As investors (and industry participants) focus on procuring sufficient lithium to meet the expected demand from a burgeoning EV market, other materials—notably, cobalt, nickel and graphite—may be garnering less attention. However, they are no less, or perhaps more, critical to the success of the EV revolution. This is especially so given that lithium is not a particularly rare metal, and can be found in many places in commercially feasible concentrations, whereas cobalt, nickel and graphite deposits are scarcer and more geographically concentrated, often found in regions not particularly friendly to western democracies. Tesla (NASDAQ: TSLA), for one,&nbsp;has been working diligently&nbsp;to ensure its growth pans are not hampered by battery or battery material shortages. It has been addressing nickel availability specifically by signing multi-year supply deals with nickel producers. Given that demand for nickel in EV batteries is expected to more than triple by 2030 from current levels, and with sanctions on Russia and countersanctions increasing supply risks, other car companies may need to follow Tesla’s lead and ensure alternate nickel supply is available, should Russian nickel become more restricted. The race for EV dominance may come down to the brass tacks, or, more accurately, nickel tacks. Access to key materials in sufficient quantities to facilitate growth is one of the determinants of market success.</p>
<h2>Automotive &amp; Transportation</h2>
<p>A closer look at Russian war’s impact on auto production. As a low labor-cost country strategically located in the heart of Europe, Ukraine is home to 38 factories operated by 22 companies from six countries, representing an investment of more than $550 million since 1998. This production infrastructure, which supported auto manufacturing in other parts of Europe, has been&nbsp;significantly disrupted by Russia’s invasion&nbsp;of the country. The results of this did not have to wait long, as numerous European car companies, as well as U.S. companies with European plants, have begun&nbsp;feeling the pressure of disrupted supply of parts on their ability to produce.</p>
<p>Early March results far from encouraging. The impact of the war in Ukraine, ongoing semiconductor shortages, pandemic-related lockdowns, and tough YoY comps are combining to drive a significant decline in new car registrations.&nbsp;French new car registrations&nbsp;fell 20% YoY in March, and early indications are that the Chinese market saw significant YoY declines as well. As more European Union countries report March results and the data for U.S. registration comes in, we expect to see similar double-digit YoY declines. With the European war showing no signs of subsiding, April and May comps are looking daunting, and the automotive market may not show positive trends till 2H22, if not 2023. Consequently, we remain cautious on companies with high exposure to the transportations sector, including PPG and AXTA, as well as AVNT, FUL, HXL and perhaps even VVV, as these companies deal with reduced demand from a key end market, while managing the impact of higher raw material, transportation and labor costs on their margins.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Putting numbers to the war’ impact on ag production. In the previous issues of Mat-Chem Notes, we highlighted the importance of Ukraine as an exporter of grains, oilseed and cereals. Although&nbsp;early plantings in Ukraine&nbsp;appear to be up 10% compared with last year, concerns are growing that&nbsp;2022 plantings&nbsp;will be barely half of last year’s acreage, with predictable results, as the country may be forced to restrict exports of key commodities to ensure its own population is provided for. Given the U.S. Department of Agriculture’s (USDA) revised inflation outlook mentioned previously, these developments don’t bode well for domestic, let alone global, food prices. Outright shortages in import-dependent regions of the world cannot be ruled out.</p>
<p>Domestic aggrege estimates up but may not be enough to address food security concerns. The&nbsp;USDA released its updated planted acreage report, which includes higher than previously expected soybean plantings and lower corn plantings. Overall acreage increased to 317.4 million acres of principal crops, up 1.2 million acres compared with 2021, which marks a rise of 0.4%. The higher soy vs. corn acreage vs. market expectations is a positive for ag-chem companies such as FMC, CTVA and AVD, as soy acres require significantly more pesticides. On the other hand, lower corn acres may be a slight negative for fertilizer companies such as CF Industries (NYSE: CF), Mosaic (NYSE: MOS) and Nutrien (NYSE: NTR), as corn requires significantly higher levels of fertilizers compared with soy and even wheat.</p>
<p>Lowering carbon footprint of renewable fuel. While the practice of adding ethanol to gasoline formulations has been a strong driver of corn demand in the U.S., justified by expectations of reduced carbon emissions by ICE automobiles, ethanol production itself has come under scrutiny regarding its carbon footprint. A&nbsp;new effort underway to address carbon emission&nbsp;concerns includes a proposed CO2&nbsp;pipeline that would capture and transport CO2&nbsp;generated by ethanol plants in the Midwest, making the process of producing transportation-related ethanol a truly carbon-reducing endeavor.</p>
<p>A commodity super cycle?&nbsp;Three developments in domestic ag market&nbsp;may generate a long-term trend of higher demand and higher prices (and higher farm income), building on the strength of the past two years. These include 1) the ongoing Russia-Ukraine war, which may have long-term impact on the production and export of agricultural commodities even after the conflict ends, 2) the growth in demand for green fuels—from ethanol to bio-diesel to renewable diesel, and, 3) the peak inland area that can be brought under cultivation domestically. This suggests that the strong performance of ag suppliers—from seed companies to fertilizer manufacturers to ag-chem formulators—may have a longer runway of above-trend performance than is being currently envisioned by investors, perhaps warranting an upward re-valuation of the trading multiples of the stocks of these companies.</p>
<h2>In Other Chemicals and Materials News</h2>
<p>M&amp;A activity continues in coatings and adhesives. Having completed its acquisition of a small European powder coatings business,&nbsp;PPG announced&nbsp;last week its divestiture of its African coatings business to Océinde, an industrial group based in Réunion, France. EMN completed the sale of its&nbsp;adhesives resin business Synthomer plc. for $1 billion. SHW also announced the&nbsp;completion of its acquisition&nbsp;of the European industrial coatings business of Sika AG.</p>
<p>Chemical industry doing its part in creating a circular economy. EMN, having&nbsp;announced in January 2022&nbsp;its plan to invest up to $1 billion to build the world's largest material-to-material molecular recycling plant in France, has made further progress and recently announced that it has&nbsp;entered exclusive negotiations&nbsp;with Port-Jerome-sur-Seine authorities in Normandy. Provided the negotiations are successful, Eastman expects the site to be operational by 2025, producing essentially virgin plastic resins from recycled plastic waste. While not a resin producer, AVNT buys significant amount of commodity resins, which it then formulates and compounds with various additives to impart new physical characteristics and create new types of engineered plastic compounds. It is therefore not surprising that the company is keenly interested in playing a role in material stewardship and the circular economy, similar to that of EMN. Recently, AVNT announced an expansion of its recycled content—engineered-plastic compound—offering. This is after it&nbsp;received FDA approval&nbsp;for the use of its thermoplastic elastomer (TPE) resins, which utilize up to 25% of recycled content in certain food-contact applications, offering customers an environmentally friendly choice.</p>
<h2>Rating and Price Target Changes</h2>
<p>FUL&nbsp;– Deutsche Bank reduced its price target (PT) to $72 from $80, and maintained its Hold rating.</p>
<p>FMC&nbsp;– Monness Crespi downgraded the stock to Neutral from Buy.</p>
<p>PPG&nbsp;– BofA lowered its PT to $168 from $186, and reiterated its Buy recommendation; RBC also lowered its PT to $158 from $169, while reiterating its Outperform rating.</p>
<p>IOSP&nbsp;– Seaport Global initiated coverage with a Neutral rating.</p>
<p>SHW&nbsp;– Evercore ISI raised its PT to $320 from $300, and reiterated its Outperform rating.</p>
<h2>DISCLOSURES</h2>
<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;Last week, the market continued to digest the impact of the war in Europe, global inflation, and continuing supply disruptions due to COVID-19-related lockdowns in parts of China. Nevertheless, the S&amp;P 500 eked out a bare 0.1% gain, and the broader Russell 2000 0.6%. Our WTR-CMI index of 30 chemicals and materials technology stocks outperformed both the indexes by appreciating 1%.
Winners and losers. Once again—and this time propelled by the&nbsp;Biden Administration’s invocation&nbsp;of the War Powers Act to drive faster domestication of the critical EV battery materials industry—lithium stocks led the gains. While LAC surged 13.0% and LTHM 7.1%, KWR and EAF fell (4.2%) and (4.0%), respectively, likely due to their exposure to the steel industry, which saw a volume contraction in 2021 and may continue to underperform in 2022.
More good news for PLL. After recently completing a successful secondary stock offering raising over $100M, PLL got more good news last week as Atlantic Lithium (OTC: ALLIF), in which PLL has an earn-in right, announced a significant 42% upgrade in the&nbsp;mineral resource estimate&nbsp;for its Ewoyaa lithium deposit in Ghana. While still in the early stages, this is a positive development. PLL is currently seeking to complete a permitting process in North Carolina, diversifying its sourcing by taking a lithium mine online in Quebec, and continuing to develop properties in Ghana.
Inflation pressure unremitting. While oil prices have retreated from their war-panic highs, downstream commodities, particularly&nbsp;commodity resins&nbsp;such as polyethylene and polypropylene, remain at elevated levels, with more (albeit modest) price increases expected in the months ahead. With fuel prices at all-time highs in the U.S., food inflation is expected to get worse in 2022, as the U.S. Department of Agriculture&nbsp;(USDA) recently upped&nbsp;its food inflation expectations for the year from 2.5-3.5% to 4.5-5.5%.
Anticorrosion coatings market growth. Demand from end-users in construction, automotive, transportation, consumer durables, and industrial machinery is expected to drive the growth of&nbsp;anti-corrosion coatings&nbsp;by 4% CAGR through 2024.

WTR-CMI WEEKLY PERFORMANCE
Source: Y-Charts; prices as of April 1 close

Lithium &amp; EV Ecosystem Developments
PLL may get a neighbor… eventually. As PLL works to complete the permitting process for its proposed lithium mine and conversion plant in North Carolina, ALB, one of the largest lithium carbonate producers,&nbsp;is said to be considering&nbsp;reopening its idle Kings Mountain lithium mine in the state, having announced environmental and economic reviews of the plan. At the earliest, these may be competed in late 2023, or more likely in 2024, at which time ALB will decide whether to pursue state and local permits needed to reopen the mine. The Biden Administration’s focus on promoting and enabling faster and greater development of strategically important domestic resources for lithium and other critical EV battery components may accelerate that timetable, or possibly lower/remove, some of the regulatory barriers and red tape needed to domesticate lithium production.
Diversifying out of China. Non-Chinese automotive companies, battery manufacturers, and lithium and graphite providers have been looking to diversify geographically and lower their reliance on China for materials critical to the continuing transition away from fossil fuels. Interestingly, Chinese battery manufacturers are also taking cue. For example, battery maker&nbsp;EVE Energy is looking to build a factory in Hungary&nbsp;to position itself as a local supplier to the growing EV automotive market in Europe.
Beyond lithium. As investors (and industry participants) focus on procuring sufficient lithium to meet the expected demand from a burgeoning EV market, other materials—notably, cobalt, nickel and graphite—may be garnering less attention. However, they are no less, or perhaps more, critical to the success of the EV revolution. This is especially so given that lithium is not a particularly rare metal, and can be found in many places in commercially feasible concentrations, whereas cobalt, nickel and graphite deposits are scarcer and more geographically concentrated, often found in regions not particularly friendly to western democracies. Tesla (NASDAQ: TSLA), for one,&nbsp;has been working diligently&nbsp;to ensure its growth pans are not hampered by battery or battery material shortages. It has been addressing nickel availability specifically by signing multi-year supply deals with nickel producers. Given that demand for nickel in EV batteries is expected to more than triple by 2030 from current levels, and with sanctions on Russia and countersanctions increasing supply risks, other car companies may need to follow Tesla’s lead and ensure alternate nickel supply is available, should Russian nickel become more restricted. The race for EV dominance may come down to the brass tacks, or, more accurately, nickel tacks. Access to key materials in sufficient quantities to facilitate growth is one of the determinants of market success.
Automotive &amp; Transportation
A closer look at Russian war’s impact on auto production. As a low labor-cost country strategically located in the heart of Europe, Ukraine is home to 38 factories operated by 22 companies from six countries, representing an investment of more than $550 million since 1998. This production infrastructure, which supported auto manufacturing in other parts of Europe, has been&nbsp;significantly disrupted by Russia’s invasion&nbsp;of the country. The results of this did not have to wait long, as numerous European car companies, as well as U.S. companies with European plants, have begun&nbsp;feeling the pressure of disrupted supply of parts on their ability to produce.
Early March results far from encouraging. The impact of the war in Ukraine, ongoing semiconductor shortages, pandemic-related lockdowns, and tough YoY comps are combining to drive a significant decline in new car registrations.&nbsp;French new car registrations&nbsp;fell 20% YoY in March, and early indications are that the Chinese market saw significant YoY declines as well. As more European Union countries report March results and the data for U.S. registration comes in, we expect to see similar double-digit YoY declines. With the European war showing no signs of subsiding, April and May comps are looking daunting, and the automotive market may not show positive trends till 2H22, if not 2023. Consequently, we remain cautious on companies with high exposure to the transportations sector, including PPG and AXTA, as well as AVNT, FUL, HXL and perhaps even VVV, as these companies deal with reduced demand from a key end market, while managing the impact of higher raw material, transportation and labor costs on their margins.
Ag-Chem and Ag-Tech
Putting numbers to the war’ impact on ag production. In the previous issues of Mat-Chem Notes, we highlighted the importance of Ukraine as an exporter of grains, oilseed and cereals. Although&nbsp;early plantings in Ukraine&nbsp;appear to be up 10% compared with last year, concerns are growing that&nbsp;2022 plantings&nbsp;will be barely half of last year’s acreage, with predictable results, as the country may be forced to restrict exports of key commodities to ensure its own population is provided for. Given the U.S. Department of Agriculture’s (USDA) revised inflation outlook mentioned previously, these developments don’t bode well for domestic, let alone global, food prices. Outright shortages in import-dependent regions of the world cannot be ruled out.
Domestic aggrege estimates up but may not be enough to address food security concerns. The&nbsp;USDA released its updated planted acreage report, which includes higher than previously expected soybean plantings and lower corn plantings. Overall acreage increased to 317.4 million acres of principal crops, up 1.2 million acres compared with 2021, which marks a rise of 0.4%. The higher soy vs. corn acreage vs. market expectations is a positive for ag-chem companies such as FMC, CTVA and AVD, as soy acres require significantly more pesticides. On the other hand, lower corn acres may be a slight negative for fertilizer companies such as CF Industries (NYSE: CF), Mosaic (NYSE: MOS) and Nutrien (NYSE: NTR), as corn requires significantly higher levels of fertilizers compared with soy and even wheat.
Lowering carbon footprint of renewable fuel. While the practice of adding ethanol to gasoline formulations has been a strong driver of corn demand in the U.S., justified by expectations of reduced carbon emissions by ICE automobiles, ethanol production itself has come under scrutiny regarding its carbon footprint. A&nbsp;new effort underway to address carbon emission&nbsp;concerns includes a proposed CO2&nbsp;pipeline that would capture and transport CO2&nbsp;generated by ethanol plants in the Midwest, making the process of producing transportation-related ethanol a truly carbon-reducing endeavor.
A commodity super cycle?&nbsp;Three developments in domestic ag market&nbsp;may generate a long-term trend of higher demand and higher prices (and higher farm income), building on the strength of the past two years. These include 1) the ongoing Russia-Ukraine war, which may have long-term impact on the production and export of agricultural commodities even after the conflict ends, 2) the growth in demand for green fuels—from ethanol to bio-diesel to renewable diesel, and, 3) the peak inland area that can be brought under cultivation domestically. This suggests that the strong performance of ag suppliers—from seed companies to fertilizer manufacturers to ag-chem formulators—may have a longer runway of above-trend performance than is being currently envisioned by investors, perhaps warranting an upward re-valuation of the trading multiples of the stocks of these companies.
In Other Chemicals and Materials News
M&amp;A activity continues in coatings and adhesives. Having completed its acquisition of a small European powder coatings business,&nbsp;PPG announced&nbsp;last week its divestiture of its African coatings business to Océinde, an industrial group based in Réunion, France. EMN completed the sale of its&nbsp;adhesives resin business Synthomer plc. for $1 billion. SHW also announced the&nbsp;completion of its acquisition&nbsp;of the European industrial coatings business of Sika AG.
Chemical industry doing its part in creating a circular economy. EMN, having&nbsp;announced in January 2022&nbsp;its plan to invest up to $1 billion to build the world's largest material-to-material molecular recycling plant in France, has made further progress and recently announced that it has&nbsp;entered exclusive negotiations&nbsp;with Port-Jerome-sur-Seine authorities in Normandy. Provided the negotiations are successful, Eastman expects the site to be operational by 2025, producing essentially virgin plastic resins from recycled plastic waste. While not a resin producer, AVNT buys significant amount of commodity resins, which it then formulates and compounds with various additives to impart new physical characteristics and create new types of engineered plastic compounds. It is therefore not surprising that the company is keenly interested in playing a role in material stewardship and the circular economy, similar to that of EMN. Recently, AVNT announced an expansion of its recycled content—engineered-plastic compound—offering. This is after it&nbsp;received FDA approval&nbsp;for the use of its thermoplastic elastomer (TPE) resins, which utilize up to 25% of recycled content in certain food-contact applications, offering customers an environmentally friendly choice.
Rating and Price Target Changes
FUL&nbsp;– Deutsche Bank reduced its price target (PT) to $72 from $80, and maintained its Hold rating.
FMC&nbsp;– Monness Crespi downgraded the stock to Neutral from Buy.
PPG&nbsp;– BofA lowered its PT to $168 from $186, and reiterated its Buy recommendation; RBC also lowered its PT to $158 from $169, while reiterating its Outperform rating.
IOSP&nbsp;– Seaport Global initiated coverage with a Neutral rating.
SHW&nbsp;– Evercore ISI raised its PT to $320 from $300, and reiterated its Outperform rating.
DISCLOSURES
Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended April 3, 2022

<h2>KEY HIGHLIGHTS</h2>
<ul>
<li>WTR-CMI last week. In what was a recovery week for most of the market, both the Russell 2000 and the S&amp;P 500 appreciated 5.4% and 6.2%, respectively, last week. Our WTR-CMI index of 30 chemicals and materials technology stocks gained 4.6%, trailing both the broader indexes.</li>
<li>Winners and losers. As many as 27 of the 30 stocks in our index appreciated. KWR led with a 10.0% appreciation, followed by AVD with 9.5% and PPG with 8.9%. An analyst upgrade of PPG’s peer SHW, and overall positive market sentiment towards the ag-chem industry, were the likely drivers of the strong performance of these stocks. MTRN (2.6%), CMP (1.8%) and PLL (0.7%) were the declines in our index.</li>
<li>Margin recovery efforts continue. Russia’s war in Ukraine has added to the upward pressure on basic commodities and energy/fuel costs, amid ongoing disruptions in supply chain and logistics. This is spurring pass-through pricing actions by chemicals and materials companies that typically sit in the middle of commodity producers and end-consumers. ECL announced an almost-unprecedented 8-12%&nbsp;temporary energy surcharge&nbsp;to help offset higher vehicle fuel and energy costs within its businesses. Similarly, ASH announced an&nbsp;across-the-board global price increase&nbsp;of up to 15%. Considering that raw materials and energy represent approximately 50% of a typical chemical company’s COGS, and assuming the price increases are designed to offset the dollar impact of cost inflation, RM costs may be rising as much as 20-30% YOY for companies in our sector.</li>
<li>The war in Ukraine brings general pain. Nearly every global market and industry sector is feeling the repercussions of the Russian invasion of Ukraine. Early concerns are being highlighted in the&nbsp;automotive industry, and warnings are growing in the&nbsp;ag market. The&nbsp;chemicals and materials&nbsp;industry is not immune to these headwinds either. With both the U.S. and now the European Union working to wean themselves off Russian oil &amp; gas imports, global energy markets, and consequently virtually every other market, should brace for further cost escalations and supply disruptions.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<p>Source: Y-Charts; prices as of March 20 close</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/110/original/image_38898501521648167700723.png?1648167704" class="editor-image img-responsive" data-smartkarma-image-id="265110"></figure>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>Looking to meet looming demand wave. Battery-powered electric vehicle (BEV) and plug-in hybrid electric vehicle (PHEV) sales are expected to double in 2022 compared with 2021, and the first two months of the year appear to validate these expectations, at least when it comes to China, the global leader in neighborhood electric vehicle (NEV) sales. The country saw a 189% increase in YoY&nbsp;sales of NEVs in February, despite lower government incentives. Therefore, it is not surprising to see continued announcement by car, metal and battery manufacturers of new plans for new battery factories and lithium conversion plants, as the industry scrambles to put in place the infrastructure needed to support the rapid growth expectations.</p>
<p>Mercedes-Benz is putting together the pieces it needs to launch EV production at its 6-million-square-foot assembly plant 40 miles southwest of Birmingham, Ala. The&nbsp;company said&nbsp;Envision AESC, the Japan-based battery technology company, will supply vehicle batteries to it from a new U.S. plant starting mid-decade. It is not clear if Envision will need to build a new plant or expand its existing one in the U.S. to facilitate the supply. Similarly,&nbsp;Stellantis and LG Energy Solutions&nbsp;are rumored to be close to announcing plans for a new battery plant in Ontario, Canada, to meet demand for battery packs from the North American market. Making sure these battery plants have the components to work with,&nbsp;BASF announced&nbsp;that it intends to produce cathode materials and recycle batteries in the Canadian province of Québec, with plant commissioning expected in 2025. Speaking of battery recycling, Aqua Metals Inc. (NASDAQ: AQMS), a lead-acid battery recycler, has produced&nbsp;lithium hydroxide from lithium-ion battery black mass&nbsp;at its Innovation Center in the Tahoe-Reno Industrial Center in Sparks, Nevada, demonstrating commercial viability of its proprietary recycling process.</p>
<p>Despite the rash of battery plant announcements outside China, the country still accounts for almost three quarters of the global EV battery production. Its share is expected to only decline to two-thirds by 2030. To help fund the battery industry in the country,&nbsp;several smaller battery manufacturers&nbsp;with ambitious expansion plans may be looking to go public in the near future to raise the capital needed to meet their targets. While China may remain the dominant player in batteries, lithium supply and concerns with its availability is causing car manufacturers to hedge their bets and sign longer-term supply agreements with emerging—sometimes even speculative—suppliers, which we have highlighted in the past issues of the Mat-Chem weekly. Recently, Australia’s Core Lithium announced&nbsp;an agreement with Tesla&nbsp;under which, it will supply up to 110,000 metric tons of spodumene concentrate to Tesla over four years starting in 2023.</p>
<h2>Automotive &amp; Transportation</h2>
<p>A tale of two regions.&nbsp;New passenger vehicle registration data for February showed contrasting trends in China and Europe.&nbsp;Sales in China, driven in part by the near-trebling in NEVs, were up 19% YoY, the second straight month of growth. In 2021, the country had seen seven consecutive months of declines. Conversely,&nbsp;European sales&nbsp;followed the U.S. pattern of YoY declines in passenger vehicle registrations, with a (6.7%) YoY comp, following a (6.0%) drop in January, extending the streak of lower YoY monthly sales to eight months. With the industry coming up on near triple-digit YoY comps in March-May, it is likely that all three major regions (NA, Europe and China) will see down-comps over the spring months, especially with the war in Ukraine further impacting production, logistics and component availability. Difficult comps aside, even the Chinese market may begin to lose its recent steam as a fresh&nbsp;Covid-19 outbreak&nbsp;and the country’s zero tolerance policy toward the pandemic lead to production and sales disruptions.</p>
<p>Auto production woes continue, suggesting tough 1H22. Toyota threw another bucket of cold water on the automotive market by targeting global production of about 800,000 vehicles average per month in C2Q22, down from the 900,000 monthly production goal it tried to maintain for 2H21. Furthermore, the company&nbsp;announced a cut of 150,000 vehicles&nbsp;to its production plan for April (down to 750,000), implying the need to ramp up May-June volumes to make up for the shortfall, and still meet its 800,00 a month average build rate. All of that was before the recent earthquake that led the company to&nbsp;suspend operations&nbsp;at more than half its factories in Japan. Production has been halted for three days starting this week on 18 assembly lines at 11 factories out of a total of 28 lines in 14 factories in Japan. All this was before the full impact of the Russian invasion of Ukraine was factored in.</p>
<p>War’s early impact. Speaking of the European war,&nbsp;automakers are working to fix the newly snagged supply chains, looking to replace the supplies of parts and components made in Ukraine that may be lost due to the conflict. Despite the fact that components, such as&nbsp;wire harnesses, are still being manufactured&nbsp;and shipped out of the country—highlighting the heroic character of the Ukrainian people—the lack of full production could curtail the number of automobiles manufactured in Europe by as much as 15% in 1H22, according to at least&nbsp;one source. With production disruptions due to the war and associated sanctions and counter-sanctions adding to the ongoing chip shortage, and the Covid-19 flare-ups, global&nbsp;automotive production may be reduced&nbsp;further by as many as 5 million units over the next two years.</p>
<p>Given all of the above, we expect companies in our index with a large direct exposure to the automotive market, such as PPG and AXTA in automotive coatings, FUL in adhesives &amp; sealants, and AVNT and HXL in engineered plastics and composites, to struggle for volume growth in 2022. With selling prices still trailing raw material and energy inflation, thereby pressuring margins, 1H22 may be a disappointing period for investors in these names.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>War in Ukraine adds pressure to already stressed ag markets.&nbsp;The largest armed conflict in Europe since WWII is casting a pall over virtually every segment of the global market and most industries, not the least of which is agricultural commodities and crop inputs, such as&nbsp;fertilizers&nbsp;and pesticides. Fertilizer prices, which have been rising due to higher natural agas prices and a number of Black Swan events in 2021, may head even higher, should Russian and Belorussian exports be impacted by either sanctions, or the countries’ decisions to curtail exports. The impact may get even more dire if China unofficially or officially joins the Russian side against the developed economies of western Europe and North America. The two countries account for 40-45% of the global phosphate production. As was highlighted in&nbsp;our recent fireside chat with CF Industries&nbsp;(NYSE: CF), domestic ammonia producers are already running their plants at close to full capacity, and recently, Nutrien (NYSE: NTR) announced that it will&nbsp;increase production of potash, one of three main fertilizer groups along with ammonia and phosphate, in anticipation of supply disruptions from Russia and Ukraine.</p>
<p>Weather remains an issue. Beyond these, there is also the weather. It remains a factor for the 2022-23 ag season, both in North America and LATAM. Domestically,&nbsp;drought in the southern U.S. plains is threatening the region's winter wheat crop, just as wheat exports from Ukraine are coming under question. And drought impact in LATAM looks to be getting worse, when it comes to estimating&nbsp;production yields in the region. Given that LATAM imports a vast majority of its ag inputs, including fertilizers and crop protection chemicals, any disruption to availability of these products can further reduce the region’s crop output, putting further strain on global crop supplies.</p>
<p>And now for some good news. Even as Chinese purchases of U.S. soybean have fallen short of the Phase I trade deal signed in January 2020—and may decline further as demand for soybean as a feed for Chinese rebuilding hog herd— its prices may hold up better than anticipated because of demand from the emerging markets for sustainable diesel. It is possible that, as the biofuel industry grows and matures,&nbsp;industrial demand for soybeans&nbsp;may increase substantially and help offset the variability in Chinese purchases, which would be a welcome news for farmers in the U.S., and companies that supply inputs into this market. The aforementioned fertilizer companies, as well as ag-chem suppliers such as FMC and CTVA stand to benefit from these developments. We continue to see opportunities for investors in these names. There are other potential beneficiaries of these trends, as well as other developments in the ag market, such as stricter regulatory environment for chemical pesticides; growing pest tolerance to existing herbicides and insecticides; and the increasing popularity of organic farming. They include emerging bio-ag companies, two of which have&nbsp;recently announced their intent to merge, creating a real powerhouse in the biobased ag-chem industry. Last week, the U.S.-based Marrone Bio Innovations (NASDAQ: MBII) and Argentinian company Bioceres Crop Solutions (NASDAQ: BIOX) announced an all-stock merger, which is expected to be completed in 3Q22.</p>
<h2>Rating and Price Target Changes</h2>
<p>CTVA&nbsp;– Goldman Sachs raised its price target (PT) to $55 from $53, maintaining its Neutral rating; Citigroup raised is PT to $66 from $59 and reiterated its Buy recommendation.</p>
<p>ECL&nbsp;– BofA upgraded its investment rating to Buy from Neutral, while trimming its PT to $196 from $210.</p>
<p>FMC&nbsp;– BofA downgraded the stock to Underperform from Buy; Citigroup raised its PT to $152 from $137 and reiterated its Buy recommendation.</p>
<p>SHW&nbsp;– BofA upgraded the stock to a Buy from Neutral, while lowering its PT to $296 from $325.</p>
<h2>DISCLOSURES</h2>
<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. In what was a recovery week for most of the market, both the Russell 2000 and the S&amp;P 500 appreciated 5.4% and 6.2%, respectively, last week. Our WTR-CMI index of 30 chemicals and materials technology stocks gained 4.6%, trailing both the broader indexes.
Winners and losers. As many as 27 of the 30 stocks in our index appreciated. KWR led with a 10.0% appreciation, followed by AVD with 9.5% and PPG with 8.9%. An analyst upgrade of PPG’s peer SHW, and overall positive market sentiment towards the ag-chem industry, were the likely drivers of the strong performance of these stocks. MTRN (2.6%), CMP (1.8%) and PLL (0.7%) were the declines in our index.
Margin recovery efforts continue. Russia’s war in Ukraine has added to the upward pressure on basic commodities and energy/fuel costs, amid ongoing disruptions in supply chain and logistics. This is spurring pass-through pricing actions by chemicals and materials companies that typically sit in the middle of commodity producers and end-consumers. ECL announced an almost-unprecedented 8-12%&nbsp;temporary energy surcharge&nbsp;to help offset higher vehicle fuel and energy costs within its businesses. Similarly, ASH announced an&nbsp;across-the-board global price increase&nbsp;of up to 15%. Considering that raw materials and energy represent approximately 50% of a typical chemical company’s COGS, and assuming the price increases are designed to offset the dollar impact of cost inflation, RM costs may be rising as much as 20-30% YOY for companies in our sector.
The war in Ukraine brings general pain. Nearly every global market and industry sector is feeling the repercussions of the Russian invasion of Ukraine. Early concerns are being highlighted in the&nbsp;automotive industry, and warnings are growing in the&nbsp;ag market. The&nbsp;chemicals and materials&nbsp;industry is not immune to these headwinds either. With both the U.S. and now the European Union working to wean themselves off Russian oil &amp; gas imports, global energy markets, and consequently virtually every other market, should brace for further cost escalations and supply disruptions.

WTR-CMI WEEKLY PERFORMANCE
Source: Y-Charts; prices as of March 20 close

Lithium &amp; EV Ecosystem Developments
Looking to meet looming demand wave. Battery-powered electric vehicle (BEV) and plug-in hybrid electric vehicle (PHEV) sales are expected to double in 2022 compared with 2021, and the first two months of the year appear to validate these expectations, at least when it comes to China, the global leader in neighborhood electric vehicle (NEV) sales. The country saw a 189% increase in YoY&nbsp;sales of NEVs in February, despite lower government incentives. Therefore, it is not surprising to see continued announcement by car, metal and battery manufacturers of new plans for new battery factories and lithium conversion plants, as the industry scrambles to put in place the infrastructure needed to support the rapid growth expectations.
Mercedes-Benz is putting together the pieces it needs to launch EV production at its 6-million-square-foot assembly plant 40 miles southwest of Birmingham, Ala. The&nbsp;company said&nbsp;Envision AESC, the Japan-based battery technology company, will supply vehicle batteries to it from a new U.S. plant starting mid-decade. It is not clear if Envision will need to build a new plant or expand its existing one in the U.S. to facilitate the supply. Similarly,&nbsp;Stellantis and LG Energy Solutions&nbsp;are rumored to be close to announcing plans for a new battery plant in Ontario, Canada, to meet demand for battery packs from the North American market. Making sure these battery plants have the components to work with,&nbsp;BASF announced&nbsp;that it intends to produce cathode materials and recycle batteries in the Canadian province of Québec, with plant commissioning expected in 2025. Speaking of battery recycling, Aqua Metals Inc. (NASDAQ: AQMS), a lead-acid battery recycler, has produced&nbsp;lithium hydroxide from lithium-ion battery black mass&nbsp;at its Innovation Center in the Tahoe-Reno Industrial Center in Sparks, Nevada, demonstrating commercial viability of its proprietary recycling process.
Despite the rash of battery plant announcements outside China, the country still accounts for almost three quarters of the global EV battery production. Its share is expected to only decline to two-thirds by 2030. To help fund the battery industry in the country,&nbsp;several smaller battery manufacturers&nbsp;with ambitious expansion plans may be looking to go public in the near future to raise the capital needed to meet their targets. While China may remain the dominant player in batteries, lithium supply and concerns with its availability is causing car manufacturers to hedge their bets and sign longer-term supply agreements with emerging—sometimes even speculative—suppliers, which we have highlighted in the past issues of the Mat-Chem weekly. Recently, Australia’s Core Lithium announced&nbsp;an agreement with Tesla&nbsp;under which, it will supply up to 110,000 metric tons of spodumene concentrate to Tesla over four years starting in 2023.
Automotive &amp; Transportation
A tale of two regions.&nbsp;New passenger vehicle registration data for February showed contrasting trends in China and Europe.&nbsp;Sales in China, driven in part by the near-trebling in NEVs, were up 19% YoY, the second straight month of growth. In 2021, the country had seen seven consecutive months of declines. Conversely,&nbsp;European sales&nbsp;followed the U.S. pattern of YoY declines in passenger vehicle registrations, with a (6.7%) YoY comp, following a (6.0%) drop in January, extending the streak of lower YoY monthly sales to eight months. With the industry coming up on near triple-digit YoY comps in March-May, it is likely that all three major regions (NA, Europe and China) will see down-comps over the spring months, especially with the war in Ukraine further impacting production, logistics and component availability. Difficult comps aside, even the Chinese market may begin to lose its recent steam as a fresh&nbsp;Covid-19 outbreak&nbsp;and the country’s zero tolerance policy toward the pandemic lead to production and sales disruptions.
Auto production woes continue, suggesting tough 1H22. Toyota threw another bucket of cold water on the automotive market by targeting global production of about 800,000 vehicles average per month in C2Q22, down from the 900,000 monthly production goal it tried to maintain for 2H21. Furthermore, the company&nbsp;announced a cut of 150,000 vehicles&nbsp;to its production plan for April (down to 750,000), implying the need to ramp up May-June volumes to make up for the shortfall, and still meet its 800,00 a month average build rate. All of that was before the recent earthquake that led the company to&nbsp;suspend operations&nbsp;at more than half its factories in Japan. Production has been halted for three days starting this week on 18 assembly lines at 11 factories out of a total of 28 lines in 14 factories in Japan. All this was before the full impact of the Russian invasion of Ukraine was factored in.
War’s early impact. Speaking of the European war,&nbsp;automakers are working to fix the newly snagged supply chains, looking to replace the supplies of parts and components made in Ukraine that may be lost due to the conflict. Despite the fact that components, such as&nbsp;wire harnesses, are still being manufactured&nbsp;and shipped out of the country—highlighting the heroic character of the Ukrainian people—the lack of full production could curtail the number of automobiles manufactured in Europe by as much as 15% in 1H22, according to at least&nbsp;one source. With production disruptions due to the war and associated sanctions and counter-sanctions adding to the ongoing chip shortage, and the Covid-19 flare-ups, global&nbsp;automotive production may be reduced&nbsp;further by as many as 5 million units over the next two years.
Given all of the above, we expect companies in our index with a large direct exposure to the automotive market, such as PPG and AXTA in automotive coatings, FUL in adhesives &amp; sealants, and AVNT and HXL in engineered plastics and composites, to struggle for volume growth in 2022. With selling prices still trailing raw material and energy inflation, thereby pressuring margins, 1H22 may be a disappointing period for investors in these names.
Ag-Chem and Ag-Tech
War in Ukraine adds pressure to already stressed ag markets.&nbsp;The largest armed conflict in Europe since WWII is casting a pall over virtually every segment of the global market and most industries, not the least of which is agricultural commodities and crop inputs, such as&nbsp;fertilizers&nbsp;and pesticides. Fertilizer prices, which have been rising due to higher natural agas prices and a number of Black Swan events in 2021, may head even higher, should Russian and Belorussian exports be impacted by either sanctions, or the countries’ decisions to curtail exports. The impact may get even more dire if China unofficially or officially joins the Russian side against the developed economies of western Europe and North America. The two countries account for 40-45% of the global phosphate production. As was highlighted in&nbsp;our recent fireside chat with CF Industries&nbsp;(NYSE: CF), domestic ammonia producers are already running their plants at close to full capacity, and recently, Nutrien (NYSE: NTR) announced that it will&nbsp;increase production of potash, one of three main fertilizer groups along with ammonia and phosphate, in anticipation of supply disruptions from Russia and Ukraine.
Weather remains an issue. Beyond these, there is also the weather. It remains a factor for the 2022-23 ag season, both in North America and LATAM. Domestically,&nbsp;drought in the southern U.S. plains is threatening the region's winter wheat crop, just as wheat exports from Ukraine are coming under question. And drought impact in LATAM looks to be getting worse, when it comes to estimating&nbsp;production yields in the region. Given that LATAM imports a vast majority of its ag inputs, including fertilizers and crop protection chemicals, any disruption to availability of these products can further reduce the region’s crop output, putting further strain on global crop supplies.
And now for some good news. Even as Chinese purchases of U.S. soybean have fallen short of the Phase I trade deal signed in January 2020—and may decline further as demand for soybean as a feed for Chinese rebuilding hog herd— its prices may hold up better than anticipated because of demand from the emerging markets for sustainable diesel. It is possible that, as the biofuel industry grows and matures,&nbsp;industrial demand for soybeans&nbsp;may increase substantially and help offset the variability in Chinese purchases, which would be a welcome news for farmers in the U.S., and companies that supply inputs into this market. The aforementioned fertilizer companies, as well as ag-chem suppliers such as FMC and CTVA stand to benefit from these developments. We continue to see opportunities for investors in these names. There are other potential beneficiaries of these trends, as well as other developments in the ag market, such as stricter regulatory environment for chemical pesticides; growing pest tolerance to existing herbicides and insecticides; and the increasing popularity of organic farming. They include emerging bio-ag companies, two of which have&nbsp;recently announced their intent to merge, creating a real powerhouse in the biobased ag-chem industry. Last week, the U.S.-based Marrone Bio Innovations (NASDAQ: MBII) and Argentinian company Bioceres Crop Solutions (NASDAQ: BIOX) announced an all-stock merger, which is expected to be completed in 3Q22.
Rating and Price Target Changes
CTVA&nbsp;– Goldman Sachs raised its price target (PT) to $55 from $53, maintaining its Neutral rating; Citigroup raised is PT to $66 from $59 and reiterated its Buy recommendation.
ECL&nbsp;– BofA upgraded its investment rating to Buy from Neutral, while trimming its PT to $196 from $210.
FMC&nbsp;– BofA downgraded the stock to Underperform from Buy; Citigroup raised its PT to $152 from $137 and reiterated its Buy recommendation.
SHW&nbsp;– BofA upgraded the stock to a Buy from Neutral, while lowering its PT to $296 from $325.
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 March 20, 2022

United States

PPG Industries, Inc. supplies products for the manufacturing, construction, automotive, chemical processing, and other industries worldwide.  The Company makes protective and decorative coatings, flat glass, fabricated glass products, continuous-strand fiber glass products, and industrial and specialty chemicals.

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Ppg Industries (PPG US)

Mat-Chem Notes for the Week Ended April 3, 2022

KEY HIGHLIGHTS WTR-CMI last week. Last week, the market continued to digest the impact of the war in Europe, global inflation, and continuing...

Water Tower Research

Mat-Chem Notes for the Week Ended March 20, 2022

KEY HIGHLIGHTS WTR-CMI last week. In what was a recovery week for most of the market, both the Russell 2000 and the S&P 500 appreciated 5.4%...

Water Tower Research

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