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Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Thematic (Sector/Industry)

KEY HIGHLIGHTS


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

WTR-CMI WEEKLY PERFORMANCE


Source: YCharts; August 5 close

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

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

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

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

KEY HIGHLIGHTS


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

WTR-CMI WEEKLY PERFORMANCE

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

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

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

<h2>KEY HIGHLIGHTS</h2>
<ul>
<li>WTR-CMI last week.&nbsp;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.
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Mat-Chem Notes for the Week Ended April 3, 2022

Macro Strategist, Saxo Capital Markets

Kay Van-Petersen

Macro Strategist

Saxo Capital Markets

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

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

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

United States

Sensient Technologies Corporation supplies colors, flavors, and fragrances. The Company manufactures a variety of ink-jet inks, cosmetic and pharmaceutical additives, and food and beverage flavors.

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Sensient Technologies (SXT US)

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

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

Kay Van-Petersen

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