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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.

Research from Water Tower Research

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Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<ul>
<li>WTR-CMI last week.&nbsp;Driven by bullish lithium outlook and growing concerns over food security, our WTR-CMI index of 30 chemicals and materials technology stocks handily beat the broader market by appreciating 2.7% last week, compared with the S&amp;P 500’s 1.8% improvement and the Russell 2000’s (0.4%) dip. YTD, WTR-CMI’s results continue to surpass both the broader indexes on a relative basis, although our index is still showing a (3.1%) decline for the year.</li>
<li>Winners and losers. Lithium stocks LAC and ALB led our index higher with 22.9% and 9.8% gains, respectively. Other lithium companies, including PLL, CMP and LTHM also appreciated. On the other hand, investors appear concerned over KOP’s ability to deliver on expectations and the stock dived 5.4%. And AVNT’s exposure to high raw material costs and automotive production disruptions were the likely reasons for the stock’s (3.5%) fall.</li>
<li>Adding to investment war chest. Capital investments required to build out the global EV infrastructure are significant, and lithium companies face this challenge. Therefore, borrowings, capital infusions from automotive and/or battery manufacturing partners, and equity raises are of paramount importance to ensure sufficient metal production capacity is available as the wave of EV demand crests in the coming years. To that end,&nbsp;PLL recently announced&nbsp;a secondary stock offering of 1.75 million shares at a price of $65.00 to fund the next stage of investments—including reopening its Quebec mine, building out its North Carolina operations, and further explorations in Ghana.</li>
<li>Food inflation a bad sign. According to&nbsp;market research, in February 2022, the average price per unit across all foods and beverages was up 10.3% versus the same weeks in 2021, and up 16.8% versus February 2020 at the retail level. This was before Russia invaded Ukraine, and the likely havoc in the energy, fertilizer and grain markets expected to result from the various sanctions and counter-sanctions that followed. The situation may worsen to the point that not just price, but availability of food become a problem some time over the next 12 months—something that bears watching closely.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<p>Source: Y-Charts; prices as of March 27 close</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/266/118/original/image_75037700151648686376676.png?1648686379" class="editor-image img-responsive" data-smartkarma-image-id="266118"></figure>
<h2>Lithium &amp; EV Ecosystem Developments</h2>
<p>Closing the loop on circular economy. While lithium exploration, mining and converting companies are investing to set up the production capacity needed to meet expected demand for electric vehicles (EVs), the industry ecosystem is also giving thought to long-term sustainability of the battery supply chain, particularly the circular economy requirements, such as battery recycling. To that end, Aurubis, a multi-metal supplier based in Germany,&nbsp;has started test operation&nbsp;of a new pilot plant for battery recycling in Hamburg, Germany, which will allow it to extract metals such as lithium, nickel, cobalt, manganese, and graphite from black mass using a modular hydrometallurgical process. A battery recycling plant on an industrial scale will also be built within the next five years, requiring €200MM in capital investment.</p>
<p>Domesticating EV battery production. CATL, the Chinese battery cell manufacturer,&nbsp;is reportedly considering building a cell factory&nbsp;with a production capacity of 80 GWh in North America. While it is not clear if the site chosen will be in Mexico, the U.S., or Canada, the expected investment of as much as $5B in such a facility suggests the Chinese manufacturer is looking to diversify and localize its production footprint in geographies with the highest commercial potential, which, given the size of the North American vehicle park, implies further battery capacity additions in the region are likely. Supporting this view is the recent&nbsp;announcement by Sparkz, the U.S. battery manufacturer, that it will begin construction of a gigafactory in West Virginia to commercialize its zero-cobalt battery.</p>
<p>Beyond lithium. While lithium supply and demand has gotten the lion’s share of attention from investors and other stakeholders, supplies of other strategic metals such as cobalt (Sparkz’s technology innovation notwithstanding) and nickel are just as critical to the successful transition of the transportation sector globally. It is no surprise, therefore, that automotive companies are reaching out to metal miners and converters beyond lithium, especially with the supply of nickel now uncertain given that Russia is a major source. Consequently, the&nbsp;Volkswagen Group announced&nbsp;that it will form joint ventures with Huayou Cobalt and Tsingshan Group to secure cobalt and nickel supplies for electric vehicles in China, and to slash costs at a time of surging raw material prices. Time will tell if supplanting a Russian bear with a Chinese tiger is the correct strategy.</p>
<h2>Automotive &amp; Transportation</h2>
<p>The good, the bad and the ugly of European auto production. VW made a series of announcements last week related to its automotive production facilities in Europe, which have been impacted by disruptions associated with the war in Ukraine, as well as continuing semiconductor shortage. It appears the company’s largest plant in Wolfsburg, Germany&nbsp;is getting back to production&nbsp;faster than anticipated. It also has resumed&nbsp;production at its factory in Bratislava, Slovakia, after a two-day stoppage because of the chip shortage and supply constraints caused by the war in Ukraine. While VW’s electric car plant in Zwickau was not expected to restart disrupted production&nbsp;until April, it may do so sooner than expected, as could the&nbsp;Dresden plant. However, parts shortages caused by the Russian invasion of Ukraine are still affecting&nbsp;Audi’s production plans, leading to weeks of production downtime. Covid-19 is also playing a role in the production curtailments. Mazda Motor Corp said it would&nbsp;suspend production&nbsp;at its two Japanese factories for two days in April due to auto parts supply disruptions caused in part by pandemic-related shutdowns in China. And lest we forget about the chip shortage,&nbsp;GM said it will halt production&nbsp;at its full-size pickup plant in Indiana over the next two weeks. And Volvo Cars has been&nbsp;forced to cut eight shifts&nbsp;at its largest plant and reduce its full-year forecast for vehicle deliveries.</p>
<p>A closer look at Russian war’s impact on auto production. Leoni is&nbsp;ramping up production of wire harnesses&nbsp;at its two plants in Ukraine, with workers operating under a night-time curfew and the risk of rocket attacks in an effort to alleviate the impact of supply disruptions due to the Russian invasion. But production remains far below previous—and necessary—levels, including from other locations. Consequently, Ford’s vehicle factories in Germany and Spain are&nbsp;still facing production disruption. And with Bosch components being found in Russian infantry vehicles invading the Ukraine,&nbsp;the company is curtailing its operations in Russia&nbsp;amid signs that its parts may have been used for ‘non-civilian’ purposes in violation of its policies.</p>
<p>Numbers don’t lie. Far from recovering, the&nbsp;European commercial vehicle market&nbsp;is showing signs of slowing down, as February registrations declined 15.7% YoY. For the first two months of 2022, registrations are down 13.5% YoY. Again, these numbers are prior to the Russian invasion of Ukraine, so subsequent disruptions to supply chain and logistics are unlikely to result in improvements in March-May, especially with the markets going against the toughest YoY comps during the upcoming months. We continue to be concerned with companies in our sector that possess high exposure to automotive and transportation markets, and their ability to meet, let alone exceed, investor expectations, and drive higher stock prices. We include PPG, AXTA, RPM, FUL, HXL and AVNT in that list. And given the raft of downward revisions in target prices seen in recent days and summarized below, we are not the only ones.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Brazilian crop protection market dynamics. According to the consultancy firm Spark Smarter Decisions, the Brazilian&nbsp;market for agricultural pesticides used on soybeans&nbsp;grew 17% in the 2020-2021 season compared with 2019-2020, in part due to 5% growth in planted acreage. The firm noted that multi-site fungicides category was a significant contributor to the growth in pesticide sales. This is good news for bio-based fungicide manufacturers such as Marrone Bio Solutions (NASDAQ: MBII) and top tier ag-chem companies such as CTVA and, especially, FMC (given its over-representation in LATAM markets). But it is also worth noting that Brazil and the LATAM ag-producing regions are largely dependent on imports of pesticides and fertilizers to function adequately. In light of expected market disruptions—particularly in fertilizers owning to the large share of the global market held by countries like Russia, Belarus and Ukraine—both the current season and the 2022-2023 cycle may see reduced, or at the very least more expensive, crop production and exports from LATAM. This could be seen as good news for farmers in the U.S., as it may drive exports higher, and allow for higher realized prices and profits for domestic farmers.</p>
<p>Another banner year for U.S. farmers?&nbsp;After record farm income in 2021,&nbsp;expectations for the farm industry&nbsp;in the U.S. remain upbeat for 2022, at least through March, according to the Creighton University’s Rural Mainstreet Index. As many as 42% of rural bankers expect higher farmer income in 2022, compared with only 12% who see a decline in profitability. Current dynamics in the domestic and global ag markets are further examined in the&nbsp;report by Food and Agricultural Policy Research Institute&nbsp;of the University of Missouri, which attempts to take into account potential impact of the war in Europe. While the report suggests normalization of market dynamics in the longer term, the disruptions wrought by war may have a greater impact on short-term dynamics, which can materially change current expectations. Already, with early&nbsp;forecasts for planted acreage in the US&nbsp;coming in, there is a difference between market forecasters and USDA expectations. Given the dynamic and rapidly changing geopolitical situation, any forecast should be treated with caution.</p>
<p>Another Holodomor in the making?&nbsp;According to&nbsp;reports coming out of Europe, planted acres in Ukraine could fall by half this spring as Russia is accused of deliberately targeting Ukrainian agriculture. As mentioned last week, Ukraine is a major grain producing and exporting region and such a drastic reduction in crop production would not only endanger regions of the world reliant on it, but also place food security of its own population in jeopardy. It is doubtful whether other grain producing regions, such as North America and LATAM, can ramp up plantings at such a short notice to offset the potential shortfall.</p>
<p>A case for bio-based pesticides. We already mentioned the tendency for crop protection companies to use multi-site fungicides to combat growing pest resistance. Similar dynamics in herbicides and insecticides have been noted as well. While different chemical pathways are often combined within crop chemical formulations to address this problem, even multiple synthetic pesticides are falling short of the desired efficacy. Bio-based pesticides offer a new alternative, and both established ag-chem majors such as FMC and CTVA, as well as a number of emerging bio-based pesticide companies such as MBII, stand to benefit from these trends. Another beneficiary of less environmentally toxic products would be beneficial insects,&nbsp;such as bees, as bio-based insecticides appear to be less harmful to bee population than synthetic chemical alternatives. And speaking of MBII and CTVA, the two companies&nbsp;announced they have signed an agreement&nbsp;that expands the opportunity for MBI technologies to be used on seeds sold by Corteva for row crops globally, as MBII currently provides seed treatment solutions to Corteva for use throughout Europe.</p>
<h2>In Other News</h2>
<p>The state of the chemical industry. The ChemQuest Group recently published the first part of its two-part report on the fundamentals and dynamics in the chemicals industry.&nbsp;The first part of the report&nbsp;is focused on paints and coatings, and examines current dynamics in market demand, raw material prices, and industry segments. While the report is, in our opinion, rightly bullish on construction markets as well as a number of industrial markets, automotive and transportation issues are also acknowledged. Nevertheless, one can make a case that chemicals and materials companies will perform at least as well as other industrial and materials markets and may outperform most. The performance of our WTR-CMI index is a good barometer of this outperformance.</p>
<p>Industry consolidation remains a reliable theme. Blaige &amp; Co.&nbsp;published a research report&nbsp;highlighting the M&amp;A activity in the adhesives and sealants industry globally. Given the high level of consolidation in the space, FUL remains the last company in our index that is a pureplay public adhesives &amp; sealants company. It, too, has been active in the M&amp;A arena, and we expect that to continue, as the industry still contains numerous small to mid-size players, some of which possess technological, geographic and customer-base characteristics that larger companies may find attractive. Adhesives &amp; sealants are not the exception in the chemicals and materials market, but rather indicative of the consolidating nature of the sector overall. M&amp;As, therefore, provide another avenue for generating above-market returns for investors, contributing to the attractiveness of the chemicals and materials sector as an investment.</p>
<h2>Rating and Price Target Changes</h2>
<p>ASH&nbsp;– Mizuho raised its PT to $129 from $127 and reiterated its Buy recommendation.</p>
<p>AXTA&nbsp;– BofA reduced its price target (PT) to $36 from $37 and reiterated its Buy recommendation; RBC downgraded the stock to Sector Perform from Outperform and reduced its PT to $26 from $33.</p>
<p>FUL&nbsp;– Citigroup reduced its PT to $75 from $80 and maintained its Neutral rating.</p>
<p>PLL&nbsp;– JP Morgan raised its PT to $92 from $84 and reiterated its Overweight recommendation.</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>RPM – BofA lowered its PT to $86 from $96, reiterating its Underperform rating; RBC lowered its PT to $93 from $94 and maintained its Sector Perform rating.</p>
<p>SHW&nbsp;– RBC lowered its PT to $315 from $332 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;Driven by bullish lithium outlook and growing concerns over food security, our WTR-CMI index of 30 chemicals and materials technology stocks handily beat the broader market by appreciating 2.7% last week, compared with the S&amp;P 500’s 1.8% improvement and the Russell 2000’s (0.4%) dip. YTD, WTR-CMI’s results continue to surpass both the broader indexes on a relative basis, although our index is still showing a (3.1%) decline for the year.
Winners and losers. Lithium stocks LAC and ALB led our index higher with 22.9% and 9.8% gains, respectively. Other lithium companies, including PLL, CMP and LTHM also appreciated. On the other hand, investors appear concerned over KOP’s ability to deliver on expectations and the stock dived 5.4%. And AVNT’s exposure to high raw material costs and automotive production disruptions were the likely reasons for the stock’s (3.5%) fall.
Adding to investment war chest. Capital investments required to build out the global EV infrastructure are significant, and lithium companies face this challenge. Therefore, borrowings, capital infusions from automotive and/or battery manufacturing partners, and equity raises are of paramount importance to ensure sufficient metal production capacity is available as the wave of EV demand crests in the coming years. To that end,&nbsp;PLL recently announced&nbsp;a secondary stock offering of 1.75 million shares at a price of $65.00 to fund the next stage of investments—including reopening its Quebec mine, building out its North Carolina operations, and further explorations in Ghana.
Food inflation a bad sign. According to&nbsp;market research, in February 2022, the average price per unit across all foods and beverages was up 10.3% versus the same weeks in 2021, and up 16.8% versus February 2020 at the retail level. This was before Russia invaded Ukraine, and the likely havoc in the energy, fertilizer and grain markets expected to result from the various sanctions and counter-sanctions that followed. The situation may worsen to the point that not just price, but availability of food become a problem some time over the next 12 months—something that bears watching closely.

WTR-CMI WEEKLY PERFORMANCE
Source: Y-Charts; prices as of March 27 close

Lithium &amp; EV Ecosystem Developments
Closing the loop on circular economy. While lithium exploration, mining and converting companies are investing to set up the production capacity needed to meet expected demand for electric vehicles (EVs), the industry ecosystem is also giving thought to long-term sustainability of the battery supply chain, particularly the circular economy requirements, such as battery recycling. To that end, Aurubis, a multi-metal supplier based in Germany,&nbsp;has started test operation&nbsp;of a new pilot plant for battery recycling in Hamburg, Germany, which will allow it to extract metals such as lithium, nickel, cobalt, manganese, and graphite from black mass using a modular hydrometallurgical process. A battery recycling plant on an industrial scale will also be built within the next five years, requiring €200MM in capital investment.
Domesticating EV battery production. CATL, the Chinese battery cell manufacturer,&nbsp;is reportedly considering building a cell factory&nbsp;with a production capacity of 80 GWh in North America. While it is not clear if the site chosen will be in Mexico, the U.S., or Canada, the expected investment of as much as $5B in such a facility suggests the Chinese manufacturer is looking to diversify and localize its production footprint in geographies with the highest commercial potential, which, given the size of the North American vehicle park, implies further battery capacity additions in the region are likely. Supporting this view is the recent&nbsp;announcement by Sparkz, the U.S. battery manufacturer, that it will begin construction of a gigafactory in West Virginia to commercialize its zero-cobalt battery.
Beyond lithium. While lithium supply and demand has gotten the lion’s share of attention from investors and other stakeholders, supplies of other strategic metals such as cobalt (Sparkz’s technology innovation notwithstanding) and nickel are just as critical to the successful transition of the transportation sector globally. It is no surprise, therefore, that automotive companies are reaching out to metal miners and converters beyond lithium, especially with the supply of nickel now uncertain given that Russia is a major source. Consequently, the&nbsp;Volkswagen Group announced&nbsp;that it will form joint ventures with Huayou Cobalt and Tsingshan Group to secure cobalt and nickel supplies for electric vehicles in China, and to slash costs at a time of surging raw material prices. Time will tell if supplanting a Russian bear with a Chinese tiger is the correct strategy.
Automotive &amp; Transportation
The good, the bad and the ugly of European auto production. VW made a series of announcements last week related to its automotive production facilities in Europe, which have been impacted by disruptions associated with the war in Ukraine, as well as continuing semiconductor shortage. It appears the company’s largest plant in Wolfsburg, Germany&nbsp;is getting back to production&nbsp;faster than anticipated. It also has resumed&nbsp;production at its factory in Bratislava, Slovakia, after a two-day stoppage because of the chip shortage and supply constraints caused by the war in Ukraine. While VW’s electric car plant in Zwickau was not expected to restart disrupted production&nbsp;until April, it may do so sooner than expected, as could the&nbsp;Dresden plant. However, parts shortages caused by the Russian invasion of Ukraine are still affecting&nbsp;Audi’s production plans, leading to weeks of production downtime. Covid-19 is also playing a role in the production curtailments. Mazda Motor Corp said it would&nbsp;suspend production&nbsp;at its two Japanese factories for two days in April due to auto parts supply disruptions caused in part by pandemic-related shutdowns in China. And lest we forget about the chip shortage,&nbsp;GM said it will halt production&nbsp;at its full-size pickup plant in Indiana over the next two weeks. And Volvo Cars has been&nbsp;forced to cut eight shifts&nbsp;at its largest plant and reduce its full-year forecast for vehicle deliveries.
A closer look at Russian war’s impact on auto production. Leoni is&nbsp;ramping up production of wire harnesses&nbsp;at its two plants in Ukraine, with workers operating under a night-time curfew and the risk of rocket attacks in an effort to alleviate the impact of supply disruptions due to the Russian invasion. But production remains far below previous—and necessary—levels, including from other locations. Consequently, Ford’s vehicle factories in Germany and Spain are&nbsp;still facing production disruption. And with Bosch components being found in Russian infantry vehicles invading the Ukraine,&nbsp;the company is curtailing its operations in Russia&nbsp;amid signs that its parts may have been used for ‘non-civilian’ purposes in violation of its policies.
Numbers don’t lie. Far from recovering, the&nbsp;European commercial vehicle market&nbsp;is showing signs of slowing down, as February registrations declined 15.7% YoY. For the first two months of 2022, registrations are down 13.5% YoY. Again, these numbers are prior to the Russian invasion of Ukraine, so subsequent disruptions to supply chain and logistics are unlikely to result in improvements in March-May, especially with the markets going against the toughest YoY comps during the upcoming months. We continue to be concerned with companies in our sector that possess high exposure to automotive and transportation markets, and their ability to meet, let alone exceed, investor expectations, and drive higher stock prices. We include PPG, AXTA, RPM, FUL, HXL and AVNT in that list. And given the raft of downward revisions in target prices seen in recent days and summarized below, we are not the only ones.
Ag-Chem and Ag-Tech
Brazilian crop protection market dynamics. According to the consultancy firm Spark Smarter Decisions, the Brazilian&nbsp;market for agricultural pesticides used on soybeans&nbsp;grew 17% in the 2020-2021 season compared with 2019-2020, in part due to 5% growth in planted acreage. The firm noted that multi-site fungicides category was a significant contributor to the growth in pesticide sales. This is good news for bio-based fungicide manufacturers such as Marrone Bio Solutions (NASDAQ: MBII) and top tier ag-chem companies such as CTVA and, especially, FMC (given its over-representation in LATAM markets). But it is also worth noting that Brazil and the LATAM ag-producing regions are largely dependent on imports of pesticides and fertilizers to function adequately. In light of expected market disruptions—particularly in fertilizers owning to the large share of the global market held by countries like Russia, Belarus and Ukraine—both the current season and the 2022-2023 cycle may see reduced, or at the very least more expensive, crop production and exports from LATAM. This could be seen as good news for farmers in the U.S., as it may drive exports higher, and allow for higher realized prices and profits for domestic farmers.
Another banner year for U.S. farmers?&nbsp;After record farm income in 2021,&nbsp;expectations for the farm industry&nbsp;in the U.S. remain upbeat for 2022, at least through March, according to the Creighton University’s Rural Mainstreet Index. As many as 42% of rural bankers expect higher farmer income in 2022, compared with only 12% who see a decline in profitability. Current dynamics in the domestic and global ag markets are further examined in the&nbsp;report by Food and Agricultural Policy Research Institute&nbsp;of the University of Missouri, which attempts to take into account potential impact of the war in Europe. While the report suggests normalization of market dynamics in the longer term, the disruptions wrought by war may have a greater impact on short-term dynamics, which can materially change current expectations. Already, with early&nbsp;forecasts for planted acreage in the US&nbsp;coming in, there is a difference between market forecasters and USDA expectations. Given the dynamic and rapidly changing geopolitical situation, any forecast should be treated with caution.
Another Holodomor in the making?&nbsp;According to&nbsp;reports coming out of Europe, planted acres in Ukraine could fall by half this spring as Russia is accused of deliberately targeting Ukrainian agriculture. As mentioned last week, Ukraine is a major grain producing and exporting region and such a drastic reduction in crop production would not only endanger regions of the world reliant on it, but also place food security of its own population in jeopardy. It is doubtful whether other grain producing regions, such as North America and LATAM, can ramp up plantings at such a short notice to offset the potential shortfall.
A case for bio-based pesticides. We already mentioned the tendency for crop protection companies to use multi-site fungicides to combat growing pest resistance. Similar dynamics in herbicides and insecticides have been noted as well. While different chemical pathways are often combined within crop chemical formulations to address this problem, even multiple synthetic pesticides are falling short of the desired efficacy. Bio-based pesticides offer a new alternative, and both established ag-chem majors such as FMC and CTVA, as well as a number of emerging bio-based pesticide companies such as MBII, stand to benefit from these trends. Another beneficiary of less environmentally toxic products would be beneficial insects,&nbsp;such as bees, as bio-based insecticides appear to be less harmful to bee population than synthetic chemical alternatives. And speaking of MBII and CTVA, the two companies&nbsp;announced they have signed an agreement&nbsp;that expands the opportunity for MBI technologies to be used on seeds sold by Corteva for row crops globally, as MBII currently provides seed treatment solutions to Corteva for use throughout Europe.
In Other News
The state of the chemical industry. The ChemQuest Group recently published the first part of its two-part report on the fundamentals and dynamics in the chemicals industry.&nbsp;The first part of the report&nbsp;is focused on paints and coatings, and examines current dynamics in market demand, raw material prices, and industry segments. While the report is, in our opinion, rightly bullish on construction markets as well as a number of industrial markets, automotive and transportation issues are also acknowledged. Nevertheless, one can make a case that chemicals and materials companies will perform at least as well as other industrial and materials markets and may outperform most. The performance of our WTR-CMI index is a good barometer of this outperformance.
Industry consolidation remains a reliable theme. Blaige &amp; Co.&nbsp;published a research report&nbsp;highlighting the M&amp;A activity in the adhesives and sealants industry globally. Given the high level of consolidation in the space, FUL remains the last company in our index that is a pureplay public adhesives &amp; sealants company. It, too, has been active in the M&amp;A arena, and we expect that to continue, as the industry still contains numerous small to mid-size players, some of which possess technological, geographic and customer-base characteristics that larger companies may find attractive. Adhesives &amp; sealants are not the exception in the chemicals and materials market, but rather indicative of the consolidating nature of the sector overall. M&amp;As, therefore, provide another avenue for generating above-market returns for investors, contributing to the attractiveness of the chemicals and materials sector as an investment.
Rating and Price Target Changes
ASH&nbsp;– Mizuho raised its PT to $129 from $127 and reiterated its Buy recommendation.
AXTA&nbsp;– BofA reduced its price target (PT) to $36 from $37 and reiterated its Buy recommendation; RBC downgraded the stock to Sector Perform from Outperform and reduced its PT to $26 from $33.
FUL&nbsp;– Citigroup reduced its PT to $75 from $80 and maintained its Neutral rating.
PLL&nbsp;– JP Morgan raised its PT to $92 from $84 and reiterated its Overweight recommendation.
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.
RPM – BofA lowered its PT to $86 from $96, reiterating its Underperform rating; RBC lowered its PT to $93 from $94 and maintained its Sector Perform rating.
SHW&nbsp;– RBC lowered its PT to $315 from $332 and reiterated its Outperform rating.
DISCLOSURES
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Compass Minerals International, Inc (CMP US)

Mat-Chem Notes for the Week Ended March 27, 2022