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Mat-Chem Notes

WTR-CMI last week. In a week when the broad market index (Russell 2000) declined 3.6%, our WTR-CMI index of 30 chemicals and materials technology companies modestly outperformed, dropping 2.3%. This nonetheless trailed the large-cap S&P 500 index, which lost only 1.8% of its value during the week. Benefiting from improved investor sentiment on possibly higher summer sales of insecticides, improving automotive and construction markets, and lower raw material costs that we discussed last week, ag-chem and coatings companies led the performance of our index. Drought concerns increase. As June progresses, dry weather is creating tough growing conditions for major crops across the US, drawing comparisons to past years (2012 being the most recent) with a similar lack of moisture. Drought appears to be spreading and intensifying from the western plains into the eastern corn belt and even eastern regions of the country. Conditions seem worst in major corn and soybean producing states, like Illinois, which is headed for the driest June on record. As we mentioned last week, this may provide an opportunity for ag-chem companies to deliver stronger sales volumes in 2Q23 and 3Q23, as dealers work through their insecticide inventories and restock, which would be a positive for FMC, CTVA, and AVD. Auto market may be cooling, again. May was a strong growth month from a Y/Y perspective for new auto builds (or at least new car registrations), with the European market seeing 18.5% Y/Y growth during the month. However, at least in China, June is showing a return to more normal buying patterns, with first-half monthly sales being down 6% versus 2022. This may lead to a pause in stock price appreciation of AXTA and PPG, both being heavily reliant on the automotive market for growth. Lithium prices recovering in China. Following a slow start to the year, with EV demand growth coming in less than anticipated and inventory channels full, lithium prices declined significantly, despite a long-term bullish outlook for the metal. However, more recently, prices have rallied, most likely on restocking activity, as well as targeted government incentives. It remains to be seen if the recent peak can hold, or if higher metal (and, by extension, battery and EV) prices dampen demand again. Construction market may be bracing for a slowdown. While manufacturing and infrastructure construction continues to be strong, commercial and residential markets are down, signaling trouble for 2H23 and potential issues for companies in our index dependent on the market, namely SHW, RPM, and FUL, among others.