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Mat-Chem Notes

WTR-CMI year to date. As we enter the final month of the third quarter, our index of 30 chemicals and materials technology stocks has underperformed the S&P 500 and the Russell 2000 on both a YTD and Y/Y basis. With most of the margin improvement benefit having played out over the course of 2022 and into 1Q23, stock performance of companies in our sector has been largely driven by market- and industry-specific dynamics and their effects on respective companies. Thus, weaker pricing and customer inventory drawdowns affected the performance of FMC and AVD, which are both down more than 30% YTD. Weaker end-market conditions were also behind CMP’s and EAF’s 25% YTD decline. On the other hand, positive trends in aerospace, construction, and specialty metals contributed to significant YTD outperformance of KOP (up 41.5%), MTRN (up 27%), and HXL (up 26%), while AVNT (up 19.9%) may have benefited from a positive valuation re-rating, having sold its low-margin, slow-growth distribution business. The best cure for high prices is high prices. As high natural gas prices and strong demand, combined with higher crop prices and the supply disruptions due to the Russian war in Ukraine, drove fertilizer prices to their highs in mid-2022, the unwinding of these trends may be behind the 30-50% decline in their prices this year. With the crop price outlook mixed and corn demand uncertain, stocks of companies like MOS, CF, NTR, and other fertilizer majors may remain rangebound. ALB looking to expand its Australian footprint. The company announced over the weekend that it is working toward a final binding agreement to acquire Liontown Resources (AXT: LTR-AU) that, when/if completed, would expand ALB’s presence in Australia and into non-lithium battery metals such as nickel and copper, potentially looking to reduce its exposure to wild lithium price swings, as well as the potentially unfriendly political environment in Chile. August builder confidence falls. For the first time this year, builder confidence fell in August, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). High borrowing rates, housing inflation, and labor and equipment constraints were cited as major drivers of the decline, which left the index in a precarious neutral reading heading into 2H23. Y/Y cost improvements may be ending. Specialty chemical manufacturers benefited in 2023 from declining Y/Y raw material costs, which may be stabilizing at mid-2023 levels, implying reduced benefit from Y/Y raw material cost comps, making volume (demand) outlook a primary driver of performance in 2H23.