Railcar &PetroChemical Update:US Chemical Shipments up 2.1%.Ethane up 1c/gal to 16c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 1 February 2016 US Chemical Shipments up 2.1%. Ethane up 1 c/gal to 16 c/gal Railcar loadings 4-week moving average up 2.1%. Weekly loadings down 2.8% ________________________________________________________________________________________________________________ For internal use only Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. David Begleiter Research Analyst (+1) 212 250-5473 david.begleiter@db.com Jermaine Brown Research Associate (+1) 212 250-3624 jermaine-r.brown@db.com Top picks Dow Chemical (DOW.N),USD42.00 Buy Eastman Chemical (EMN.N),USD61.21 Buy DuPont (DD.N),USD52.76 Buy Source: Deutsche Bank (GDP, Real YoY)2012201320142015E2016E2017EUS2.8%2.2%2.4%2.4%1.8%2.1%Euroland-0.6%-0.3%0.9%1.5%1.6%1.5%Japan2.0%1.6%-0.1%0.7%0.9%0.7%G71.7%1.5%1.7%1.8%1.7%1.8%Asia ex-Japan6.1%6.6%6.4%6.1%6.1%6.3%China7.8%7.7%7.3%6.9%6.7%6.7%Global3.1%3.4%3.3%3.1%3.2%3.6%So urce: DB Glo bal Eco no mics Team We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are Dow Chemical (DOW, $42.00, Buy, TP $62), Eastman Chemical (EMN, $61.21, Buy, TP $75) and DuPont (DD, $52.70, Buy, TP $64) The 4-week moving average of chemical railcar loadings increased 2.1% in Week #4 (ended 01/23/2016) vs. a 2.2% increase the prior week. Loadings YTD are up 2.1%. Chemical railcar loadings represent 30% of total US chemical shipment tonnage (followed by trucks, barges, and pipelines), offering a trend of broader chemical industry activity and demand. The more volatile measure of weekly loadings declined 2.8% YoY (versus a 2.4% increase in the prior week) and declined 7.2% sequentially (vs. a 1.9% decrease in the prior week). Ethane prices up 1 c/gal to 16 c/gal. Propane prices up 3 c/gal to 36 c/gal Ethane prices rose 1 c/gal last week to 16 c/gal (vs its fuel value of 14 c/gal). In ’16-’17, we expect ethane to trade at or near its fuel value, or 15-20 c/gal, based on DB’s US Natural Gas price forecasts of $2.50/MMBtu in ’16 and $3.10/MMBtu in ’17. While ethane supply/demand fundamentals are currently loose (ethane rejection is at a near-record 500k bpd), we expect fundamentals to get tighter in ‘17 owing to increased demand from Enterprise Products 240k bpd ethane export facility (on-line 2H16) and the start-up of 6 greenfield ethylene crackers in ’17-’18 (500k bpd of potential demand). Propane prices rose 3 c/gal last week to 36 c/gal. Per IHS, Q1 propane prices are expected to fall 7 c/gal QoQ to 34 c/gal. Propane prices are down 24% YoY on above-average inventories and lower oil prices, partially offset by higher seasonal demand and exports. Propane inventories fell 7% last week to 84MM bbls and are 55% and 64% above their 3- and 5-year averages, respectively. Longer term, we expect propane supplies to fall on higher exports (up 12% in ’15 vs 30% in ’14, expected to be up in ’16 vs ‘15). Spot ethylene up 3 c/lb to 19 c/lb. Margins up 1 c/lb to 10 c/lb Spot ethylene prices rose 3 c/lb last week to 19 c/lb (vs contract price of 25.75 c/b) on soft market activity with deals for January delivery ranging from 17.75-19.5 c/lb. The December contract price settled earlier this month at 25.75 c/lb, a decrease of 2.75 c/lb from the November contract price. Spot ethylene margins expanded 1c/lb to 10 c/lb on lower production costs. Contract propylene prices settled down 0.5 c/lb in January to 31.5 c/lb for polymer grade (PG) and 30.0 c/lb for chemical grade (CG). This compares to February 2015 PG and CG contract prices of 50.5 c/lb and 49.0 c/lb, respectively. The increase in December propylene prices reflects ongoing refinery turnarounds and ethane cracking favorability over propane and butane, which more than offset healthy inventory levels and soft global propylene prices. 2.8% of North American ethylene capacity expected to be offline in February IHS expects 2.8% of North American (NA) ethylene capacity to be offline in February, flat vs. January. Per IHS, Flint Hills’ Port Arthur, TX cracker (1.8% NA ethylene capacity) experienced an operational upset on Friday 1/22 but restarted early last week. There are no scheduled steam cracker outages until March. For ’16, IHS is forecasting NA ethylene production