Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 14 March 2016 US Chemical Shipments up 3.8%. Ethane up 3 c/gal to 18 c/gal Railcar loadings 4-week moving average up 3.8%. Weekly loadings up 8.0% ________________________________________________________________________________________________________________ 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),USD50.62 Buy DuPont (DD.N),USD63.83 Buy Eastman Chemical (EMN.N),USD71.41 Buy Source: Deutsche Bank (GDP, Real YoY)2012201320142015F2016F2017FUS2.8%2.2%2.4%2.4%1.3%2.2%Euroland-0.6%-0.3%0.9%1.5%1.4%1.5%Japan2.0%1.6%-0.1%50.0%-0.3%0.5%G71.7%1.5%1.7%1.8%1.2%1.8%Asia ex-Japan6.1%6.6%6.4%6.2%6.1%6.3%China7.8%7.7%7.3%6.9%6.7%6.7%Global3.1%3.4%3.3%3.1%3.0%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, $50.62, Buy, TP $56), Eastman Chemical (EMN, $71.41, Buy, TP $75) and DuPont (DD, $63.83, Buy, TP $64) The 4-week moving average of chemical railcar loadings increased 3.8% in Week #10 (ended 03/05/2016) vs. a 1.4% increase the prior week. Loadings YTD are up 2.5%. 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 increased 8.0% YoY (versus a 5.1% increase in the prior week) and increased 1.0% sequentially (vs. a 6.1% increase in the prior week). Ethane prices up 3 c/gal to 18 c/gal. Propane prices up 3 c/gal to 47 c/gal Ethane prices rose 3 c/gal last week to 18 c/gal (vs its fuel value of 13 c/gal) on higher natural gas prices and exports out of the East Coast which have limited US Gulf supplies. 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 $2.51/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 47 c/gal. Propane prices are down 13% YoY on above-average inventories and lower oil prices, partially offset by higher seasonal demand and exports. Propane inventories fell 2% last week to 62MM bbls and are 40% and 60% 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/gal to 27 c/lb. Margins expand 2 c/lb to 16 c/lb Spot ethylene prices rose 3 c/gal last week to 27 c/lb (vs contract price of 25.75 c/b) on increased market activity with deals for March delivery completed between 25.0-28.25 c/lb and deals for April delivery ranging from 25.25 to 28.0 c/lb. Spot ethylene margins expanded 2 c/lb to 16 c/lb on higher spot prices, higher crude prices and tighter supply ahead of a heavy cracker turnaround season. Contract propylene prices settled up 1.5 c/lb in March to 31.5 c/lb for polymer grade (PG) and 30.0 c/lb for chemical grade (CG). This compares to March 2015 PG and CG contract prices of 49.0 c/lb and 47.5 c/lb, respectively. The increase in March 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. 4.2% of North American ethylene capacity expected to be offline in March IHS expects 4.2% of North American (NA) ethylene capacity to be offline in March, vs 0.9% in February. Per IHS, DuPont’s Orange, TX cracker (2.0% NA ethylene capacity) experienced an operational upset early last week. The duration of the outage is unknown but unconfirmed reports indicate the outage is not major. Ahead of an above average outage seaso