Railcar&PetroChemical Update：US Chemical Shipments up 1.2%.Ethane down 1c/gal to 25c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 26 February 2017 US Chemical Shipments up 1.2%. Ethane down 1c/gal to 25c/gal Railcar loadings 4-week moving average up 1.2%. Weekly loadings up 4.1% ________________________________________________________________________________________________________________ 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) 057/04/2016. David Begleiter Research Analyst (+1) 212 250-5473 david.begleiter@db.com Katherine Griffin Research Associate (+1) 212 250-7265 katherine-a.griffin@db.com Top picks Dow Chemical (DOW.N),USD63.55 Buy DuPont (DD.N),USD79.81 Buy Ashland (ASH.N),USD121.87 Buy Source: Deutsche Bank Weekly Price Performance -8.00%-3.00%2.00%MOSPOTKROCMPFOECEAXTACBTLYBAPDGRAOLNFMCEMNXLBVALSHWPXFULS&PCOMPEVGNPPGWLKPALBECLTSEDDCCHUNMONDOWOMN Source: Factset, Deutsche Bank We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are Dow Chemical (DOW, $63.55, Buy, TP $70), DuPont (DD, $79.81, Buy, TP $90) and Ashland (ASH, $121.87, Buy, TP $125) The 4-week moving average of chemical railcar loadings increased 1.2% in Week #8 (ended 02/18/2017) vs. a 2.0% increase the prior week. Loadings YTD are down 0.3%. 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 4.1% YoY (versus a 3.0% decline in the prior week) and increased 4.7% sequentially (vs. a 6.5% decrease in the prior week). Ethane prices down 1 c/gal to 25 c/gal. Propane down 7 c/gal to 66 c/gal Ethane prices declined 1 c/gal last week to 25 c/gal (vs its fuel value of 19 c/gal). While US ethane supply/demand (s/d) fundamentals remain loose, ethane rejection, which peaked at 500-600k bpd in 1H16, has declined following the September start-up of Enterprise Products’ 200k bpd ethane export facility in Houston. Coupled with higher natural gas prices, ethane prices have nearly doubled since the beginning of ‘16 (13.50 c/gal). Starting in 2H’17, we expect US ethane s/d fundamentals to tighten further driven by 600k bpd of new demand from the start-up of 8 greenfield ethylene crackers in ’17-’19. As the market tightens, we expect ethane to trade toward its historical premium of ~10c/gal vs its fuel value, with the premium reflecting fractionation, transportation and storage costs. Based on DB’s ’17 US Natural Gas price forecast of $3.13/MMBtu, we estimate ethane prices will move toward 30 c/gal by y/e ‘17. Propane prices fell 7 c/gal last week to 66 c/gal. Similar to ethane, propane prices are up sharply from their early ’16 lows (30-35 c/gal). Propane inventories fell 5% last week to 50MM bbls and are 31% and 34% above their 3 and 5-yr avgs, respectively. Longer term, we expect propane inventories to decline due to higher exports (+20% in ’16 vs up 12% in ‘15, up in ’17E). Spot ethylene prices down 5 c/lb to 29.25 c/lb. Margins down 2 c/lb to 18 c/lb Spot ethylene prices declined 5 c/lb last week to 29.25 c/lb (vs the January contract price of 33.5 c/lb). Spot deals for February delivery range between 28.5-30.0 c/lb with deals for March ranging between 28.0-30.0 c/lb. Average spot ethylene margins compressed 2 c/lb last week to 18 c/lb as price declines more than offset lower production costs. Polymer grade (PG) propylene spot prices were higher last week with deals for February delivery of 49.0-51.0 c/lb and deals for March delivery of 46.0-50.75 c/lb , up 3.38 c/lb from the prior week. The February contract price settled at 48.0 c/lb. 4.9% of North American ethylene capacity expected to be offline in February IHS expects 4.9% of North American (NA) ethylene capacity to be offline in February vs 3.9% in January. Per IHS, Chevron Phillips’ Sweeny, TX #33 cracker (2.6% of NA ethylene capacity) and Formosa’s #2 Point Comfort, TX cracker (2.3% of NA ethylene capacity) are offline undergoing planned turnaround work. For ’16 (per IHS) NA ethylene production losses totaled 4.6B lbs, or 5.7%, of capacity. This compares to ethylene production losses of 3.1B lbs, or 4.1%, of ethylene capacity in ’15. F