US Chemical Shipments -2.9%.Ethane up 1 c/gal to 26 c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 11 September 2017 US Chemical Shipments -2.9%. Ethane up 1 c/gal to 26 c/gal Railcar loadings 4-week moving average -2.9%. Weekly loadings down 21.3% ________________________________________________________________________________________________________________ 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) 083/04/2017. 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 David Huang Research Associate (+1) 904 520-5307 david-a.huang@db.com Top picks Ashland (ASH.N),USD61.67 Buy Eastman Chemical (EMN.N),USD84.83 Buy Trinseo (TSE.N),USD66.30 Buy Source: Deutsche Bank Weekly Price Performance -8.00%-3.00%2.00%OLNMOSDWDPAXTATSEEMNCBTGRAECLCEASHPPGXLBWLKPS&PCOMPCCFOEAPDFMCALBCMPHUNKROMONSHWOMNPXLYBPOTVNTRFUL Source: Factset, Deutsche Bank We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are Eastman Chemical (EMN, $84.83, Buy, TP $95), Trinseo (TSE, $66.30, Buy, TP $74) and Ashland (ASH, $61.67, Buy, TP $75) The 4-week moving avg of chemical railcar loadings decreased 2.9% in Week #36 (ended 09/01/2017) vs. a 4.3% increase the prior week. Loadings YTD are up 0.2%. Chemical railcar loadings represent 20% 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 decreased 21.3% YoY (versus a 3.1% increase in the prior week) and decreased 20.8% sequentially (vs. a 0.3% decrease in the prior week). Ethane prices up 1 c/gal to 26 c/gal. Propane up 3 c/gal to 83 c/gal Ethane prices were up 1 c/gal last week to 26 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 ’16 start-up of Enterprise Products 200k bpd ethane export facility in Houston. Starting in Q4’17, 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 $2.93/MMBtu, we estimate ethane prices will move toward 30 c/gal by year-end ‘17. Propane prices rose 3 c/gal last week to 83 c/gal. While propane inventories were up 9% last week to 80MM bbls, they are 13% and 4% below 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 up 3.75 c/lb 29.75 c/lb. Margins up 4.25 c/lb to 14.75 c/lb Spot ethylene prices rose 3.75 c/lb last week to 29.5 c/lb (vs the July contract price of 29.25 c/lb, August contract price remains unsetteled). Spot deals for September ranged between 29.5-30 c/lb with deals for October delivery ranged between 30-31 c/lb. Average spot ethylene margins expanded 4.25 c/lb last week to 14.75 c/lb on higher selling prices and lower production costs (lower naphtha more than offset higher ethane and propane) Polymer grade (PG) propylene spot prices were higher last week with deals for September delivery ranged between 44-44.25 c/lb. August propylene contract prices settled up 0.5 c/lb at 39.5 c/lb for PG and 38.0 c/lb for chemical grade. Propylene prices, which had risen 21 c/lb, or 68% (for PG), from December to March, fell 14 c/lb, or 27%, in April/May due to improving refinery-based supply. After rolling over flat in June and a 0.5 c/lb increase in July, August contracts settled higher driven by lower-than-expected supply levels due to the delayed start-up of Enterprise’s PDH unit. >50% of US ethylene capacity offline due to Harvey Per IHS, more than 50% of the US ethylene capacity remains offline as a result of Hurricane Harvey’s landfall in Texas, with most of the shutdowns due to flooding or loss of power. IHS Nova Chemical’s Sarnia, Ont cracker (2% of North American {NA} ethylene capacity) and Dow’s Taft, LA (#2) cracker (1% of NA eth