Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 1 October 2017 US Chemical Shipments Down 4.6%. Ethane up 0.4 c/gal to 27.4 c/gal Railcar loadings 4-week moving average -4.6%. Weekly loadings up 1.6% ________________________________________________________________________________________________________________ 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),USD65.39 Buy Eastman Chemical (EMN.N),USD90.49 Buy Trinseo (TSE.N),USD67.10 Buy Source: Deutsche Bank Weekly Price Performance -8.00%-3.00%2.00%WLKPCCECLGRAVNTRDWDPFMCAXTATSEPOTPPGCBTMONCEHUNXLBAPDS&PCOMPOLNALBPXKROASHLYBSHWFOEMOSFULEMNCMPOMN Source: Factset, Deutsche Bank We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are Eastman Chemical (EMN, $90.49, Buy, TP $95), Trinseo (TSE, $67.10, Buy, TP $74) and Ashland (ASH, $65.39, Buy, TP $75). The 4-week moving avg of chemical railcar loadings decreased 4.6% in Week #39 (ended 09/23/2017) vs. a 4.2% decrease the prior week. Loadings YTD are up 0.3%. 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 increased 1.6% YoY (versus a 0.8% decrease in the prior week) and increased 0.7% sequentially (vs. a 5.0% increase in the prior week). Ethane prices up 0.4 c/gal to 27.4 c/gal. Propane up 1.5 c/gal to 94.0 c/gal Ethane prices were up 0.4 c/gal last week to 27.4 c/gal (vs its fuel value of 20 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 1.5 c/gal last week to 94.0 c/gal. While propane inventories were down 3% last week to 78MM bbls, they are 16% and 8% 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 down 1.3 c/lb to 30.7 c/lb. Margins compress 2.2 c/lb to 12.6 c/lb Spot ethylene prices fell 1.3 c/lb last week to 30.7 c/lb (vs the July contract price of 29.25 c/lb, August/September contract prices remains unsetteled as a 2 month settlement is being negotiated. Spot deals for September ranged from 29.75 to 31.625 c/lb with deals for October delivery ranged between 29.75-31.75 c/lb. Average spot ethylene margins compressed 2.2 c/lb last week to 12.6 c/lb on lower selling prices and higher production costs. Polymer grade (PG) propylene spot prices were higher last week with deals for September delivery ranged between 46.5-48.25 c/lb. September propylene contract prices settled up 7 c/lb at 46.5 c/lb for PG and 45.0 c/lb for chemical grade on the back of Hurricane Harvery supply disruptions. 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. Prices rose 0.5 c/lb in July and August. 10% of US ethylene capacity remain offline due to Hurricane Harvey Per IHS, approximately 10% of US ethylene capacity remains offline as a result of Hurricane Harvey. IHS Nova Chemical’s Sarnia, Ont cracker (2% of North American {NA} ethylene capacity), Dow’s Taft, LA (#1) cracker (1.6% of NA ethylene capacity), Dow’s Taft, LA (#2) cracker (1% of NA ethylene capacity) and Shell’s Deer Park, TX cracker (3% of NA ethlylene capacity) will be of