Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 16 October 2017 US Chemical Shipments up 2.9%. Ethane down 0.5 c/gal to 26.5 c/gal Railcar loadings 4-week moving average +2.9%. Weekly loadings up 10.4% ________________________________________________________________________________________________________________ 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 DowDuPont (DWDP.N),USD71.43 Buy Ashland (ASH.N),USD66.46 Buy Eastman Chemical (EMN.N),USD88.65 Buy Source: Deutsche Bank Weekly Price Performance -8.00%-3.00%2.00%7.00%AXTAOLNEMNWLKPLYBASHCEFULGRAAPDS&PCOMPPXPPGDWDPCMPSHWXLBALBECLPOTMONCBTCCTSEFMCFOEMOSKROOMNHUNVNTR Source: Factset, Deutsche Bank We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are DowDuPont (DWDP, $71.43, Buy, TP $80), Eastman Chemical (EMN, $88.65, Buy, TP $100), and Ashland (ASH, $66.46, Buy, TP $74). The 4-week moving avg of chemical railcar loadings increased 2.9% in Week #41 (ended 10/07/2017) vs. a 1.3% increase the prior week. Loadings YTD are up 0.5%. 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 10.4% YoY (versus a 1.3% increase in the prior week) and decreased 1.5% sequentially (vs. a 3.2% increase in the prior week). Ethane prices down 0.5 c/gal to 26.5 c/gal. Propane flat at 94 c/gal Ethane prices declined 0.5 c/gal last week to 26.5 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 were flat last week at 94 c/gal. While propane inventories were up 1% last week to 79MM bbls, they are 17% and 9% 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 0.5 c/lb to 28.5 c/lb. Margins down 0.5 c/lb to 11.9 c/lb Spot ethylene prices fell 0.5 c/lb last week to 28.5 c/lb (vs the September contract price of 35.25 c/lb, and August contract prices of 31.25 c/lb). Spot deals for October ranged from 26.5 to 30.625 c/lb with deals for November delivery at 30.25 c/lb. Average spot ethylene margins compressed 0.5 c/lb last week to 11.5 c/lb on lower selling prices. Polymer grade (PG) propylene spot prices were lower last week with deals for October delivery ranged between 45-47 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. ~13% of North American ethylene capacity expected to be offline in October Per IHS, CP Chem’s Cedar Bayou, TX cracker (2.1% of North American {NA} ethylene capacity) and Equistar’s La Porte, TX cracker (3.1% of NA ethylene capacity) remain offline as a result of Hurricane Harvey. Nova Chemical’s Sarnia, Ont cracker (2% of 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 offline in October for planned t