Railcar &PetroChemical Update：US Chemical Shipments up 5.3%.Ethane up 0.1 c/gal to 26.9 c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 13 November 2017 US Chemical Shipments up 5.3%.Ethane up 0.1 c/gal to 26.9 c/gal Railcar loadings 4-week moving average +5.3%. Weekly loadings up 6.1% ________________________________________________________________________________________________________________ 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) 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),USD69.97 Buy Ashland (ASH.N),USD66.01 Buy Eastman Chemical (EMN.N),USD90.75 Buy Source: Deutsche Bank Weekly Price Performance -8.00%-3.00%2.00%7.00%CCVNTROMNASHGRAMONDWDPTSEHUNFULAXTACEKROPOTSHWEMNXLBPPGCBTECLCMPMOSS&PCOMPPXWLKPLYBAPDOLNFOEFMCALB Source: Factset, Deutsche Bank We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are DowDuPont (DWDP, $70.23, Buy, TP $82), Eastman Chemical (EMN, $89.98, Buy, TP $105), and Ashland (ASH, $65.08, Buy, TP $74). The 4-week moving avg of chemical railcar loadings increased 5.3% in Week #45 (ended 11/04/2017) vs. a 6.4% increase the prior week. Loadings YTD are up 0.9%. 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 6.1% YoY (versus a 2.1% increase in the prior week) and increased 5.1% sequentially (vs. a 2.6% decrease in the prior week). Ethane prices roughly flat at 27 c/gal. Propane up 2 c/lb to 97 c/gal Ethane prices rose a modest 0.1 c/gal last week to 26.9 c/gal (vs its fuel value of 21 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 likely move toward 30 c/gal by year-end ‘17. Propane prices rose 2 c/lb last week to 97 c/gal. While propane inventories were down 1% last week to 77MM bbls, they are 18% 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 1.4 c/lb to 26.1 c/lb. Margins down 1.0 c/lb to 9.4 c/lb Spot ethylene prices fell 1.4 c/lb last week to 26.1 c/lb (vs the October contract price of 34.75 c/lb). Spot deals for November ranged from 25.75 to 26.5 c/lb with deals for December at 26 c/lb. Average spot ethylene margins compressed 1.0 c/lb last week to 9.4 c/lb as lower selling prices more than offset lower production costs. Polymer grade (PG) propylene spot prices were higher last week with deals for November delivery at 45.75-47.25 c/lb. October propylene contract prices settled up 1.5 c/lb at 48.0 c/lb for PG and 46.5 c/lb for chemical grade. This follows a 7 c/lb increase in September. The 8.5 c/lb, or 21%, increase in propylene prices in September and October has been driven by supply tightness due to Hurrricane Harvey which caused outages at multiple US Gulf Coast olefins and refinieres as well as delaying a new propane dehydrogenation (PDH) unit which had been scheduled to start up in September. 5.3% of North American ethylene capacity expected to be offline in November Per IHS, CPChem’s Cedar Bayou, TX cracker (2.1% of North American {NA} ethylene capacity) and Sweeny, TX cracker (0.6% of NA ethylene capacity) remain offline as a result of Hurricane Harvey. Dow’s Taft, LA (#1) cracker (1.6% of NA ethylene capacity) and Dow’s Taft, LA (#2) cracker (1.0% of NA ethylene c