Railcar & PetroChemical Update: US Chemical Shipments up 3.1%. Ethane down 4 c/gal to 20 c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 11 December 2017 US Chemical Shipments up 3.1%. Ethane down 4 c/gal to 20 c/gal Railcar loadings 4-week moving average +3.1%. Weekly loadings up 4.0% ________________________________________________________________________________________________________________ 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),USD70.73 Buy Ashland (ASH.N),USD70.14 Buy Eastman Chemical (EMN.N),USD92.18 Buy Source: Deutsche Bank Weekly Price Performance -10.00%0.00%10.00%OMNKROCCFOEFMCVNTRASHHUNPOTCBTFULMOSGRAMONALBTSEOLNAPDDWDPPXCMPPPGCEEMNECLS&PCOMPXLBWLKPLYBSHWAXTA Source: Factset, Deutsche Bank We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are DowDuPont (DWDP, $70.73, Buy, TP $82), Eastman Chemical (EMN, $92.18, Buy, TP $105), and Ashland (ASH, $70.14, Buy, TP $78). The 4-week moving avg of chemical railcar loadings increased 3.1% in Week #49 (ended 12/2/2017) vs. a 3.6% increase the prior week. Loadings YTD are up 1.1%. 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 4.0% YoY (versus a 0.5% decrease in the prior week) and increased 28.5% sequentially (vs. a 15.5% decrease in the prior week). Ethane prices down 4 c/gal to 20 c/gal. Propane down 1 c/gal to 97 c/gal Ethane prices fell 4.3 c/gal last week to 20.4 c/gal (vs its fuel value of 18 c/gal). The decline in ethane prices was driven by muted demand (the new 1.5MM m.t. DowDuPont ethylene cracker, the largest in the US, went down for maintenance on December 4 and is not due to come back up until December 24) and selling of ethane by 2 ethylene producers (possibly due to year-end inventory control). While US ethane supply/demand 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 1H’18, 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 $3.02/MMBtu, we estimate ethane prices will likely move toward 30 c/gal by year-end ‘17. Propane prices fell 0.5 c/gal last week to 97.3 c/gal. While propane inventories were up 2% last week to 74MM bbls, they are 19% 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 up 1 c/lb to 28 c/lb. Margins up 1.5 c/lb to 12.5 c/lb Spot ethylene prices rose 0.6 c/lb last week to 27.8 c/lb (vs the November contract price of 33.25 c/lb). Spot deals for December ranged from 27.375 to 28.25 c/lb with deals for January ranged between 26.25-29.25 c/lb. Average spot ethylene margins Expanded 1.5 c/lb last week to 12.5 c/lb on higher selling prices and lower production costs. Polymer grade (PG) propylene spot prices were lower last week with deals for December delivery at 47-47.5 c/lb. November propylene contract prices settled up 1 c/lb at 49.0 c/lb for PG and 47.5 c/lb for chemical grade. This follows a 7 c/lb increase in September, and 1.5 c/lb increase in October. The 9.5 c/lb, or 24%, increase in prices since September has been driven by supply tightness due to Hurricane 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. 4.2% of North American ethylene capacity expected to be offline in December Per IHS, CPChem’s Cedar Bayou, TX cracker (2.1% of Nor