Railcar & PetroChemical Update: US Chemical Shipments down 2.8% Ethane up 1c/gal to 18c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 15 June 2015 US Chemical Shipments down 2.8% Ethane up 1c/gal to 18c/gal Railcar loadings 4-week moving avg down 2.8%. Weekly loadings down 3.6% ________________________________________________________________________________________________________________ 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) 124/04/2015. David Begleiter, CFA Research Analyst (+1) 212 250-5473 david.begleiter@db.com Ramanan Sivalingam Associate Analyst ( ) 212 250-8619 ramanan.sivalingam@db.com Jermaine Brown Research Associate (+1) 212 250-3624 jermaine-r.brown@db.com Top picks Dow Chemical (DOW.N),USD51.84 Buy Eastman Chemical (EMN.N),USD77.82 Buy Source: Deutsche Bank (GDP, Real YoY)2011201220132014E2015E2016EUS1.8%2.8%2.2%2.4%2.2%3.0%Euroland1.4%-0.6%-0.4%0.9%1.4%1.6%Japan-0.7%2.0%1.5%-0.1%0.8%1.8%G71.4%1.7%1.5%1.7%1.8%2.4%Asia ex-Japan7.3%6.1%6.1%6.5%6.4%6.3%China9.2%7.8%7.7%7.4%7.0%6.7%Global3.6%3.1%3.0%3.4%3.3%3.8%So urce: DB Glo bal Eco no mics Team We maintain our equal-weight stance on the sector Within the chemicals sector, our top ideas are Dow Chemical (DOW, $51.84, Buy, TP $60), Eastman Chemical (EMN, $77.82, Buy, TP $90) and Trinseo (TSE, $28.29, Buy, TP $30). The 4-week moving average of chemical railcar loadings declined 2.8% in Week #23 (ended June 6) vs. a 1.8% decrease the prior week. Loadings YTD are up 0.3%. Chemical railcar loadings represent 30% of total US chemical shipment tonnage (followed by trucks, barges, and pipelines), offering a trend of broader chemical industry and demand. The more volatile measure of weekly loadings declined 3.6% YoY (versus a 1.4% decline in the prior week) and increased 0.2% sequentially (vs. a 3.3% decrease in the prior week). Ethane prices rise 1 c/gal to 19 c/gal. Propane prices rise 11 c/gal to 42 c/gal Ethane prices rose 1 c/gal to 19 c/gal last week (in line with its fuel value). We expect ethane to trade in line with its fuel value through ‘15. Longer term, we expect ethane to trade at or near fuel value, or in the 25-30 c/gal range, based on DB’s US Natural Gas price forecasts. While ethane supply/demand fundamentals are currently loose (ethane rejection is at a record 400k-plus bpd), we expect fundamentals to get tighter in ’17 owing to increased demand from Enterprise Products ethane export facility (start-up 2H16) and start-up of 6 greenfield ethylene crackers in ’17-’18. Reduced US drilling activity has the potential to further tighten the ethane supply/demand balance. Propane prices rose 11 c/gal last week to 42 c/gal after falling 13 c/gal to 31 c/gal in the prior week, the lowest level in over 13 years. Per IHS, Q2 propane prices are expected to fall 7 c/gal QoQ to 46 c/gal after declining 24 c/gal QoQ in Q1 on above average inventories and lower crude prices partially offset by higher seasonal demand and exports. Propane supplies rose 1.8MM bbls, or 2%, last week to 78.8MM bbls and are 35% and 47% above their 3 and 5-year averages, respectively. Longer term, we expect propane supplies to fall on higher exports (forecasted to rise 12% in ’15 vs 30% in ’14). Spot ethylene prices were flat at 36 c/lb. Margins rise 1 c/lb to 28 c/lb Per IHS, spot ethylene prices were flat last week at 36 c/lb. Margins rose 1 c/lb to 28 c/lb. Polymer grade (PG) propylene spot prices fell 1 c/lb to 37 c/lb. June PG/Chemical Grade contract prices settled down 2 c/lb MoM to 40 c/lb and 38.5 c/lb, respectively. PG contract prices are down 45% since their September high (72.5 c/lb) while spot prices are at their lowest levels since ‘09 as high inventories (5MM bbls), the highest since 2012, are offsetting healthy derivative demand. The major drivers of the lower propylene prices are competitive propane and butane steam cracking economics and five-year high propylene inventory levels partially offset by higher oil prices, FCC turnarounds and unplanned cracker outages. 2.8% of North American ethylene capacity expected to be offline in June IHS expects 2.8% of North American ethylene capacity to be offline in June vs 2.6% in May. Dow Plaquemine LHC-3(2.1% of NA ethylene capacity) has restarted following an operational issue that began May 26. Williams’ ethylene facility in Geismar, LA (2.2% of NA ethylene capacity) has also restarted following