Railcar & PetroChemical Update: US Chemical Shipments up 2.4%. Ethane down 1c/gal to 19c/gal

Deutsche Bank Markets Research North America United States Industrials Chemicals/Commodity Periodical Railcar & PetroChemical Update Date 5 October 2015 US Chemical Shipments up 2.4%. Ethane down 1c/gal to 19c/gal Railcar loadings 4-week moving average up 2.4%. Weekly loadings down 1.0% ________________________________________________________________________________________________________________ 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) 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 Albemarle (ALB.N),USD46.15 Buy Dow Chemical (DOW.N),USD44.45 Buy Eastman Chemical (EMN.N),USD66.33 Buy Source: Deutsche Bank (GDP, Real YoY)20112012201320142015E2016EUS1.8%2.8%2.2%2.4%2.6%3.0%Euroland1.4%-0.6%-0.3%0.9%1.4%1.6%Japan-0.7%2.0%1.6%-0.1%0.6%1.1%G71.4%1.7%1.5%1.7%2.0%2.3%Asia ex-Japan7.3%6.1%6.6%6.4%6.2%6.1%China9.2%7.8%7.7%7.3%7.0%6.7%Global3.6%3.1%3.4%3.3%3.1%3.5%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, $44.45, Buy, TP $55), Eastman Chemical (EMN, $66.33, Buy, TP $85) and Albemarle (ALB, $46.15, Buy, TP $55) The 4-week moving average of chemical railcar loadings increased 2.4% in Week #39 (ended 9/26/2015) vs. a 2.2% increase the prior week. Loadings YTD are up 0.4%. Chemical railcar loadings represent 30% 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 declined 1.0% YoY (versus a 2.6% increase in the prior week) and declined 3.0% sequentially (vs. a 3.9% increase in the prior week). Ethane prices fell 1 c/gal to 19 c/gal. Propane prices flat at 47 c/gal Ethane prices fell 1 c/gal last week to 19 c/gal (vs its fuel value of 16 c/gal). We expect ethane to trade in line with its fuel value through ‘15. Longer term, we expect ethane to trade at or near its 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 near-record 500k bpd), we expect fundamentals to get tighter in ’17 owing to increased demand from Enterprise Products ethane export facility (start-up 2H16) and the start-up of 6 greenfield ethylene crackers in ’17-’18. Reduced US drilling activity has the potential to further tighten ethane supply/demand fundamentals. Propane prices were flat last week at 47 c/gal. Per IHS, Q4 propane prices are expected to rise 8 c/gal QoQ to 48 c/gal. Propane prices are down 55% YoY on above average inventories and lower oil prices partially offset by higher seasonal demand and exports. Propane inventories rose 1.7MM bbls, or 2%, last week to 98.7MM bbls and are 35% and 46% above their 3 and 5-yr 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 fell 2 c/lb to 20 c/lb. Margins decrease 2 c/lb to 8 c/lb Per IHS, spot ethylene prices fell 2 c/lb last week to 20 c/lb. Ethylene prices remain depressed as a result of lower oil prices (down 24% since June 30th) and healthy ethylene production. Due to lower ethylene prices, ethylene margins fell 2 c/lb last week to 8 c/lb. Polymer grade (PG) propylene spot prices increased 1 c/lb last week to 28 c/lb. September PG/chemical grade contract prices settled down 2 c/lb vs August to 28 c/lb and 28.5 c/lb, respectively. PG contract prices are down 59% since their September ‘14 high (72.5 c/lb) as the highest inventory levels since 2012 (5MM bbls) are offsetting healthy derivative demand. The major drivers of lower propylene prices remain competitive propane and butane steam cracking economics and 5-yr high propylene inventory levels partially offset by FCC turnarounds and unplanned outages. 6.5% of North American ethylene capacity expected to be offline in October IHS expects 6.5% of North American (NA) ethylene capacity to be offline in October vs 5.0% in September. Flint Hills is undergoing planned maintenance at its Port Arthur, TX cracker (1.8% of NA