KRO AXLL CE S&PCOMP EMN Periodical OMN GRA Railcar & …pg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/22/1c... · Weekly price performance -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% FOE SHW

Deutsche Bank Markets Research

North America

United States

Industrials

Chemicals/Commodity

Periodical

Railcar & PetroChemical Update

Date

22 July 2016

Industry Update

US Chemical Shipments -0.7%. Ethane down 2 c/gal to 18 c/gal

Railcar loadings 4-week moving average down 0.7%. Weekly loadings up 2.9%

________________________________________________________________________________________________________________

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) 057/04/2016.

David Begleiter

Research Analyst

(+1) 212 250-5473

[email protected]

Jermaine Brown

Research Associate

(+1) 212 250-3624

[email protected]

Top picks

Dow Chemical (DOW.N),USD52.50 Buy

DuPont (DD.N),USD67.85 Buy

Eastman Chemical (EMN.N),USD72.02 Buy

Source: Deutsche Bank

Weekly price performance

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0%

FOE

SHW

CMP

ALB

ECL

FMC

VAL

POT

PX

APD

CBT

XLB

PPG

EVGN

GRA

S&PCOMP

CE

KRO

AXLL

EMN

OMN

FUL

DOW

DD

AXTA

HUN

WLKP

MON

OLN

LYB

MOS

TSE

CC

Source: Thomson Reuters, Deutsche Bank

K

We maintain our equal-weight stance on the sector Within the chemicals sector, our top

ideas are Dow Chemical (DOW,

$52.50, Buy, TP $64), Eastman

Chemical (EMN, $72.02, Buy, TP $85)

and DuPont (DD, $67.85, Buy, TP $80)

The 4-week moving average of chemical railcar loadings declined 0.7% in Week #29 (ended 07/16/2016) vs. a 1.5% decrease the prior week. Loadings YTD are up 1.9%. 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 increased 2.9% YoY (vs a 10.3% decline in the prior week) and increased 10.4% sequentially (vs. a 10.3% decrease in the prior week).

Ethane prices down 2 c/gal to 18 c/gal. Propane down 1 c/gal to 47 c/gal Ethane prices fell 2 c/gal this week to 18 c/gal (vs its fuel value of 18 c/gal). While US ethane supply/demand fundamentals are currently loose (ethane rejection remains at near-record levels of 500-600k bpd), we expect ethane to trade at or near its fuel value, or 17-20 c/gal, in 2H16. However, starting in early ’17, we expect ethane supply/demand fundamentals to tighten due to increased exports (led by Enterprise Products’ new 200k bpd ethane export facility which is expected on-line Q3’16) and the start-up of 7 greenfield ethylene crackers in ’17-’18 (up to 540k bpd of demand). As the market tightens, we expect ethane to trade towards its historical value of fuel value plus 10 c/gal - with the premium accounting for fractionation, transportation and storage costs. Based on DB’s ’17 US Natural Gas price forecast of $3.13/MMBtu , this results in an ethane price of 30 c/gal.

Propane prices fell 1 c/gal this week to 47 c/gal. Propane inventories were flat this week at 87MM bbls and are 24% and 36% above their 3- and 5-year averages, respectively. Longer term, we expect propane inventories to decline due to higher exports (up 12% in ’15 vs 30% in ’14, expected to be up in ’16 vs ‘15).

Spot ethylene up 3 c/lb to 30 c/lb. Margins expand 4 c/lb to 19 c/lb Spot ethylene prices rose 3 c/lb this week to 30 c/lb (vs the June contract price of 30.25 c/b). The spring turnaround season continues with three crackers currently down for maintenance. Spot deals for July delivery were completed at 27.25 to 31.5 c/lb with deals for August ranging from 27.375 to 31.0 c/lb. Spot ethylene margins expanded 4 c/lb this week to 19 c/lb on lower feedstock prices. Polymer grade (PG) propylene spot prices were higher this week with deals for July delivery completed between 31.25-32.0 c/lb. July PG and CG contract prices settled up 0.5 c/lb to 33.5 c/lb and 32.0 c/lb, respectively. The major propylene price drivers are steam cracker turnarounds opposite weak global propylene prices and the return to operation of both US PDH units.

8.1% of North American ethylene capacity expected to be offline in July IHS expects 8.1% of North American (NA) ethylene capacity to be offline in July vs 7.4% in June. Per IHS, Chevron Phillips’ Sweeny 22, TX cracker (2.4% of NA ethylene capacity) returned to service early this week. Lyondell’s Corpus Christi, TX, cracker (2.2% of NA ethylene capacity) remains offline for planned maintenance/expansion, with the restart delayed until late September from mid-August due to the combined impacts of a wet spring and hot summer. Westlake Lake Charles Petro 1 (1.7% of NA ethylene capacity) is in the process of restarting following the completion of planned maintenance and expansion work. For ’16, IHS is forecasting NA ethylene production losses of 3.8B lbs, or 4.8%, of NA ethylene capacity. This compares to NA ethylene production loses of 3.1B lbs, or 4.1%, of NA ethylene capacity in ‘15.

Distributed on: 07/22/2016 19:44:58GMT

22 July 2016

Chemicals/Commodity


Page 2 Deutsche Bank Securities Inc.Deutsche Bank Securities Inc.

Figure 1: Chemicals railcar loadings for week ended July 16, 2016 (Week# 29)

% YoY % Sequential

4-week moving average (0.7%) 1.1%

Prior week (1.5%) (1.2%)

Week ended 2.9% 10.4%

Prior week (10.3%) (10.3%)

YTD 2016 1.95%

Source: Association of American Railroads and Deutsche Bank

Figure 2: U.S. Ethylene Production Cash Costs - Spot Co-Production Credits

Weekly Avg. Cents/ Pound Change from Last Week

Purity Ethane 10.0 (0.5)

Propane 11.2 (1.0)

Co-Prod. Int. Lt. Naphtha 16.0 1.0

Butane 11.9 (0.3)

Light Naphtha 21.4 0.4

Gas Oil 22.8 (1.3)

Weighted Avg. 10.9 (0.5)

Source: IHS Chemical

Figure 3: Mt. Belvieu Ethane Purity Prices (North America) Figure 4: Mt. Belvieu Propane Non-TET (North America)

10

14

18

22

26

Jul-

15

Aug-1

5

Aug-1

5

Sep-1

5

Sep-1

5

Sep-1

5

Oct-

15

Oct-

15

Oct-

15

Nov-1

5

Nov-1

5

Dec-1

5

Dec-1

5

Dec-1

5

Jan-1

6

Jan

-16

Feb-1

6

Feb-1

6

Feb-1

6

Mar-

16

Mar-

16

Apr-

16

Apr-

16

Apr-

16

May-1

6

May-1

6

Jun

-16

Jun

-16

Jun

-16

Jul-

16

Jul-16

c/ gallon

20

30

40

50

60

Jul-15

Aug-1

5

Aug-1

5

Sep-1

5

Sep-1

5

Sep-1

5

Oct-

15

Oct-

15

Nov-1

5

Nov-1

5

Dec-1

5

Dec-1

5

Dec-1

5

Jan-1

6

Jan-1

6

Feb-1

6

Feb-1

6

Mar-

16

Mar-

16

Mar-

16

Apr-

16

Apr-

16

May-1

6

May-1

6

Jun-1

6

Jun-1

6

Jun-1

6

Jul-16

c/ gallon

Source: Bloomberg

Source: Bloomberg

Figure 5: US Ethylene Pipeline Gulf Coast FOB Spot

Prices (c/lb)

Figure 6: US Chemical Grade Propylene Gulf Coast FOB

Spot Prices (c/lb)

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

De

c-1

4

Mar-

15

Jun-1

5

Sep-1

5

Dec-1

5

Mar-

16

Jun-1

6

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Sep-1

5

Dec-1

5

Mar-

16

Jun-1

6



22 July 2016

Chemicals/Commodity


Deutsche Bank Securities Inc. Page 3

Figure 7: Propane Export Capacity (MM bbls/month)

2012 2013 2014 2015

Enterprise 3.5-4 7.5 7.5 9

Targa 1-1.5 3-3.5 5-5.5 5-5.5

Total 4.5-5.5 10.5-11 12.5-13 14-14.5 Source: Deutsche Bank, Enterprise, Targa

Figure 8: China Acetic Acid Spot Prices (CNY/ton)

1000

1500

2000

2500

3000

3500

4000

4500

Jan-1

3

Mar-

13

May-1

3

Jul-13

Sep

-13

Nov-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-14

Sep

-14

Nov-1

4

Jan-1

5

Mar-

15

May-1

5

Jul-15

Sep

-15

Nov-1

5

Jan-1

6

Mar-

16

May-1

6

Jul-16

Source: Bloomberg Finance LP

Figure 9: US ethane-based ethylene production costs are

advantaged vs other regions (c/lb)

Figure 10: US ethane supply has been increasing steadily

since 2005 (‘000 of bpd)

0

5

10

15

20

25

Saudi Arabia

Western Canada

US Ethane

US Weighted Average

US Coprod. Int. Light

Southeast Asia

Naphtha

Northeast Asia

Naphtha

US Light Naphtha

West Europe Naphtha

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

Jun

-2001

Jun

-2002

Jun

-2003

Jun

-2004

Jun-2

005

Jun-2

006

Jun

-2007

Jun

-2008

Jun

-2009

Jun

-2010

Jun

-2011

Jun

-2012

Jun

-2013

Jun

-2014

Jun

-2015



22 July 2016

Chemicals/Commodity


Page 4 Deutsche Bank Securities Inc.

Table Of Contents

US Chemicals Railcar Data ............................................................. 6

Key end market data ...................................................................... 8 End Market: Agriculture.................................................................................................... 9 End Market: US Construction ......................................................................................... 11 End Market: US Automotive & Electronics ..................................................................... 16

US macro indicators ..................................................................... 17 US output indicators ....................................................................................................... 17 US financial market indicators ........................................................................................ 19

Overseas macro indicators ........................................................... 20

Sector Valuation & Risks .............................................................. 21

Table of Exhibits

Figure 1: Chemicals railcar loadings for week ended March 1, 2014 (Week# 9) .............. 2 Figure 2: U.S. Ethylene Production Cash Costs - Spot Co-Production Credits .................. 2 Figure 3: Mt. Belvieu Ethane Purity Prices (North America) ............................................. 2 Figure 4: Mt. Belvieu Propane Non-TET (North America) ................................................. 2 Figure 5: US Ethylene Pipeline Gulf Coast FOB Spot Prices (c/lb) ..................................... 2 Figure 6: US Chemical Grade Propylene Gulf Coast FOB Spot Prices (c/lb) ...................... 2 Figure 7: Propane Export Capacity (MM bbls/month) ....................................................... 3 Figure 8: China Acetic Acid Spot Prices (CNY/ton) ........................................................... 3 Figure 9: US ethane-based ethylene production costs are advantaged vs other regions (c/lb) .................................................................................................................................. 3 Figure 10: US ethane supply has been increasing steadily since 2005 (‘000 of bpd) ....... 3 Figure 11: Chemical distribution channels, by volume and cost ....................................... 6 Figure 12: Chemical and petroleum railcar loadings (4-wk m.a., % YoY) ......................... 6 Figure 13: Four-week moving average of weekly railcar loadings (2014-Present) ............ 6 Figure 14: Sequential growth in weekly chemical railcar loadings (2014-Present) ........... 7 Figure 15: Weekly railcar loadings (000s, 2014-Present) .................................................. 7 Figure 16: Four-week moving average of weekly railcar loadings, %YoY (2000-Present) 7 Figure 17: Four-week moving average of weekly railcar loadings (000’s, 2000-Present) . 7 Figure 18: US chemical companies revenue exposures to key end markets .................... 8 Figure 19: Corn, soybeans & wheat stocks-to-use ratio ................................................... 9 Figure 20: US Corn and Soy Acreage (1970-2016E; millions of acres) ............................. 9 Figure 21: US Corn Yields (1970-2016E; bushels per acre) ............................................. 10 Figure 22: US Soybean Yields (1970-2016E; bushels per acre) ...................................... 10 Figure 23: Global Corn Consumption (MM tons) ............................................................ 10 Figure 24: Arable Land Per Capita .................................................................................. 10 Figure 25: US construction data has stabilized since record lows in mid-’09 and is beginning to show signs of improvement ...................................................................... 11 Figure 26: Private non-residential construction has surpassed public non-residential construction .................................................................................................................... 11 Figure 27: Household debt to asset ratio returning to trend levels ................................. 12 Figure 28: Household Debt/GDP ratio also returning to trend levels .............................. 12 Figure 29: Homebuilder sentiment have moved above Housing-related consumption. . 12 Figure 30: Housing starts appear to have bottomed and have ticked up in 2012 ........... 12 Figure 31: Homebuilder sentiment index suggests that housing could add 1½ percent to GDP over the next 12 months ......................................................................................... 13 Figure 32: The homebuilder sentiment index suggests .................................................. 13 Figure 33: Consumer purchasing plan: home ................................................................. 13 Figure 34: Industry sentiment indicators trending up strongly ....................................... 13 Figure 35: Close to record-high levels of affordability .................................................... 14 Figure 36: Real resid investment contribution to real GDP growth ................................. 14 Figure 37: components of residential investment that are adding to GDP growth ......... 14

22 July 2016

Chemicals/Commodity



Figure 38: Traffic of prospective buyers of new homes .................................................. 14 Figure 39: Conference board consumer confidence survey: plans to buy a new home within six months ........................................................................................................... 15 Figure 40: US home prices rising steadily ...................................................................... 15 Figure 41: North American auto builds ........................................................................... 16 Figure 42: North American Rigid PCBs board book-to-bill ratio ..................................... 16 Figure 43: US Chemicals and Petroleum Shipments ...................................................... 17 Figure 44: Chemicals Railcar Loadings, Capacity Utilization, and Industrial Production 17 Figure 45: Growth in railcar loadings is ahead of industrial production .......................... 18 Figure 46: ECRI Leading Index vs. Industrial Production ................................................ 18 Figure 47: Industrial Production vs. ISM PMI Index ........................................................ 18 Figure 48: Industrial Production vs. ISM Mfg. New Orders ............................................ 18 Figure 49: Industrial Production vs. Conference Board Leading Indicators .................... 18 Figure 50: Conference Board Leading Indicators vs. Real GDP ..................................... 18 Figure 51: Chemicals sector multiples vs the yield curve ............................................... 19 Figure 52: A steeper yield curve has previously led rising chemicals IP ......................... 19 Figure 53: Eurozone confidence indicators ..................................................................... 20 Figure 54: ZEW German economic sentiment indicator (12mo m.avg.) ......................... 20 Figure 55: OECD Europe CLI vs Euro area Industrial Production .................................... 20

22 July 2016

Chemicals/Commodity



US Chemicals Railcar Data

Figure 11: Chemical distribution channels, by volume and cost

By tonnage (882MM tons) By cost* ($40.0 billion)

Rail 30% 20%

Truck 48% 67%

Waterborne 18% 10%

Pipeline, Air & Other 4% 3%

Source: American Chemistry Council. *Cost is cost of transportation, not value of product, 2010 data

Year to date, chemical railcar loadings are down 1.9%

Year to date, chemical railcar loadings are down approximately 1.9%.

Figure 12: Chemical and petroleum railcar loadings (4-wk m.a., % YoY)

(30%)

(25%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

2 4 6 8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

42

44

46

48

50

52

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Week# 29

Chemicals railcar loadings (4-wk m.a. % YoY)Ethanol-driven Increase in loadings (estimated from blending, 4-wk m.a. %YoY)Petroleum Products Railcar Loadings (4-wk m.a. % YoY

Source: Association of American Railroads

Figure 13: Four-week moving average of weekly railcar loadings (2014-Present)

23,000

25,000

27,000

29,000

31,000

33,000

2 4 6 8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

42

44

46

48

50

52


Week# 29

2014 2015 2016


22 July 2016

Chemicals/Commodity



Figure 14: Sequential growth in weekly chemical railcar

loadings (2014-Present)

Figure 15: Weekly railcar loadings (000s, 2014-Present)

(25%)

(15%)

(5%)

5%

15%

25%

35%

-


Se

qu

en

tia

l Ch

an

ge

Week# 29

2014 2015 2016

22

24

26

28

30

32

34

-

Jan Feb Mar Apr May Jun Jul Aug Sep Oct NovDec

Week# 29

2014 2015 2016



Figure 16: Four-week moving average of weekly railcar

loadings, %YoY (2000-Present)

Figure 17: Four-week moving average of weekly railcar

loadings (000’s, 2000-Present)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

20

22

24

26

28

30

32 Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan-0

7

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan-1

2

Jan

-13

Jan

-14

Jan

-15

Jan

-16



22 July 2016

Chemicals/Commodity



Key end market data

Figure 18: US chemical companies revenue exposures to key end markets

Company Auto & Transport Construction Electronics Comments

Air Products 15% Energy 24%, Gen'l Mfg 15%, Chemicals 17%, Metals 10%, Medical 7%, Food 3%, Others 10%

Airgas 2% 13% - Industrial & Mfg: 25% ; Repair & Maintenance: 27% Retail & Wholesale: 4% Other 3% Medical: 9% ; Food; 6%; Analytical: 2% Utilities: 2%, Petrochemical: 7% “Auto & Transport” is only Transport and no Auto

Albemarle 6% 9% 15% Refining 32%, Pharma/ Ag 12%, Industrial 10%, Packaging 9%, Oilfield 4%, Other 3%

Cabot 15% 10% 10% Tire 45% ; Others 20%

Celanese 11% 3% Filter Media 22%; Paints & Coatings 13%; Consumer & Medical Apps 12%; Consumer & Industrial Adhesives; Industrial Performance Apps 7%; Textiles 5% ; Food & Beverage 4%; Paper & Packaging 3%

DuPont 20% 10% 9% Agriculture/ food 21%; Food Ingred, Ref & packaging 8%; Other packaging 3%; Chemicals/ petchem 5%; Textile/ apparel 5%; Plastics 3%; Other industrial 7%; Aerospace 4%; Paper 1%; Healthcare 1%; Personal care 3%.“Construction” includes residential, commercial construction”

Dow Chemical 5% 18% 7% Consumer & Institutional 22%, Agriculture 15%

Ferro 10% 34% 21% Appliances 8%; Containers 8%; Household furnishings 7%; Industrial 6%; Others 6%

HB Fuller 10% Adhesives: 72%; Paints: 8%; Packaging: 4%; Insulating glass: 4%; Consumer: 2%

LyondellBasell 7% 10% Refining/Fuels: 35%; Packaging: 18%; Consumer: 12%; Coatings: 4%; Textiles/Furnishings:4%; Other:10%. “Auto & Transport” consists of Transportation only. “Construction” consists of “Building & Construction”.

PPG 30% 27% Consumer goods 21%; Industrial goods 10%; Chemical products: 5%; Aerospace 4%; Marine 3% (Auto consists of OEM 19%, Auto aftermarket 11%)

Praxair - - 7% Manufacturing 24%; Chemicals 10%; Energy 13%; Food and Beverage 7%; Aerospace 2%; Healthcare 10%; Metals 16%; Other 11%

Valspar 3% 30% - Industrial 36%, Packaging 21%, Other 10% “Auto & Transport” is automotive refinish and “Construction” is architectural paints

Source: Company data, Deutsche Bank estimates

22 July 2016

Chemicals/Commodity



End Market: Agriculture

Figure 19: Corn, soybeans & wheat stocks-to-use ratio

Source: Deutsche Bank, USDA

Figure 20: US Corn and Soy Acreage (1970-2016E; millions of acres)

35

45

55

65

75

85

95

105

70/7

1

73/7

4

76/7

7

79/8

0

82/8

3

85/8

6

88/8

9

91/9

2

94/9

5

97/9

8

00/0

1

03/0

4

06/0

7

09/1

0

12/1

3

15/1

6F

Corn Acres Planted Soybean Acres Planted


22 July 2016

Chemicals/Commodity



Figure 21: US Corn Yields (1970-2016E; bushels per acre) Figure 22: US Soybean Yields (1970-2016E; bushels per

acre)

60

80

100

120

140

160

180

70/7

1

73/7

4

76/7

7

79/8

0

82/8

3

85/8

6

88/8

9

91/9

2

94/9

5

97/9

8

00/0

1

03/0

4

06/0

7

09/1

0

12/1

3

15/1

6F

20

25

30

35

40

45

50

70/7

1

73/7

4

76/7

7

79/8

0

82/8

3

85/8

6

88/8

9

91/9

2

94/9

5

97/9

8

00/0

1

03/0

4

06/0

7

09/1

0

12/1

3

15/1

6F



Figure 23: Global Corn Consumption (MM tons) Figure 24: Arable Land Per Capita

220

410

600

970

1090

0

200

400

600

800

1000

1200

1965 1980 2000 2020E 2030E

MM Tons

1.02

0.75

0.55

0.44 0.41

0

0.2

0.4

0.6

0.8

1

1.2

1961 1980 2000 2020E 2030E

Acres/Capita

Source: Global Insights

Source: Global Insights

22 July 2016

Chemicals/Commodity



End Market: US Construction

Figure 25: US construction data has stabilized since record lows in mid-’09 and is

beginning to show signs of improvement

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Total non-res constr. May-16 = $685 Total res-constr. May-16 = $458

Total res-constr. %YOY; May-16 = 5.3% Total non-res constr. %YOY; May-16 = 1.2%

Source: Haver Analytics

Figure 26: Private non-residential construction has surpassed public non-residential

construction

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Yo

Y c

han

ge

Mar-16 = 8.1%

May-16 = 8.1%

Private non-residential construction SAAR $ millions (% YoY, 3mo m.a.)

Public non-residential construction SAAR $ millions (% YoY, 3mo m.a.)

Source: Deutsche Bank, Haver Analytics, U.S. Census Bureau

22 July 2016

Chemicals/Commodity



Figure 27: Household debt to asset ratio returning to

trend levels

Figure 28: Household Debt/GDP ratio also returning to

trend levels

Source: Federal Reserve Board, Haver Analytics, DB Global Market research

Source: Federal Reserve Board, Haver Analytics, DB Global Market research

Figure 29: Homebuilder sentiment have moved above

Housing-related consumption.

Figure 30: Housing starts ticked up in ’12 and have

continued to rise

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

0

10

20

30

40

50

60

70

80

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

Homebuilders' sentiment (SA, All Good = 100, 1 qtr. lead (LHS)

Total housing-related consumption* % YOY (RHS)

0

20

40

60

80

100

300

700

1,100

1,500

1,900

2,300 '8

8'8

9'9

0'9

1'9

2'9

3'9

4'9

5'9

6'9

7'9

8'9

9'0

0'0

1'0

2'0

3'0

4'0

5'0

6'0

7'0

8'0

9'1

0'1

1'1

2'1

3'1

4'1

5'1

6

Housing Starts, 3mo m.a. (000s, LHS): May-16 = 1,134

Homebuilders Sentiment (SA, All Good = 100): 15

Source: NAHB, BEA *Furniture & household equipment, housing shelter and household operation

Source: Federal Reserve Board, Haver Analytics

22 July 2016

Chemicals/Commodity



Figure 31: Homebuilder sentiment index suggests that

housing could add 1½ percent to GDP over the next 12

months

Figure 32: The homebuilder sentiment index suggests

that home prices ticked up in ’14 and are rising

Source: NAHB, BEA , Haver Analytics, DB Global Markets Research

Source: NAHB, Fiserv, Marco Markets LLC, Haver Analytics, DB Global Markets Research

Figure 33: Consumer purchasing plan: home Figure 34: Industry sentiment indicators trending up

strongly

Source: Conference Board, Haver Analytics, DB Global Markets Research

Source: NAHB, Univ of Michigan, Haver Analytics, Bloomberg Finance LP, DB Global Markets Research

22 July 2016

Chemicals/Commodity



Figure 35: Close to record-high levels of affordability Figure 36: Real resid investment contribution to real GDP

growth

Source: NAR, Haver Analytics, DB Global Markets Research

Source: BEA, Haver Analytics, DB Global Markets Research

Figure 37: components of residential investment that are

adding to GDP growth

Figure 38: Traffic of prospective buyers of new homes

Source: BEA, Haver Analytics, DB Global Markets Research

Source: NAHB, , Haver Analytics , DB Global Markets Research

22 July 2016

Chemicals/Commodity



Figure 39: Conference board consumer confidence

survey: plans to buy a new home within six months

Figure 40: US home prices rising steadily

Source: Census, Haver Analytics,DB Global Markets Research

Source: S&P, CoreLogic, FHFA, Haver Analytics, DB Global Markets Research

22 July 2016

Chemicals/Commodity



End Market: US Automotive & Electronics

Figure 41: North American auto builds

0%

5%

10%

15%

20%

25%

30%

3,000

3,200

3,400

3,600

3,800

4,000

4,200

4,400

4,600

4,800

1Q

-2011

2Q

-2011

3Q

-2011

4Q

-2011

1Q

-2012

2Q

-2012

3Q

-2012

4Q

-2012

1Q

-2013

2Q

-2013

3Q

-2013

4Q

-2013

1Q

-2014

2Q

-2014

3Q

-2014

4Q

-2014

1Q

-2015

2Q

-2015

3Q

-2015

4Q

-2015

1Q

-2016E

2Q

-2016E

3Q

-2016E

4Q

-2016E

NA Light Vehicles Production (in '000) % Change YoY (RHS)

Source: Deutsche Bank, Wards, Deutsche Bank Autos Team

Figure 42: North American Rigid PCBs board book-to-bill ratio

0.8

0.9

1.0

1.1

1.2

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Rigid PCBs book to bill ratio; May-16 = 1.01

Source: IPC (Association Connecting Electronics Industries)

Front-end semiconductor bookings, which represent more chemicals-intensive

upstream processes (e.g. wafer fab, foundry…) are typically led by back-end bookings

which represent downstream test and packaging activities

NA PCB book-bill ratios give a view into consumer electronics demand, and particularly

demand for flame retardant plastic additives (e.g. ALB, CEM)

22 July 2016

Chemicals/Commodity



US macro indicators

US output indicators

Figure 43: US Chemicals and Petroleum Shipments

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jun-14 (RHS) = 3.5%

Petroleum and Chemicals Railcar Loadings (%YoY of 4-wk m.a.)

Source: Waterborne Commerce Statistics Center, New Orleans, LA

Figure 44: Chemicals Railcar Loadings, Capacity Utilization, and Industrial Production

(25%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

(1,200)

(1,000)

(800)

(600)

(400)

(200)

-

200

400

600

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Chemicals % Capacity Utilization (bps YoY, 6mo m.a., LHS); May-16 = 127

Chem Railcar Loadings (%YoY, 6mo m.a., RHS); Jun-16 = 2.0%

Chemicals Ind. Production (%YoY, 6mo m.a., RHS); May-16 = 1.3%

Source: Waterborne Commerce Statistics Center, New Orleans, LA

22 July 2016

Chemicals/Commodity



Figure 45: Growth in railcar loadings is ahead of industrial

production

Figure 46: ECRI Leading Index vs. Industrial Production

(15%)

(10%)

(5%)

0%

5%

10%

15%

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Jun-16 (LHS) = (1.4%)

Feb-16 (LHS) = (0.9%)

Railcar loadings, ex-grain & coal (4-wk ma %YoY, shift fwd 1mo, LHS)

Industrial production (% YoY, RHS)

(15%)

(10%)

(5%)

(0%)

5%

10%

15%

(40%)(30%)(20%)(10%)

0%10%20%30%40%

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Jun-16 (RHS) = (0.8%)

Oct-13 (LHS) = 5.1%

ECRI Leading Index (% YoY, adv. 5 months, LHS)


`

Source: Association of American Railroads, Federal Reserve

Source: Federal Reserve, ECRI, Reuters

Figure 47: Industrial Production vs. ISM PMI Index Figure 48: Industrial Production vs. ISM Mfg. New Orders

(15%)

(10%)

(5%)

0%

5%

10%

15%

30

40

50

60

70

80

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Jun-16 (LHS) = 53.2

Jun-16 (RHS) = (0.8%)

ISM (Mfg.), shifted fwd 3 months (left axis)

Industrial production (% YoY, right axis)

(15%)

(10%)

(5%)

0%

5%

10%

15%

10

20

30

40

50

60

70

80

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

May-16 (RHS) = 55.7

Jun-16 (RHS) = (0.8%)

ISM New Orders (Mfg.) shifted fwd 3 mos (LHS)


Source: Federal Reserve, ISM


Figure 49: Industrial Production vs. Conference Board

Leading Indicators

Figure 50: Conference Board Leading Indicators vs. Real

GDP

(10%)

(5%)

0%

5%

10%

15%

20%

'80

'85

'90

'95

'00

'05

'10

'15

Apr-16 (RHS) = (1.3%)

May-16 = (0.7%)

Conf. Board leading indicators, (6-m % chg) shifted forward 3mos

Headline IP ex-mining, ex-utilities (6-m % chg)

(6%)

(4%)

(2%)

0%

2%

4%

6%

8%

10%

(10%)

(5%)

0%

5%

10%

15%

'80

'85

'90

'95

'00

'05

'10

'15

Mar-16 (RHS) = 2.1%

Dec-13 (LHS) = 5.7%

Conf. Board Leading Indicator, % YoY (LHS, shifted forward 2 qtrs)

Real GDP % YoY (RHS)

Source: Federal Reserve, Bloomberg

Source: Deutsche Bank, Reuters

22 July 2016

Chemicals/Commodity



US financial market indicators

Figure 51: Chemicals sector multiples vs the yield curve Figure 52: A steeper yield curve has previously led rising

chemicals IP

-

5.0

10.0

15.0

20.0

25.0

-225

-150

-75

0

75

150

225

300

375

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Jun-16 (RHS) = 16.5

Dec-13 (LHS) = 270.8

10y-3m Yield Curve (bps, LHS)

DB Chems Universe NTM P/E (RHS)

-18%-12%-6%0%6%12%18%24%30%

(500)

(300)

(100)

100

300

500

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Dec-13 (LHS) = 255.2

Jun-16 (RHS) = 1.0%

US 10yr - 3m eurodollar (6mo ma. shifted fwd 6mos, bps, LHS)

Industrial Production: Chemicals (% YoY, 6mo m.a., RHS)

Source: Thomson One


22 July 2016

Chemicals/Commodity



Overseas macro indicators

Figure 53: Eurozone confidence indicators Figure 54: ZEW German economic sentiment indicator

(12mo m.avg.)

40

44

48

52

56

60

85

90

95

100

105

110

115

'88

'91

'94

'97

'00

'03

'06

'09

'12

'15

Recession periods in Germany

European Commission Economic sentiment (36mo mv. avg.)

24 Month Moving Average B.Sector

Euro Zone PMI manufacturing (24mo mv. avg.)

-60

-40

-20

0

20

40

60

80

100

120

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

Recession periods in Germany

ZEW Economic Sentiment (12mo mv. avg.)

Source: Bloomberg Finance LP, European Commission, Ifo

Source: Bloomberg Finance LP, ZEW center for European Econ. Research

Figure 55: OECD Europe CLI vs Euro area Industrial Production

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

'91

'93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

'15

Dec-13 (LHS) = 1.0%

May-16 (RHS) = 1.4%

OECD Europe Composite Leading Indicators % chg. YoY, shifted fwd 4 mos (LHS)

Eurozone IP ex Construction (RHS 3mo avg YoY chg)

Source: Haver Analytics, OECD, Thomson One, Eurostat

22 July 2016

Chemicals/Commodity



Sector Valuation & Risks

Valuation: We value companies within the chemicals sector based on: 1) forward P/E multiples (vs.

historical ranges, and the overall market); 2) forward EV/EBITDA multiples (where

leverage diverges greatly from that of peers, also vs. historical averages); 3) our

adjusted calculation of cash return on cash invested (“ROIC”) and the strong correlation

(R2>70%) we have found between chemical sector valuations and returns on capital.

Risks: Chemicals volumes are tightly linked with industrial production, while input costs are

closely tied to energy prices (e.g., oil, natural gas). Accordingly, key risks to our

forecasts include a recession in overall GDP (domestic or international, depending on

company-specific overseas exposure), a surge in energy prices, and sharp deterioration

(or improvement, in select cases) in chemicals-intensive housing or automotive

production.

The author of this report wishes to acknowledge the contribution made by Aneesh

Agarwal and Manish Agrawal, employees of Evalueserve, a third-party provider to

Deutsche Bank of offshore research support services.

22 July 2016

Chemicals/Commodity



Appendix 1

Important Disclosures

Additional information available upon request

*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. David Begleiter

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

46 %52 %

3 %

53 % 42 %

17 %0

100

200

300

400

500

600

Buy Hold Sell

North American Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

22 July 2016

Chemicals/Commodity



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request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.

Copyright © 2016 Deutsche Bank AG

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Stuart Kirk Head of Thematic Research

International locations

Deutsche Bank AG

Deutsche Bank Place

Level 16

Corner of Hunter & Phillip Streets

Sydney, NSW 2000

Australia

Tel: (61) 2 8258 1234

Deutsche Bank AG

Große Gallusstraße 10-14

60272 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

Documents

KRO AXLL CE S&PCOMP EMN Periodical OMN GRA Railcar & …pg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/22/1c... · Weekly price performance -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% FOE SHW