RAILCARPETROCHEMICALUPDATEUSCHEMICALSHIPMENTSDOWN1.2.ETHANEPRICESFALL1CGAL1120

Top picksBuyBuyBuyDeutsche BankMarkets ResearchNorth AmericaUnited StatesIndustrialsChemicals/CommodityPeriodicalRailcar &PetroChemicalDate19 November 2012UpdateDavid Begleiter, CFAUS chemical shipments down 1.2%.Ethane prices fall 1c/galRailcar loadings 4-week moving avg. down 1.2%, weekly loadings up 2.5%The 4-week moving average of chemical railcar loadings declined 1.2% inWeek #45 (ended November 10) vs. a 1.6% decrease the prior week. LoadingYTD are down 1.1%. Chemical railcar loadings represent 23% of total USchemical shipment tonnage (followed by trucks, barges, and pipelines), offeringa measurement of broader chemical industry activity and demand trends. Themore volatile measure of weekly loadings increased 2.5% YoY (versus a 1.2%decline in the prior week) and increased 3.4% sequentially (vs. a 0.8% decreasein the prior week).Ethane prices fell 1c/gal last week to 29.5c/gal (down 63% YTD)Ethane prices fell 1c/gal last week to 29.5c/gal while spot ethylene prices fell2c/lb to 53c/lb. With naphtha feedstock costs also rising 20%, the combinedeffect was to reduce spot ethylene margins by 2c/lb to 33c/lb. Polymer grade(PG) propylene spot prices for November fell to 53c-55c/gal. The PG contractprice for November rose 4c/lb to 57c/lb (vs a forecasted 5c/lb increase) owingto near-term supply shock. PG prices are expected to fall in December onResearch Analyst(+1) 212 250-Ramanan SivalingamAssociate Analyst( ) 212 250-Jermaine BrownResearch Associate(+1) 212 250-3624jermaine-Ashland (ASH.N),USD68.27LyondellBasell (LYB.N),USD46.87Eastman Chemical (EMN.N),USD55.69improved supply and lower seasonal demand.ExxonMobils Baytown BOP-X facility (3.1% of NA capacity) remains down foran unplanned maintenance outage that is expected to last through the third(GDP, Real YoY)USEuroland20080.4%0.6%2009-2.6%-4.1%20103.0%1.9%2011 2012E 2013E1.8% 2.2% 2.0%1.4% -0.5% 0.0%week of November. The Flint Hills Port Arthur, TX ethylene facility (1.9% of NAcapacity) remains down for a maintenance outage that is expected to last untillate this month. We expect ethylene capacity outages to decrease sequentiallyin November (4.7% of NA ethylene capacity offline), vs 6.9% offline inOctober, and decrease in December (1.0% of NA capacity offline).JapanG7Asia ex-JapanChinaGlobal-0.7%0.3%6.8%9.0%2.7%-5.3%-3.5%5.7%9.1%-0.9%4.1%2.9%9.4%10.3%5.1%-0.7% 1.9% 0.6%1.4% 1.3% 1.3%7.3% 6.1% 6.7%9.2% 7.7% 8.2%3.6% 2.9% 3.2%We expect ethane prices to move modestly higher to 40c/gal in DecemberSource: DB Global Economics Teamand 43-45c/gal in January on higher propane prices, which we expect to riseon seasonal demand and Enterprise starting up its expanded export terminal.Weakened potash demand spilling over to phosphate.Unsettled potash contracts in China and India, coupled with above averageNorth American potash inventories (39% above the 5-year avg) are leadingbuyers to delay purchases to avoid price risk. This cautious sentiment is spillingover to phosphate as buyers are being thriftier with their purchases in spite oflow inventory levels. Given this weakened demand, Mosaic (MOS; Hold)lowered their 13 Q2 potash volumes to 1.3MM-1.4MM m.t (prior guidance:1.6MM-1.9MM m.t.) and phosphate volumes to 2.9MM-3.1MM m.t. (Priorguidance: 3.0MM-3.4MM m.t.).We maintain our equal-weight stance on the sectorWithin in the chemicals sector, our top specialty chemical idea is Ashland(ASH, Buy, TP $85), our top differentiated chemical idea is Eastman Chemical(EMN, Buy, TP $70) and our top commodity chemical idea is LyondellBasell(LYB, Buy, TP $60)._All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourcedfrom local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subjectcompanies. 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 ANDANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.Apr-11Apr-12Aug-11May-11May-12Aug-12Feb-12Feb-11Mar-11Mar-12Oct-10Oct-11Oct-12Nov-11Dec-11Nov-10Dec-10Sep-11Sep-11Aug-11Aug-12Sep-12Nov-10Dec-10Nov-11Dec-11May-11May-12Nov-12Oct-11Nov-11 Dec-11 Dec-11Sep-11Apr-12Jan-12Oct-11Sep-11Nov-11 Dec-11 Dec-11Apr-12May-12Aug-12 Sep-12Jan-12Jun-12Feb-12 Mar-12Oct-12Jul-12May-12Aug-12Jun-12Feb-12 Mar-12Jul-12Nov-12Sep-12Jun-11Jan-11Jan-12Jun-12Oct-10Oct-11Apr-11Apr-12Jan-11Jun-11Jan-12Jun-12Feb-11Feb-12Mar-11Mar-12Oct-12Jul-11Jul-12Jul-11Jul-1219 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateFigure 1: Chemicals railcar loadings for week ended November 10, 2012 (Week# 45)% YoY% Sequential4-week moving averagePrior weekWeek endedPrior weekYTD 2012(1.2%)(1.6%)2.5%(1.2%)(1.05%)0.4%(1.0%)3.4%(0.8%)Source: Association of American Railroads and Deutsche BankFigure 2: U.S. Ethylene Production Cash Costs - Spot Co-Production CreditsWeekly Avg. Cents/ PoundChange from Last WeekPurity EthanePropaneCo-Prod. Int. Lt. NaphthaButaneLight NaphthaGas OilWeighted Avg.Source: IHS Chemical12.918.450.342.158.267.120.2(0.2)(1.5)8.62.16.90.60.4Figure 3: Mt. Belvieu Ethane Purity Prices (North America)c/ gallon1009080706050403020Source: IHS ChemicalFigure 5: US Ethylene Pipeline Gulf Coast FOB Spot Prices(c/lb)7570Figure 4: Mt. Belvieu Propane Non-TET (North America)c/ gallon170160150140130120110100908070Source: IHS ChemicalFigure 6: US Chemical Grade Propylene Gulf Coast FOBSpot Prices (c/lb)908065706055504560504040303530Source: Bloomberg Finance LP20Source: Bloomberg Finance LPOct-11Oct-11Nov-11 Dec-11Sep-11Apr-12Aug-12May-12Sep-12Jun-1997Jun-1998Jan-12Jun-12Feb-12Mar-12Jun-1995Jun-1996Jun-1999Jun-2000Jun-2001Jun-2002Jun-2003Jun-2004Jun-2005Jun-2006Jun-2007Jun-2008Jun-2009Jun-2010Jun-2011Jun-2012Oct-12Jul-12Figure 7: China Acetic Acid Spot Prices (CNY/ton)450040003500300025002000Source: Bloomberg Finance LPFigure 8: US ethane-based ethylene production costs areadvantaged vs other regions (c/lb)65605550454035302520151050Figure 9: US ethane supply has been increasing steadilysince 2005 (000 of bpd)11001000900800700600500400Western US EthaneUSUSUS Light NortheastWest SoutheastCanadaWeighted Coprod NaphthaAsiaEuropeAsiaAverageLightNaphthaNaphtha Naphtha Naphtha19 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateTable Of ContentsUS Chemicals Railcar Data . 6Key end market data. 8End Market: Agriculture . 9End Market: US Construction . 11End Market: US Automotive & Electronics . 13US macro indicators . 14US output indicators . 14US financial market indicators. 16Overseas macro indicators. 17Sector Valuation & Risks . 18Table of ExhibitsFigure 1: Chemicals railcar loadings for week ended October 13, 2012 (Week# 41) . 2Figure 2: U.S. Ethylene Production Cash Costs - Spot Co-Production Credits. 2Figure 3: Mt. Belvieu Ethane Purity Prices (North America). 2Figure 4: Mt. Belvieu Propane Non-TET (North America). 2Figure 5: US Ethylene Pipeline Gulf Coast FOB Spot Prices (c/lb) . 2Figure 6: US Chemical Grade Propylene Gulf Coast FOB Spot Prices (c/lb) . 2Figure 7: China Acetic Acid Spot Prices (CNY/ton). 3Figure 8: US ethane-based ethylene production costs are advantaged vs other regions (c/lb). 3Figure 9: US ethane supply has been increasing steadily since 2005 (000 of bpd) . 3Figure 11: Chemical distribution channels, by volume and cost . 6Figure 12: Chemical and petroleum railcar loadings (4-wk m.a., % YoY) . 6Figure 13: Four-week moving average of weekly railcar loadings (2009-Present) . 6Figure 14: Sequential growth in weekly chemical railcar loadings (2009-Present). 7Figure 15: Weekly railcar loadings (000s, 2009-Present) . 7Figure 16: Four-week moving average of weekly railcar loadings, %YoY (2000-Present). 7Figure 17: Four-week moving average of weekly railcar loadings (000s, 2000-Present). 7Figure 18: US chemical companies revenue exposures to key end markets. 8Figure 19: Corn stocks-to-use ratios are at the lowest levels since the mid-1970s . 9Figure 20: US Corn and Soy Acreage (1970-2013E; millions of acres). 9Figure 21: US Corn Yields (1970-2013E; bushels per acre). 10Figure 22: US Soybean Yields (1970-2013E; bushels per acre). 10Figure 23: Global Corn Consumption (MM tons) . 10Figure 24: Arable Land Per Capita . 10Figure 25: Global Corn Yields by Country / Region (bu/acre; 2011). 10Figure 26: Global Corn Acreage by Region (millions of acres; 2011) . 10Figure 27: US construction data has stabilized since record lows in mid-09 and is beginningto show signs of improvement. 11Figure 28: Private non-residential construction has surpassed public non-residentialconstruction. 11Figure 29: Household debt to asset ratio returning to trend levels. 12Figure 30: Household Debt/GDP ratio also returning to trend levels . 12Figure 31: Housing-related consumption remains well above homebuilder sentiment . 12Figure 32: Housing starts appear to have bottomed and have ticked up in 2012. 12Figure 33: North American auto builds . 13Figure 34: North American printed circuit board book-to-bill ratio . 13Figure 35: US Chemicals Shipments on Internal Waterways. 14Figure 36: Chemicals Railcar Loadings, Capacity Utilization, and Industrial Production. 14Figure 37: Growth in railcar loadings is ahead of industrial production. 15Figure 38: ECRI Leading Index vs. Industrial Production . 15Figure 39: Industrial Production vs. ISM PMI Index. 15Figure 40: Industrial Production vs. ISM Mfg. New Orders . 15Figure 41: Industrial Production vs. Conference Board Leading Indicators. 15Figure 42: Conference Board Leading Indicators vs. Real GDP . 15Figure 43: Chemicals sector multiples vs the yield curve . 16Figure 44: A steeper yield curve has previously led rising chemicals IP . 16Figure 45: Eurozone confidence indicators. 17Figure 46: ZEW German economic sentiment indicator (12mo m.avg.) . 17Figure 47: OECD Europe CLI vs Euro area Industrial Production. 17246810 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52246810 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 5219 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateUS Chemicals Railcar DataFigure 10: Chemical distribution channels, by volume and costBy tonnage (882MM tons)By cost* ($40.0 billion)RailTruckWaterbornePipeline, Air & Other30%48%18%4%20%67%10%3%Source: American Chemistry Council. *Cost is cost of transportation, not value of product, 2010 dataYear to date, chemical railcar loadings are down 1.1%Year to date, chemical railcar loadings are down approximately 1.1%. With ethanolcomprising approximately 21% of chemicals loadings and DoE blending up 10% (est.) in11, we estimate that ethanol is boosting 12 US chemicals railcar loadings by roughly2%.Figure 11: Chemical and petroleum railcar loadings (4-wk m.a., % YoY)60%50%40%30%20%10%0%(10%)Week# 45JanFebMarAprMayJunJulAugSepOctNovDecChemicals 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 RailroadsFigure 12: Four-week moving average of weekly railcar loadings (2009-Present)33,00031,00029,00027,00025,00023,000Week# 45JanFebMarAprMayJunJulAugSep OctNovDecSource: Association of American Railroads201020112012SequentialChange-Jan-00 Jan-01Jan-02Jan-03 Jan-04Jan-05 Jan-06Jan-07Jan-08 Jan-09Jan-10Jan-11 Jan-12Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12Figure 13: Sequential growth in weekly chemical railcarloadings (2009-Present)35%25%15%5%(5%)Figure 14: Weekly railcar loadings (000s, 2009-Present)3432302826(15%)(25%)JanFebMarAprMayWeek# 45Jun JulAugSepOctNov Dec2422Week# 45201020112012Jan Feb Mar2010Apr May Jun Jul2011Aug Sep OctNovDec2012Source: Association of American RailroadsFigure 15: Four-week moving average of weekly railcarloadings, %YoY (2000-Present)30%20%10%0%(10%)(20%)(30%)(40%)Source: Association of American RailroadsSource: Association of American RailroadsFigure 16: Four-week moving average of weekly railcarloadings (000s, 2000-Present)32302826242220Source: Association of American Railroads-19 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateKey end market dataFigure 17: US chemical companies revenue exposures to key end marketsCompany3MAuto & Transport11%Construction4%Electronics10%CommentsIndustrial 25%; Healthcare 18%; Consumer 15%; Energy 3%,Safety & Security 14%Air Products15%Energy 24%, Genl Mfg 15%, Chemicals 17%, Metals 10%,Medical 7%, Food 3%, Others 10%Airgas2%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 onlyTransport and no AutoAlbemarle6%9%15%Refining 32%, Pharma/ Ag 12%, Industrial 10%, Packaging 9%,Oilfield 4%, Other 3%Ashland8%17%Coatings 6%, Lubricants 15%, Chemicals 5%, Pulp/ paper 12%,Energy 3%, Regulated Ind 3%, Marine 4%, Infrastructure 2%,Packaging/ converting 3%, Retail consumer 3%, Personal Care3%, Medical 2%, Others 14%CabotCelanese15%11%10%3%10%Tire 45% ; Others 20%Filter Media 22%; Paints & Coatings 13%; Consumer & MedicalApps 12%; Consumer & Industrial Adhesives; IndustrialPerformance Apps 7%; Textiles 5% ; Food & Beverage 4%;Paper & Packaging 3%Cytec17%47%Chemical Processing:13%,Mineral Processing 7%; Plastic : 4%;Adhesives: 3% ; Other: 9% “Auto & Transport” consists ofAutomotive onlyDuPont20%10%9%Agriculture/ food 21%; Food Ingred, Ref & packaging 8%; Otherpackaging 3%; Chemicals/ petchem 5%; Textile/ apparel 5%;Plastics 3%; Other industrial 7%; Aerospace 4%; Paper 1%;Healthcare 1%; Personal care 3%.“Construction” includesresidential, commercial construction”Ferro10%34%21%Appliances 8%; Containers 8%; Household furnishings 7%;Industrial 6%; Others 6%HB Fuller10%Adhesives: 72%; Paints: 8%; Packaging: 4%; Insulating glass:4%; Consumer: 2%LyondellBasell7%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”.PPG30%27%Consumer goods 21%; Industrial goods 10%; Chemical products:5%; Aerospace 4%; Marine 3% (Auto consists of OEM 19%,Auto aftermarket 11%)Praxair7%Manufacturing 24%; Chemicals 10%; Energy 13%; Food andBeverage 7%; Aerospace 2%; Healthcare 10%; Metals 16%;Other 11%Rockwood Holdings11%13%8.00%Metal Treatment 17%; Chemicals/Plastics 14%; Life Sciences12%; Consumer Products 2%; Paper 2%; Environmental 2%;Other 8%Valspar3%30%Industrial 36%, Packaging 21%, Other 10% “Auto & Transport” isautomotive refinish and “Construction” is architectural paintsSource: Company data, Deutsche Bank estimates12/13E70/7172/7374/7576/7778/7980/8182/8384/8586/8788/8990/9192/9394/9596/9798/9900/0102/0304/0506/0708/0910/11End Market: AgricultureFigure 18: Corn stocks-to-use ratios are at the lowest levels since the mid-1970sSource: Deutsche BankFigure 19: US Corn and Soy Acreage (1970-2013E; millions of acres)10595857565554535Source: Deutsche Bank, USDAUS Corn AcreageUS Soy Acreage70/7172/7374/7576/7778/7980/8182/8384/8586/8788/8990/9192/9394/9596/9798/9900/0102/0304/0506/0708/0910/1112/13E12/13E70/7172/7374/7576/7778/7980/8182/8384/8586/8788/8990/9192/9394/9596/9798/9900/0102/0304/0506/0708/0910/1119 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateFigure 20: US Corn Yields (1970-2013E; bushels per acre)1801601401201008060Source: Deutsche Bank, USDAFigure 22: Global Corn Consumption (MM tons)MM TonsFigure 21: US Soybean Yields (1970-2013E; bushels peracre)50454035302520Source: Deutsche Bank, USDAFigure 23: Arable Land Per CapitaAcres/Capita120010901.2100080097010.81.020.756006000.60.554004100.40.440.412202000.201965198020002020E2030E01961198020002020E2030ESource: Global InsightsFigure 24: Global Corn Yields by Country / Region(bu/acre; 2011)Source: Global InsightsFigure 25: Global Corn Acreage by Region (millions ofacres; 2011)16014714510092140120100801291261199884786890807060507060403740303227252002010109.56.54.530Source: Global Insights, USDASource: Global Insights, USDA030405060708091011YoYchange020304050607080910111212End Market: US ConstructionFigure 26: US construction data has stabilized since record lows in mid-09 and isbeginning to show signs of improvement$1,000$900$800$700$600$500$400$300$200$100$0Total non-res constr. Sep-12 = $559Total res-constr. %YOY; Sep-12 = 19.2%Total res-constr. Sep-12 = $292Total non-res constr. %YOY; Sep-12 = 2.6%30%20%10%0%(10%)(20%)(30%)(40%)(50%)Source: Haver AnalyticsFigure 27: Private non-residential construction has surpassed public non-residentialconstruction40%30%20%10%0%-10%-20%-30%Jul-12 = 0.4%Sep-12 = 9.7%-40%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 Bureau8889909192939495969798990001020304050607080910111288 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1219 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateFigure 28: Household debt to asset ratio returning totrend levelsSource: Federal Reserve Board, Haver Analytics, DB Global Market researchFigure 30: Housing-related consumption remains wellabove homebuilder sentimentFigure 29: Household Debt/GDP ratio also returning totrend levelsSource: Federal Reserve Board, Haver Analytics, DB Global Market researchFigure 31: Housing starts appear to have bottomed andhave ticked up in 2012807060504030201006%5%4%3%2%1%0%-1%-2%-3%2,3001,9001,5001,100700300100806040200Housing Starts, 3mo m.a. (000s, LHS): Sep-12 = 786Homebuilders sentiment (SA, All Good = 100, 1 qtr. lead (LHS)Total housing-related consumption* % YOY (RHS)Source: NAHB, BEA*Furniture & household equipment, housing shelter and household operationHomebuilders Sentiment (SA, All Good = 100): 15Source: Federal Reserve Board, Haver Analytics0405060708091011121Q052Q053Q054Q051Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q12E4Q12EEnd Market: US Automotive & ElectronicsFigure 32: North American auto builds80%60%40%20%0%-20%-40%-60%Quarterly NA Light Vehicles Production (%YoY)Previous quarter forecastQuarterly ForecastAnnual NA Light Vehicles Production (%YoY)80%60%40%20%0%-20%-40%-60%Previous Quarter Annual NA Light Vehicles Production (%YoY)Source: Deutsche Bank, Wards, Deutsche Bank Autos TeamFigure 33: North American printed circuit board book-to-bill ratio2.01.81.61.41.21.00.8Rigid PCBs book to bill ratio; Sep-12 = 1.00Flexible Circuits book to bill ratio; Sep-12 = 0.71Combined (Rigid & Flexible) book to bill ratio; Sep-12 = 0.97Source: IPC (Association Connecting Electronics Industries)Front-end semiconductor bookings, which represent more chemicals-intensiveupstream processes (e.g. wafer fab, foundry) are typically led by back-end bookingswhich represent downstream test and packaging activitiesNA PCB book-bill ratios give a view into consumer electronics demand, and particularlydemand for flame retardant plastic additives (e.g. ALB, CEM)Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-119697989900010203040506070809101112Jan-1219 November 2012Chemicals/CommodityRailcar & PetroChemical UpdateUS macro indicatorsUS output indicatorsFigure 34: US Chemicals Shipments on Internal Waterways25%20%20%15%10%5%0%-5%-10%-15%-20%-25%Sep-12 (RHS) = 1.3%Oct-12 (LHS) = 0.9%15%10%5%0%-5%-10%-15%-20%-25%Petroleum and Chemicals Monthly Tonnage on US Internal Waterways (LHS, %YoY 6mo m.a.)Petroleum and Chemicals Railcar Loadings (RHS, %YoY of 4-wk m.a.)Source: Waterborne Commerce Statistics Center, New Orleans, LAFigure 35: Chemicals Railcar Loadings, Capacity Utilization, and Industrial Production800600400200-(200)(400)(600)(800)(1,000)(1,200)Chemicals % Capacity