Railcar &PetroChemical Update:US Chemical Shipments +0.8%.Ethane down 0.6c/gal to 25.9c/gal

Railcar loadings 4-week moving average up 0.8%. Weekly loadings up 2.4%The 4-week moving avg of chemical railcar loadings increased 0.8% in Week#20 (ended 05/13/2017) vs. a 0.8% decrease the prior week. Loadings YTD aredown 0.6%. Chemical railcar loadings represent 30% of total US chemicalshipment tonnage (followed by trucks, barges, and pipelines), offering a trendof broader chemical industry activity and demand. The more volatile measureof weekly loadings increased 2.4% YoY (versus a 0.5% decline in the priorweek) and increased 1.2% sequentially (vs. a 2.9% decrease in the prior week).

    Ethane prices down 0.6 c/gal to 25.9 c/gal. Propane up 7 c/gal to 66.9 c/galEthane prices fell 0.6 c/gal this week to 25.9 c/gal (vs its fuel value of 22 c/gal).

    While US ethane supply/demand (s/d) fundamentals remain loose, ethanerejection, which peaked at 500-600k bpd in 1H16, has declined following theSeptember start-up of Enterprise Products’ 200k bpd ethane export facility inHouston. Coupled with higher natural gas prices, ethane prices have doubledsince early ‘16. Starting in 2H17, we expect US ethane s/d fundamentals totighten further driven by 600k bpd of new demand from the start-up of 8greenfield ethylene crackers in ’17-’19. As the market tightens, we expectethane to trade toward its historical premium of ~10c/gal vs its fuel value, withthe premium reflecting fractionation, transportation and storage costs. Basedon DB’s ’17 US Natural Gas price forecast of $2.93/MMBtu, we estimateethane prices will move toward 30 c/gal by year-end ‘17.

    Propane prices rose 7 c/gal this week to 66.9 c/gal. Similar to ethane, propaneprices are up sharply from their early ’16 lows (of 30-35 c/gal). Propaneinventories were up 1% last week to 42.2MM bbls but are 32% and 22% belowtheir 3 and 5-yr avgs, respectively. Longer term, we expect propane inventoriesto decline due to higher exports (+20% in ’16 vs up 12% in ‘15, up in ’17E).

    Spot ethylene down 1.2 c/lb to 29.1 c/lb. Margins compress 1.3 c/lb to 15.3c/lbSpot ethylene prices fell 1.2 c/lb this week to 29.1 c/lb (vs the April contractprice of 32.0 c/lb). Spot deals for May delivery ranged between 28.25-30 c/lbwith deals for June delivery ranged between 29.875-30 c/lb. Average spotethylene margins were down 1.3 c/lb last week to 15.3 c/lb due to higherproduction costs and lower prices.

    Polymer grade (PG) propylene spot prices were lower this week and deals forMay delivery ranged between 36-37 c/lb and deals for June delivery at 36 c/lb,up 0.50 c/lb from the prior week. May propylene contract prices settled down7.5 c/lb two weeks ago to 38.5 c/lb for PG and 37.0 c/lb for chemicals grade.

    Propylene prices, which had risen 20.5 c/lb from December to March, havenow fallen 13.5 c/lb in April and May due to improving refinergy-based supplyand weak domestic demand. With Flint Hills PDH unit coming back online bythe end of May, propylene prices are likely to see further downward pressurein June.

    No planned maintenance outage in the rest of MayIHS expects 1.7% of North American (NA) ethylene capacity to be offline inMay vs 2.5% in April. Per IHS, Dupont’s Orange,TX cracker (1.7% of NAethylene capacity) completed planned turnaround and came back online thisweek. For ’17, IHS forecasts NA ethylene production losses of 3.8B lbs, or4.4%, of capacity. This compares to 4.7B lbs, or 5.8%, of capacity in ’16 and3.1B lbs, or 4.1%, of ethylene capacity in ’15.