Chemicals:Q2(June Quarter)2017Earnings Preview

Expect solid Q2 results on healthy demand, price increases. Top Pick: DD/DOW.

    We expect US chemicals to report positive June quarter results driven by i)healthy demand in the US, Europe and Asia. While there were areas ofweakness in the quarter, most notably auto OEM demand, this was more thanoffset by solid consumer demand (highlighted by strong US polyethylenedemand in June) and broad-based manufacturing growth and ii)implementation of price increases to offset higher raw material costs. Onguidance, we expect US chemical companies to be positive as demand trendsare expected to stay healthy, price increase are fully implemented and rawmaterial costs begin to decline. Our top picks are Dow / DuPont and Ashland.

    Global GDP growth is expected to accelerate from to 3.6% in ’17 from 3.1% in ’16.

    DB’s economics team forecasts US GDP growth accelerated to 3.5% in Q2 from1.2% in Q1. For Q3, US GDP growth is forecasted to slow 3.0% as solidhousing/construction activity (housing starts up 12% YoY in ‘17E) is partially offsetby sluggish industrial and manufacturing activity. In Europe, DB’s economics teamforecasts GDP growth declined to 1.9% in Q2 from 2.3% in Q1. For Q3, Europe GDPgrowth is forecasted to slow to 1.7%. China’s GDP grew 6.9% in Q2 vs a similar6.9% in Q1. For ’17 DB’s economics team forecasts US GDP growth of 2.4% (vs1.6% in ’16), Europe GDP growth of 1.8% (vs 1.7% in ’16), China GDP growth of6.7% (vs 6.7% in ’16) and global GDP growth of 3.6% (vs 3.1% in ’16).

    Ethylene chain margins expand in Q2.

    US contract ethylene margins expanded 1.9 c/lb in Q2 vs Q1 to 20.3 c/lb on highercontract prices (up 1.1 c/lb QoQ to 31.9 c/lb) and lower production costs (down 0.8c/lb QoQ in Q2 to 11.7 c/lb, down 2% YoY). Meanwhile, polyethylene (PE) pricesrose $0.02/lb in Q2 vs Q1 due to a combination of steady demand, low inventories,and outages, which kept PE prices flat in June (vs a 3 c/lb decline in May). Startingin Q3, we expect US ethylene chain margins to weaken due to a limited number ofethylene outages (from April through August, just 2.7% of US ethylene capacity isscheduled to be offline vs. 7.3% a year ago) and new ethylene / PE capacity.

    Differentiated / specialty chemical companies forecasted to post 4% EPS growth.

    In Q2, we expect Specialty and Differentiated Chemical companies to post 4% YoYEPS growth driven by solid demand, flat-to-slightly higher feedstock costs, costreductions and share buybacks. We expect ethylene producers to post YoY lowergrowth due to lower oil prices partially offset by buybacks and growth projects.

    Top Picks: Dow/DuPont and Ashland Global.

    Dow/DuPont: We expect both Dow and DuPont to post in-line Q2 results driven bysolid ethylene chain fundamentals and Dow Corning synergies at Dow, andaggressive cost reductions and solid demand at DuPont. Notwithstanding the EU’sextended deadline (of Jul-28) to rule on DuPont’s transaction with FMC, which webelieve will drive merger close towards Sept 1, we are maintaining our Buy ratingon Dow as we believe there is significant portfolio optionality given DowDuPont’seventual separation into 3 (or more) focused and properly capitalized companies.

    Ashland: We expect FQ3 results to be positive on solid volumes in ASI (4% volumegrowth in FQ2 and 6% growth in FQ1, following 6 quarters of flat to down volumes)coupled with price increases, which are expected to fully offset transitory issues ofhigher raw material costs and adverse FX by 2H’17. Eastman: We expect in-line Q2results and a reiteration of full year guidance as demand trends have been stablesince Q1 and selling price increases are catching up to higher raw material costs.