Railcar &PetroChemical Update:US Chemical Shipments up 3.1%.Ethane down 4c/gal to 20c/gal

Railcar loadings 4-week moving average +3.1%. Weekly loadings up 4.0%.

    The 4-week moving avg of chemical railcar loadings increased 3.1% in Week#49 (ended 12/2/2017) vs. a 3.6% increase the prior week. Loadings YTD are up1.1%. Chemical railcar loadings represent 20% of total US chemical shipmenttonnage (followed by trucks, barges, and pipelines), offering a trend of broaderchemical industry activity and demand. The more volatile measure of weeklyloadings increased 4.0% YoY (versus a 0.5% decrease in the prior week) andincreased 28.5% sequentially (vs. a 15.5% decrease in the prior week).

    Ethane prices down 4 c/gal to 20 c/gal. Propane down 1 c/gal to 97 c/gal.

    Ethane prices fell 4.3 c/gal last week to 20.4 c/gal (vs its fuel value of 18 c/gal).

    The decline in ethane prices was driven by muted demand (the new 1.5MMm.t. DowDuPont ethylene cracker, the largest in the US, went down formaintenance on December 4 and is not due to come back up until December24) and selling of ethane by 2 ethylene producers (possibly due to year-endinventory control). While US ethane supply/demand fundamentals remainloose, ethane rejection, which peaked at 500-600k bpd in 1H16, has declinedfollowing the September ’16 start-up of Enterprise Products 200k bpd ethaneexport facility in Houston. Starting in 1H’18, we expect US ethane s/dfundamentals to tighten further, driven by 600k bpd of new demand from thestart-up of 8 greenfield ethylene crackers in ’17-’19. As the market tightens,we expect ethane to trade toward its historical premium of ~10c/gal vs its fuelvalue, with the premium reflecting fractionation, transportation and storagecosts. Based on DB’s ’17 US Natural Gas price forecast of $3.02/MMBtu, weestimate ethane prices will likely move toward 30 c/gal by year-end ‘17.

    Propane prices fell 0.5 c/gal last week to 97.3 c/gal. While propane inventorieswere up 2% last week to 74MM bbls, they are 19% and 9% below their 3 and5-yr avgs, respectively. Longer term, we expect propane inventories to declinedue to higher exports (+20% in ’16 vs up 12% in ‘15, up in ’17E).

    Spot ethylene up 1 c/lb to 28 c/lb. Margins up 1.5 c/lb to 12.5 c/lb.

    Spot ethylene prices rose 0.6 c/lb last week to 27.8 c/lb (vs the Novembercontract price of 33.25 c/lb). Spot deals for December ranged from 27.375 to28.25 c/lb with deals for January ranged between 26.25-29.25 c/lb. Averagespot ethylene margins Expanded 1.5 c/lb last week to 12.5 c/lb on higherselling prices and lower production costs.

    Polymer grade (PG) propylene spot prices were lower last week with deals forDecember delivery at 47-47.5 c/lb. November propylene contract prices settledup 1 c/lb at 49.0 c/lb for PG and 47.5 c/lb for chemical grade. This follows a 7c/lb increase in September, and 1.5 c/lb increase in October. The 9.5 c/lb, or24%, increase in prices since September has been driven by supply tightnessdue to Hurricane Harvey which caused outages at multiple US Gulf Coastolefins and refinieres as well as delaying a new propane dehydrogenation(PDH) unit which had been scheduled to start up in September.

    4.2% of North American ethylene capacity expected to be offline in December.

    Per IHS, CPChem’s Cedar Bayou, TX cracker (2.1% of North American {NA}ethylene capacity) and Shell Chemical’s Norco, LA cracker (2.1% of NAethylene capacity) are offline last week due to operational upsets. In addition,DowDuPont’s Freeport, TX LHC-9 cracker (3.8% of NA ethylene capacity) isoffline for maintenance. For ’17, IHS forecasts NA ethylene production lossesof 5.1B lbs, or 6.1%, of capacity. This compares to 4.5B lbs, or 5.5%, ofcapacity in ’16 and 3.1B lbs, or 4.1%, of ethylene capacity in ’15.