David Begleiter:Q3(September Quarter)2017Earnings Preview

Hurricane headwinds in Q3should become tailwinds in Q4.Top Pick: DWDP

    Hurricane Harvey, which made landfall on August 25, cast a long shadow overUS chemicals in Q3. Due to the hurricane and its aftermath many US chemicalcompanies experienced negative impacts from shuttered plants, lostproduction, tight raw material supply conditions, higher distribution andlogistics costs and supply chain disruptions. As a result no less than a dozenUS chemical companies preannounced earnings shortfalls or talked downnumbers for the quarter. The good news is that underlying demand ex Harveyremained solid in Q3and Q4should see benefits from the hurricane in the formof price increases, restocking and rebuilding. Top picks: DWDP, EMN, ASH.

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

    DB’s economics team forecasts US GDP growth slowed to 2.0% in Q3from 3.1% inQ2. For Q4, US GDP growth is forecast to accelerate to 3.1% as most of the lostoutput and delayed purchases in Q3due to hurricane related disruptions areexpected to be made up in Q4. In Europe, DB’s economics team forecasts Q3GDPgrowth of 0.6% QoQ. For Q4, Europe GDP growth is forecast to slow slightly to0.5% QoQ. China’s GDP growth slowed to to 6.6% in Q3from 6.9% in Q2. For ’17DB’s economics team forecasts US GDP growth of 2.4% (vs 1.8% in ’16), EuropeGDP growth of 2.2% (vs 1.8% in ’16), China GDP growth of 6.7% (vs 6.7% in ’16)and global GDP growth of 3.7% (vs 3.1% in ’16).

    Ethylene chain margins compress in Q3

    US contract ethylene margins compressed 3.7c/lb in Q3to 14.8c/lb on flat prices(at 31.9c/lb) and higher production costs (up 3.7c/lb to 16.4c/lb and up 34% YoY).Meanwhile, polyethylene (PE) prices rose $0.02/lb in Q3(to $0.75for HDPE) asHurricane Harvey resulted in extensive capacity shutdowns leading to materialbecoming short or non-existent in some cases. In Q4, we expect US ethylene chainmargins to improve as hurricane-induced tight supply/demand fundamentalssupport elevated PE pricing. We expect hurricane impacts and supply/demandtightness will linger thru October and pass starting in November.

    Differentiated / specialty chemical companies forecast to post 10% EPS growth

    In Q3,we expect Specialty and Differentiated Chemical companies to post 10% YoYEPS growth driven by solid demand, FX tailwinds, cost reductions and sharebuybacks. We expect Commodity Chemical producers to post YoY higher earningson higher prices and growing demand.

    Top Picks: DowDuPont, Ashland Global and Eastman

    DowDuPont: With the September 1merger of Dow and DuPont the 2iconic USchemical companies have become one – at least for the next 18months. Thereafterthey will split into 3companies. We believe this 3way separation will drivesubstantial value creation thru enhanced focus, strong free cash flow and portfoliooptionality. Ex hurricane impacts, we expect Q3to show further improvement onthe strength of cost reductions. Ashland: If Ashland is successful in validating ASI(80% of ‘18E EBITDA) is a high margin, high quality specialty chemical business,we believe its 1-2EBITDA point discount to peers will close (1EBITDA pt =$10/shr). And if it cannot, we believe downside is limited as Ashland is an attractiveasset in a consolidating industry. Eastman: The company’s recent announcementthat excluding the impact of the Kingsport fire ’17EPS would be at the high end ofits 10-12% EPS guidance range was a critical step in restoring investor confidencein the ability of management to deliver on its expectations. If Eastman can deliver ina similar fashion in ’18, we believe its P/E multiple will expand by 1-2pts.