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Cement Outlook: 2011-2015 World of Concrete January 2011 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009 Portland Cement Consumption: Fall Thousand Metric Tons 140,450 Growth Rates 120,450 2007: - 9.6 100,450 2008: - 15.1 80,450 2009: - 26.9 2010: + 0.7 60,450 2011: + 1.3 40,450 2012: + 3.7 20,450 2013: + 16.6 450 2014: + 18.0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Early 2011 Characterized by Large Y-O-Y Percentage Gains PCA believes this will be a false read for 2011 Performance Capacity Utilization Percent Capacity Utilized 100% 80% 60% 40% 20% 0% 2002 2004 2006 2008 2010 2012 2014 NESHAP Closures Economic Outlook Economic Adversity Abates 2011/12 2006 2007 2008 2009 Sub-Prime/Exotics Energy Lending Standards Labor Markets State Deficits The abatement of the conditions that put us in recession…are receding…but remain in place. 2010 2011 Synchronized Recovery Theory Job creation determines how quickly the recovery cycle spins. Heals Structural Restraints Incremental Demand Gains Lending Standards Ease & Hiring Accelerates Defaults & perceived lending risks decline In the context of moderating productivity Gains Leads to: Job Gains Sentiment Gains Sentiment includes Consumer, Business & Banks: Housing Recovery Residential Contribution to Recovery Muted Thousand Metric Tons 10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 -10,000 -12,000 27.7 MMT Decline 19 MMT Gain or 68% Recapture 1999 2001 2003 2005 2007 2009 2011 2013 2015 Ingredients for a Starts Recovery Homebuilders Expected ROI Inventory no higher than 5 months supply Carry costs erode expected ROI. Price stability Weaker the price environment…lowers the months’ supply trigger point. Foreclosures Accelerate Foreclosure Impacts Add to Inventory 2.8 Foreclosures in 2009. 871K Bank possessions. Equates to one out of every 4 homes on the market. Depress Prices Depressed Homebuilder ROI Adds supply. Longer carry costs. Bank owned properties discounted. Lower revenues. Erodes expected ROI. Pressures new home prices. Delays recovery in starts. Residential: Re-Set Scenario $ Billion 40 35 30 Alt-A 25 Subprime Resets 20 15 Option Adjustable 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 Months’ Supply: Single Family Number of months required to burn off existing inventory at current selling rates Projected 12 10 8 6 Desired Months Supply 4 2 0 Jan 2006 Jan 2007 Source: PCA Projections Jan 2008 Jan 2009 Jan 2010 Jan 2011 Single Family Starts Projections Thousand Homes 1,400.0 Slow job growth, tight lending standards & high level of foreclosures prevent a significant increase in starts. 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 Single Family Starts Projections Thousand Homes 1,400.0 Stronger job growth, easier tight lending standards & foreclosures abate but lag to burn off inventories – delaying a signal to build 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 Single Family Starts Projections Thousand Homes 1,400.0 Strong job growth, easier tight lending standards foreclosure issue gone. Pent-up demand release is moderated by mortgage rates increases. 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 Nonresidential Drag Commercial Nonresidential Drag Lessens Thousand Metric Tons 6,000 13.1 MMT Decline 4,000 2,000 0 -2,000 8.4 MMT Gain or 64% Recapture -4,000 -6,000 -8,000 1999 2001 2003 2005 2007 2009 2011 2013 2015 Nonresidential Conclusions No longer a significant drag on cement consumption growth. Large imbalances exist in before a positive NOI materializes Slow job growth implies slow healing process Credit environment hostile. Conditions for positive ROI years off. Not a significant contributor to cement consumption growth until 2013 Office Buildings: Recovery Process Leads to a recovery in office construction. Asset Prices Firm New Office Hiring Vacancy Rates Decline Credit Troubles Ease Defaults & perceived lending risks decline 1/5 of all jobs in the office. Leasing Rates Stabilize After reaching threshold of roughly 14% vacancy rate Office Buildings Recovery Timing 32.0 Million Office Jobs Equates to Full Occupancy 27.5 Million Office Jobs Equates to Stable Leasing Rates 27.0 Million Office Jobs Today Implying….. 500,000 Office Jobs must be created before leasing rates stabilize Since 1 in 5 Jobs Are In The Office 2.5 million Jobs This condition may not materialize until 2012 This equates to a total job creation number of roughly Public Recovery ARRA Spending Composition Assumptions Billion $ Cement Consumption 2,951,000 MT 12.0 10.0 Cement Consumption 583,000 MT Cement Consumption 2,310,000 MT 8.0 6.0 Cement Consumption 214,000 MT 4.0 2.0 0.0 2009 Resurfacing 2010 2011 Widening & New Route Chart Excludes “Other” Spending 2012 Bridge State Fiscal Conditions FY 2011 Budget Gaps WA NH MT ME VT ND OR MN ID NY SD MA WI RI WY MI CT IA PA NE NV UT IL IN DE CO MD WV CA KS NJ OH VA MO KY NC TN AZ OK NM AR SC MS AL GA LA TX FL HI Source: PCA/CBPP Oct. 2010 No Shortfall Under 11% 11%-20% Over 20% State Deficits $ Real Slow Job Creation Leads to Slow Deficit Heal 300,000,000 200,000,000 100,000,000 0 -100,000,000 -200,000,000 -300,000,000 -400,000,000 1999 2001 2003 2005 2007 2009 2011 2013 Source: NIPI Data National Estimates: States Do Not Heal in a Synchronized Fashion 2015 Discretionary State Highway Cement Consumption Thousand Metric Tons 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 SAFETEA-LU Math 2010 2011 SAFETEA-LU - Delay in Extension - Recapture 2010 Volume Impact Net Change 2011 (No Delay) -1 to -2 MMT 0 MMT ----- +1 to +2 MMT - 1 to -2 MMT +1 to +2 MMT +2 to +4 MMT PCA Washington: 50/50 Lame Duck Passage Portland Cement Consumption: Highway Thousand Metric Tons 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2004 2006 State Discretionary 2008 Highway Bill 2010 2012 Stimulus 2014 Beyond the Crisis “New Normal” or “New Headaches” Portland Cement Consumption Thousand Metric Tons Recovery Occurs in Context of “New Normal” 140,450 120,450 100,450 80,450 60,450 40,450 20,450 450 1998 2000 2002 2004 2006 2008 2010 2012 2014 After the Crisis: “New Normal”: Economics American consumer, the engine of US economic growth May distance from debt spending patterns (lowering GDP). Baby boomers may not re-capture wealth Higher inflation erodes spending. Impacts Slower growth – Is 50 basis point enough? After the Crisis: “New Normal”: Policy Fiscal Policy Stimulus spending must be paid for…resulting in higher interest rates, higher taxes, and potentially higher inflation. Monetary policy easing (U.S. & global) & QE2 Could add to inflationary pressures. QE2 compounds the inflationary risks. Raises prospects of Federal Reserve tightening. Weakens dollar in context of large public debt. Heightens debt costs. Opens door for fiscal austerity. After the Crisis: “New Normal”: Construction Not a typical recession recovery. Amplified by structural corrections. Amplified by possible policy errors. Long impacts Pent-Up Demand Being generated across all sectors. Longer period of distress, more pent-up demand Timing and magnitude of release impacted by economy. Regional impacts from resulting growth. Residential, nonresidential & public synchronized – 2013 & Beyond. Typically suggests strong cement consumption growth rates. After the Crisis: “New Normal”: Global Emerging economies, led by China/India, account for key growth drivers. Accounts for larger share of world GDP than OECD by 2014 (IMF). Exerts “new” potent demand on world markets “Synchronized” world growth returns 2013-2020. Commodity prices (oil), freight rates, trading patterns subject to change. Impacts concrete competitiveness (oil prices = paving position, residential ICF) Impacts sourcing decisions – high freight rates raising import costs. New challenges could lead to potentially new economic/political tensions. Announced New Coker Installations Cumulative: Thousands of Barrels Per Day After the Crisis: “New Normal”: MIT Researchers at the MIT Concrete Sustainability Hub are working to quantify the full cradle-to-grave life-cycle environmental and economic costs of paving and building materials. Residential Buildings – More than 90% of the life-cycle carbon emissions are due to the use phase, with construction and end-of-life disposal accounting for less than 10% of the total emissions. Residential Buildings – Concrete structures built with insulated concrete forms (ICF) enjoy long-term operational energy savings of 20% or more over woodframed buildings. In the context of synchronized world growth, higher oil prices, homebuyers may increasingly emphasize energy saving aspects of concrete homes. Per Home, Lifetime C02 Savings ICF Home Over Frame Co2 Metric Tons, Per Home 100 90 Total Heating & Cooling C02 Saving: 92 Tons per Home 80 70 60 50 40 Additional C02 Emitted by Cement Production 30 20 10 0 2007 2012 2017 2022 2027 2032 2037 2042 2047 Conservatively Assumes 50 Year Life of Home 2052 2057 After the Crisis: “New Normal”: Regulation Activist EPA Plant shut downs High compliance costs. New Source regulations! Resumption of demand growth Import Dependence Grows In context of weak dollar In context of emerging economy demand growth Higher freight rates. Sourcing strategies Near term, import dependence – longer term? Cement Consumption: Long Term Million Metric Tons 190 170 150 130 110 90 70 50 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Growth in Context of Population Changes, Slower US Economic Growth, Strong Global Growth, Climate Change Legislation and the “Green” Revolution. 2030 Cement Outlook: 2011-2015 World of Concrete January 2011 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009