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Cement & Construction Outlook Missouri Concrete Association Summer Meeting July 26, 2008 Dave Zwicke, PCA Regional Economist Overview The economy is weak….Recession? Broader Economy…… Cement Industry….. Fiscal & Policy actions will not avert a recession Fiscal Policy will not impact GDP as expected Consumer Debt, Energy Costs Lending aversion toward risk is spreading Credit markets are tighter Both Consumer and Commercial impacts beginning to emerge What Happened? “To determine the cause of a slowdown in economic growth, or even a recession look no further than the excesses and imbalances created during the preceding boom period” Debt played important role in 2003-2006 growth Responsible debt? Easy terms & standards Unprecedented link to housing wealth Payback is tough – maybe more than consensus Was aggressive subprime lending responsible debt? Tighter credit Housing price collapse What are the Two Key Questions? How deep will industry retrenchment go ? How long will it last ? Portland Cement Consumption 000 MT Declines Continue Through 2009. Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) (On a Percentage Basis: Equal to 1980-82 Recession) Outlook Double-digit declines in consumption with trough in 2009 Large capacity increases in the pipeline magnify potential market imbalances Imports record large, sustained declines Global demand conditions suggest high freight rates 2008 bears most of the burden of market imbalance Utilization Rates decline Materializes to a greater extent in 2009 Inventory levels remain above historical averages Past peak (2005) not realized until 2014 Economic Outlook Threats to Economic Growth Continued Residential Weakness Foreclosures rising --- Prices falling Consumer spending declining Credit Markets Credit markets remain tight Tight credit conditions negatively impact residential and nonresidential investment Energy Prices High gas prices continue to stress the consumer Commodity costs on the rise States in Recession As of May, 2008 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 Recession GA At Risk LA TX AK FL HI Source: PCA/Economy.com Growing The Stage is Set… Unemployment Rate -- % Change Year Ago Source: BLS = Recession Employment declines … Change in payroll jobs (000) 400 300 Period of slowed hiring 200 100 0 2007: + 1,096,000 -100 YTD: -438,000 -200 2005 Source: BLS 2006 2007 2008 5 year Average Employment Declines are Regional June Year-to-date 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 Loss GA Flat LA TX AK FL HI Source: BLS Gain Housing has been the catalyst… Units (000) Source: Census, S&P Case Shiller Annual Growth Consumers feel the crunch… Annual Percent Change Consumer Pessimism Growing 1985=100 Source: Conference Board Monetary Policy Federal Funds Rate Recession Risks Prompt Fed Rate Cuts Rising Inflation Forces a Policy Reversal Long Recognition Lag By Fed…Forcing More Aggressive Policy Posture Fiscal Stimulus Impacts 2nd half 2008 – 1st half of 2009 $150 Billion Rebates Expected to reduce depth and duration of recession Fiscal policy may shorten economic downturn and accelerate recovery…but it will NOT AVERT the recession Energy Prices may offset fiscal stimulus… Unleaded Gas, $ Per Gallon Every 1 Cent Increase at the Pump Takes $1 Billion Out of Consumer’s Pockets on an Annualized Basis Since January 1st, Gasoline Prices have increased $1.33 cents = Equating to a $130 Billion Annualized Draw on Consumer Spending Source: Department of Energy Economic Growth Percent Change, GDP Growth Rate Tax Rebate Bump Residential Construction Cement Composition - Missouri 2005 Public 2009 Residential Nonresidential Mortgage Rates Composite contract rate % Fed began cutting rates Easy Credit Period Foreclosures on the rise… % of loans 90 days past due, SA Source: Mortgage Bankers Association Foreclosures are concentrated… Below U.S. Near U.S. Above U.S. Source: Equifax, Economy.com % of households defaulting on their 1st mortgage, 08Q1 US: 1.8% Home Prices will stabilize in late 2009 Existing Single Family Homes High Inventories Will Depress Prices Throughout 2008 National Housing Starts 000 Units Missouri Housing Market Annual % Change -- Single Family Median Home Source: National Association of Realtors Single Family Housing– Missouri 000 Permits 31% Decline: 2007, Similar Decline in 2008... Recovery 2010 Nonresidential Construction Nonresidential Construction Nonresidential Strength in 2006-2007 Favorable ROI supported by active investment environment Pent-up Commercial Demand Easy Credit Conditions Nonresidential Softening in 2008-2009 ROI Softens With Overall Economic Weakness Credit Conditions Tightening Risks and Uncertainty Grow Financial Liquidity Sub Prime TED Spread – Difference between 3m T-Bill & LIBOR Nonresidential Construction Annual Percent Change Dodge Data Has Already Signaled a Decline Nonresidential Construction $1996, Millions Industrial Vacancy Rates Percent Vacant Source: CB Commercial Office Vacancy Rates Percent Vacant Dot Com Bubble Source: CB Commercial Public Construction Cement Composition - Missouri 2005 Public 2009 Residential Nonresidential Highway Construction $1996, Millions 2008: -2.8% 2009: -3.5% 2010: -2.3% Fiscal 2009 Revenue Outlook District of Columbia Pessimistic Concerned Source: National Conference of State Legislatures Stable Optimistic Competitive Opportunity? Producer Price Index, 2003=100 Source: BLS Missouri Cement Market Total Cement Consumption - Missouri Thousands, Metric Tons 2008: --13.5% 2009: --9.6% 2010: +2.1% Long Term Cement Consumption Thousands Metric Tons Missouri 2007: 2.4 MMT to 2030: 3.7 MMT Missouri Cement Market 000 Metric Tons Cement Capacity Portland + Masonry Cement Cement Consumption Regional Capacity Expansions Thousands of Metric Tons New State Company Year Capacity Arkansas Ash Grove Cement 2009 630 Missouri Continental Cement 2008 540 Holcim 2009 3,960 Buzzi Cement 2009 900 Direct Shipments Survey User Group 2005 2006 2007 Ready-Mix 82% 82% 82% Street & Highways Contractors 8% 7% 8% Building Materials Dealers 2% 2% 2% Pre-Cast 3% 2% 2% All Other 2% 4% 3% Brick & Block 3% 3% 3% Source: PCA Market Research Long Term Cement Conclusions Growth Outlook Favorable Discount current short-term business cycles Population and economic growth support consumption “Green” advantages of concrete will add to demand Cement & Construction Outlook Missouri Concrete Association Summer Meeting July 26, 2008 Dave Zwicke, PCA Regional Economist