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Cement & Construction Outlook Concrete Reinforcing Steel Institute Western Regional Meeting September 11, 2008 Dave Zwicke, PCA Regional Economist The Bottom Line Near Term Adversity Economic outlook remains dim. Adversity may continue longer than expected No recovery in housing until 2010 Nonresidential decline slower to materialize…longer recovery Potential of fiscal crisis at State level brewing Construction Spending Millions 1996$ Declines Continue Through 2009. Peak (2006)-to-Trough (2009) Decline: -20.8% -- $-154 billion Cement Consumption (000) Metric Tons Declines Continue Through 2009. Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) (On a Percentage Basis: Equal to 1980-82 Recession) Construction Turning Points 1996=100 180 Residential 2006 160 Public 2009 140 120 100 80 Nonresidential 2008 60 1996 1998 2000 2002 2004 2006 2008 2010 2012 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 Economic Outlook: Five Factors Sub-Prime Mortgage Payments Financial Crisis Defaults Write-Downs Energy Structural Global Realities Credit Cards Risk Aversion Defaults Tight Lending Standards Home Price Declines Reliance on Home Equity Gone Tight Lending Standards Commercial, Consumer, homeowner capital access reduced Global Gasoline Prices Inflation Energy Prices Fertilizer/Biofuels hit Ag Prices Supply Side Costs Ingrained Heating Prices Cost of Business Expected Inflation Rises Fed Tightens Adds Weakness to Dollar Short and Long Term Interest Rates Rise Labor Markets Slower Economic Growth One Million Job Loss in 2008 Housing Recovery Delayed Nonresidential Declines State Fiscal Crisis Looming Public Declines Economic Adversity 2006 Sub-Prime Energy Financial Crisis Inflation Labor Markets 2007 2008 2009 2010 States in Recession As of August, 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 -100 2007: + 1,096,000 YTD: -605,000 -200 Jan-05 Source: BLS Jan-06 Jan-07 Jan-08 5 year Average Employment Declines are Regional July 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 $1.23 cents = Equating to a $120 Billion Annualized Draw on Consumer Spending Source: Department of Energy Economic Growth Percent Change, GDP Growth Rate Tax Rebate Bump Hard to Sell Businessmen that Recession is “technically” Avoided or Short Lived – Distress Continues well Into 2009. Residential Construction Cement Composition - West 2005 2009 20% 35% 47% 59% 22% 18% Public 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 States Most at Risk to Residential Weakness Residential Share of Total Cement Consumption Source: PCA HAWAII IDAHO ARIZONA OREGON NEVADA COLORADO NATIONAL NEW MEXICO UTAH CALIFORNIA WASHINGTON MONTANA WYOMING 46.5% 41.9% 40.5% 35.7% 35.5% 35.4% 35.2% 34.6% 32.4% 32.2% 32.1% 22.9% 14.2% Single Family Housing– West Annual Percent Change 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 Nonresidential Construction Annual Percent Change Dodge Data Has Already Signaled a Decline Financial Liquidity Sub Prime TED Spread – Difference between 3m T-Bill & LIBOR Lenders Reporting Tighter Lending Standards: Commercial Percent Reporting Tighter Lending Standards 40 Medium to Large Firms Easy Credit Period 30 20 10 0 Small Firms -10 -20 -30 Sub-Prime Has Spilled into Commercial Credit Markets 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008 Q1 Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey 120 Business Leaders Confidence Index has declined 23% during past year. 100 80 Bullish Business Attitudes 60 40 20 0 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008 Q1 Nonresidential Construction 2007 Momentum is Burning Off Measured by PIP, Nonresidential Outperformed PCA Expectations. But, Cement Intensities Declining Evidence that a retraction in nonresidential lies ahead Fundamentals Deteriorate…Longer Recovery Larger declines of 2009 Nonresidential Construction $1996, Millions States Most at Risk to Credit Crisis / Oil Nonresidential Share of Total Cement Consumption WYOMING MONTANA NEW MEXICO IDAHO COLORADO NEVADA WASHINGTON CALIFORNIA NATIONAL ARIZONA UTAH OREGON HAWAII Source: PCA 44.4% 33.4% 26.1% 25.7% 24.9% 20.5% 19.8% 18.4% 17.8% 17.2% 16.3% 14.8% 10.0% Office Vacancy Rates – U.S. Percent Vacant Source: CB Commercial Office Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q2, 2008 Q2, 2007 Source: CBRE Office Construction $1996, Millions Industrial Vacancy Rates – U.S. Percent Vacant Source: CB Commercial Industrial Production – U.S. Institute of Supply Management Index Source: CB Commercial Industrial Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q2, 2008 Q2, 2007 Source: CBRE Office Construction $1996, Millions Public Construction Cement Composition - West 2005 2009 20% 59% 22% Public Residential Nonresidential State Fiscal Conditions $49 Billion Shortfall in 2009 2009 Projected 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 Deficit GA LA TX AK FL HI Source: PCA/Center on Budget and Policies Priorities Surplus States Most at Risk of Budget Shortfalls SAFETEA-LU Share of Total Highway Expenditures WASHINGTON COLORADO ARIZONA UTAH NEVADA OREGON CALIFORNIA U.S. NEW MEXICO IDAHO WYOMING MONTANA HAWAII Source: PCA 27.2% 29.1% 29.1% 29.5% 30.1% 32.0% 34.0% 34.7% 35.6% 43.3% 52.0% 58.1% 61.8% Highway Construction $1996, Millions 2008: -3.0% 2009: -3.5% 2010: -2.6% 2011: +3.2% Take a Step Back… 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 2030 Highway Lane Miles Thousands of Miles 11,000,000 10,000,000 9,000,000 8,000,000 Just to Maintain Current Highway 7,000,000 Congestion Levels, Federally Aided Highways Must Expand Nearly 25% by 2030 . Given 49 Million Additional 6,000,000 Licensed Drivers. 1996 2000 2004 2008 2012 2016 2020 2024 2028 Competitive Opportunity? Producer Price Index, 2003=100 200 180 Asphalt 160 140 Ready Mix Concrete 120 100 80 2003 Source: BLS 2004 2005 2006 2007 2008 Liquid Asphalt Supply Thousands of Barrels 44 Million Barrel Decline by 2011 Long Term Conclusions Cyclical downturn is temporary. Growth rates 2011-2013 extremely strong. Demographics remain favorable. Green building adds to consumption. Residential alone could add 9MMT over demographics. Asphalt paving vulnerable. High oil prices. “Delayed Cokers” = Shortages/Price Increases. Consumption could approach 200MMT by 2035. How to supply the beast in context of climate change compliance & international freight rate uncertainty. Cement & Construction Outlook Concrete Reinforcing Steel Institute Western Regional Meeting September 11, 2008 Dave Zwicke, PCA Regional Economist