Cement Outlook: 2010-2014

Ed Sullivan, Chief Economist PCA

PCA Spring Board Meeting April 2010

Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

Overview

Portland Cement Consumption Thousand Metric Tons

- 54 MMT

Growth Rates

2007: - 9.6

2008: - 15.1

2009: - 26.9

Point One Market May have reached a Trough Point – Earlier Than

Expected

Portland Cement ConsumptionSAAR, Thousand Metric Tons

2008 2010

Portland Cement Consumption: No Snow, No ARRASAAR, Thousand Metric Tons

2008 2010

No Snow, No ARRA

Portland Cement Consumption: Trough PointSAAR, Thousand Metric Tons

2008 2010

Trough Point May Have Materialized – Earlier Than Expected

Trough point for market may have materialized during Oct 2009 – Feb 2010

PRELIMINARY ESTIMATE Two months – Early estimate

Snow effects

Depressed Jan-Feb

Inflated March-April March up 1.5%, Snow Adjusted down 6%

Core market conditions have improved

SAAR less snow, less ARRA

Growing at a 7% annual rate during past two months. Residential, Oil, Farm and possibly a flattening in state discretionary spending

Point Two

First Quarter Weakness In Context of Full Year Results

Portland Cement Consumption2010 First Quarter Performance: 2 MMT in the Hole

SA

AR

Vo

lum

e C

han

ge

Ver

sus

2009

-943 -2,104

-2,067

Portland Cement Consumption2010 Performance: Fourth Quarter

SA

AR

Vo

lum

e C

han

ge

Ver

sus

2009

+ 642 +909

+1,422

2009 Total

First Quarter Losses Are Offset by Fourth Quarter Gains First Quarter:

Down 15% from 2009 levels

- 2,067,000 metric tons from 2009 levels

Fourth Quarter;

Weak 2009 performance = 62,500,000 SAAR

+ 1, 422,000 from 68,400,000 SAAR (2009 total)

14% Gain over 2009 levels

Net: -645,000 from flat performance

Note: April = +300,000 to +600,000 based on anecdotal information

First Quarter Losses Are Offset by Fourth Quarter Gains

Fourth Quarter;

Weak 2009 performance = 62,500,000 SAAR

+ 3,000,000 from 75,000,000 SAAR (PCA Forecast)

20% + Gain over 2009 levels

Net: +1,000,000 from 2009 levels

+1.5% Year total growth if flat conditions persist in 2nd/3rd quarters

Point Three Tepid Expected National Gains – Vary Significantly by

Region/State

Portland Cement Consumption Thousand Metric Tons

- 54 MMT

Growth Rates

2007: - 9.6

2008: - 15.1

2009: - 26.9

2010: + 5.2

2011: + 13.4

2012: + 18.4

2013: + 12.4

2014: + 8.2

National Outlook National outlook relatively unchanged at +5%, or, +3.5 MMT.

Growth is dependent on:

Tepid single family housing recovery: +815,000 MT

Oil gains: +375,000 MT

Farm gains: +280,000 MT

Increased ARRA highway spending and intensities: +3,600,000 MT

Increased ARRA non-highway spending including; airports, water, conservation : +300,000 MT to +500,000 MT

This growth more than offsets nonresidential, multifamily & state discretionary drags

National versus Regional Outlook

States with:

High foreclosure exposure will not fully participate in the modest housing recovery.

High ARRA resurfacing priorities will see less stimulatory impact.

Little exposure to oil or farm sectors will bare brunt of nonresidential declines.

ARRA Highway Intensities

1. ARIZONA 0.859

2. IDAHO 0.848

3. FLORIDA 0.781

4. ARKANSAS 0.774

5. TEXAS 0.726

6. MISSOURI 0.712

7. HAWAII 0.631

8. DELAWARE 0.600

9. OHIO 0.585

10.LOUISIANA 0.572

11.KANSAS 0.571

12.NORTH CAROLINA 0.558

50. OREGON 0.135

49. NORTH DAKOTA 0.147

48. MASSACHUSETTS 0.159

47. SOUTH DAKOTA 0.163

46. WYOMING 0.183

45. RHODE ISLAND 0.189

44. MARYLAND 0.198

43. MAINE 0.204

42. CALIFORNIA 0.208

41. ILLINOIS 0.216

40. ALASKA 0.222

39. VERMONT 0.252

Top States

Lowest States

Point Four

Operating Conditions Remain Adverse

Cumulative Market ImbalancesMillion Metric Tons

Portland Cement : Utilization Rates Percent Utilization Based on Clinker Capacity

Slow Demand Improvement, Digestion of New Capacity & Inventory Reductions Will Delay Utilization Recovery

The Economic Recovery Process: How & When

There is light at the end of the tunnel….it’s just a really long tunnel

Sub-Prime

FinancialCrisis

Energy

Labor Markets

2006 20082007 2009 2010

State Deficits

Economic Adversity Abates Mid-2010Economic Adversity Abates Mid-2010

Economic Growth & Job Creation Percent Change & Thousand Jobs

Net Other GDP Growth

Net Other = All, excluding inventory changes and ARRA impacts

% Jobs

Point Five Cement recovery will occur in the context of slow

economic growth

Point Five: Cement Market Recovery Will Take Place in the Context of Slow

Economic Growth Recent strong GDP growth distorts the underlying fundamentals of the

economy…..

While fundamentals are improving, many of the factors that gave rise to the collapse are still operating…..

Sluggish gains in GDP growth are expected…

Yet….

GDP Growth = 2.7%

Nearly one million jobs created (170K in first quarter)

Tightening of credit winds down, outright easing materializes in some sectors

Vacancy rates marginally improve from current levels – beginning the process of nonresidential recovery.

Deterioration in state deficits may be better than expected

Ingredients for a “Recovery” in Cement

Ingredients for a “Recovery”

Residential Public

Late 2010 Recovery in Starts.

ARRA continues to accelerate. Cement projects materialize

2nd half 2010

Cement Consumption: + 5.2% 2010This Implies continued weak consumption levels during first half of 2010

PCA’s 5.2% growth in 2010 translates into 4 MMT. This “recovery” must be considered in the context of a

54 MMT peak-trough decline.

Point Six

First Half weakness, Second half Strength

Point Six

First half of 2010 characterized by year-over-year declines.

Turning point may have materialized sooner than expected.

Second half gains reflecting a backend recovery.

Very large percentage gains characterize fourth quarter.

Criteria For Housing Recovery

Residential Cement Consumption Thousand Metric Tons

- 29.6 MMT

55% of Total Cement Consumption decline is attributed to residential

Residential sector’s adverse

impact on cement consumption has run its course.

Ingredients for a Starts Recovery

Inventory no higher than 5

months supplyPrice stability

Carry costs erode expected ROI.

Weaker the price increases…lower the months supply

trigger point.

Homebuilders Expected ROI

Foreclosures Accelerate

Foreclosure Impacts

Add to Inventory

Depress Prices

2.8 Foreclosures in 2009.

871K Bank possessions.

Equates to one out of every 5 homes on the

market.

Depressed Homebuilder

ROI

Adds supply.

Bank owned properties discounted.

Pressures new home prices.

Longer carry costs.

Lower revenues.

Erodes expected ROI.

Delays recovery in starts.

Point Seven

Upside Risk?

PCA’s projections lie below consensus estimates by a

significant margin.

May imply upside risks to cement consumption …

Roughly 1.5 million metric tons in 2010 and 2011

Pricing recovery for new homes.

Foreclosure assessments.

Ingredients for a Public Recovery

AaaA

Ingredients for a Public Cement Recovery

Highway/Street Cement Consumption

ARRA Stimulus

State Fiscal Sterilization

Outlays accelerating.

Design & concrete intensive projects

roll out last.

Decline in discretionary state

cement consumption have been massive

during past three years.

2009: 0.6 MMT 2009: -5.4 MMTAaaA

2010: 4.1 MMT 2010:-0.5 MMT

State Sterilization

Sterilization by State Fiscal Conditions

State Fiscal Conditions Real 1996$

State Deficits Worsen in 2010.

Highway Construction as Percent of Total Budget Real highway/Real State Expenditures

PCA ‘s Assumptions Extremely Conservative.

Decline in State Discretionary Construction Spending Percentage Change Real $

Discretionary State Highway Cement Consumption Thousand Metric Tons

Point EightDespite a worsening in state deficits, cement drags will

lessen

Point Eight State fiscal conditions are expected to worsen.

Cutbacks in discretionary state construction spending will continue.

State construction spending strategies aimed at resurfacing and stretching scarce dollars will continue.

State cement consumption will decline ….but less so that 2009.

Some suggest state cement consumption bottomed in 2009…

Suggesting upside risk to PCA projections of 500,000 metric tons

ARRA-Led Recovery

ARRA Spending AssumptionsBillion $

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2009 2010 2011 2012

ARRA Spending Composition AssumptionsBillion $

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2009 2010 2011 2012

Resurfacing Widening & New Route Bridge

Chart Excludes “Other” Spending

Point Nine

Point Nine

ARRA spending will more than double in 2010.

Even at same 2009 intensities, implies a 700,000 to 800,000 metric ton increase in 2010.

Composition of obligated ARRA spending is disappointing.

Nevertheless, more cement intensive projects will materialize in 2010 – raising cement intensities.

ARRA will be a much more potent contributor to consumption in second half of 2010.

Nonresidential Drag

Commercial Nonresidential Drag Thousand Metric Tons

0

5,000

10,000

15,000

20,000

25,000

30,000

1998 2000 2002 2004 2006 2008 2010 2012 2014

Oil & Farm Cement Consumption Thousand Metric Tons

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1998 2000 2002 2004 2006 2008 2010 2012 2014

Oil & Farm Conditions are

Favorable. Gains in these sectors partially offset nonresidential

weakness.

Nonresidential Drag Commercial nonresidential cement consumption is

expected to decline 29% in 2010, following 50% decline in 2009.

Drag on 2010 cement consumption is less due to extremely low 2009 base.

2009 = -6.1 MMT

2010 = - 1.8 MMT

Assumes intensity constant. They should increase.

Starts versus continuing construction intensities

Nonresidential Farm & Oil cement consumption are expected to increase.

2009 = -3.0 MMT, 2010 = +600,000 MT

Beyond the Crisis

Ten Year Peak-to-Peak Recovery

Cement Outlook: 2010-2014

Ed Sullivan, Chief Economist PCA

PCA Spring Board Meeting April 2010

Named Most Accurate Forecaster By Chicago Federal Reserve, 2009